-----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, Kk7xbIG4h9zsgeRwtpeYrmqvySklFDrNreEYigqpkIfJ7W3DPAA5tz/jZMD2KRs3 I4KA786NXfylHv40aiAPXw== 0000950131-01-001515.txt : 20010314 0000950131-01-001515.hdr.sgml : 20010314 ACCESSION NUMBER: 0000950131-01-001515 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPRINT CORP CENTRAL INDEX KEY: 0000101830 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 480457967 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04721 FILM NUMBER: 1567025 BUSINESS ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY CITY: WESTWOOD STATE: KS ZIP: 66205 BUSINESS PHONE: 9136243000 MAIL ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY CITY: WESTWOOD STATE: KS ZIP: 66205 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TELECOMMUNICATIONS INC DATE OF NAME CHANGE: 19920316 FORMER COMPANY: FORMER CONFORMED NAME: UNITED UTILITIES INC DATE OF NAME CHANGE: 19731011 10-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission File No. 1-04721 SPRINT CORPORATION (Exact name of registrant as specified in its charter) KANSAS 48-0457967 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) P.O. Box 11315, 64112 Kansas City, Missouri (Zip Code) (Address of principal executive offices) Registrant's telephone number, (913) 624-3000 including area code Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- FON Common Stock, Series 1, $2.00 par value, and FON Group Rights New York Stock Exchange PCS Common Stock, Series 1, $1.00 par value, and PCS Group Rights New York Stock Exchange Guarantees of Sprint Capital Corporation 6.875% Notes due 2028 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file these reports), and (2) has been subject to these filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of voting and non-voting stock held by non-affiliates at February 28, 2001, was $37,426,477,728. COMMON SHARES OUTSTANDING AT FEBRUARY 28, 2001: FON COMMON STOCK 799,223,455 PCS COMMON STOCK 935,235,668 CLASS A COMMON STOCK 86,236,036
Documents incorporated by reference. Registrant's definitive proxy statement filed under Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which definitive proxy statement is to be filed within 120 days after the end of Registrant's fiscal year ended December 31, 2000, is incorporated by reference in Part III hereof. SECURITIES AND EXCHANGE COMMISSION ANNUAL REPORT ON FORM 10-K Sprint Corporation Part I - -------------------------------------------------------------------------------- Item 1. Business - -------------------------------------------------------------------------------- The Corporation Sprint Corporation, incorporated in 1938 under the laws of Kansas, is mainly a holding company. In November 1998, Sprint's shareholders approved the formation of the FON Group and the PCS Group and the creation of the FON stock and the PCS stock. In addition, Sprint purchased the remaining ownership interests in Sprint Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired these ownership interests from Tele-Communications, Inc. (TCI), Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued the Cable Partners special low-vote PCS shares and warrants to acquire additional PCS shares. Sprint also issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. The purchase of the Cable Partners' interests is referred to as the PCS Restructuring. In the 1999 second quarter, Cox Communications, Inc. exercised a put option requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint issued additional low vote PCS shares in exchange for this interest. Also in November 1998, Sprint reclassified each of its publicly traded common shares into one share of FON stock and 1/2 share of PCS stock. This recapitalization was tax-free to shareholders. Each Class A common share owned by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to represent an equity interest in the FON Group and the PCS Group that entitled FT and DT to one share of FON stock and 1/2 share of PCS stock. These transactions are referred to as the Recapitalization. The PCS stock is intended to reflect the performance of Sprint's 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: . Global markets division . Local division . Product distribution and directory publishing businesses. Characteristics of Tracking Stock 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. The vote per share of the PCS stock is different from the vote of the FON stock. The FON stock has one vote per share. The vote of the PCS stock is based on the market price of a share of PCS stock relative to the market price of a share of FON stock for a period of time prior to the record date for a shareholders meeting. The shares of PCS stock held by the Cable Partners have 1/10 of the vote per share of the publicly traded PCS stock except where there is a class vote. The shares held by the Cable Partners convert into full voting PCS stock upon sale to the public. The price of the FON stock may not accurately reflect the performance of the FON Group and the price of the PCS stock may not accurately reflect the performance of the PCS Group. Events affecting the results of one Group could adversely affect the results of the other Group and the stock price of the stock tracking the other Group. Net losses of either Group, and dividends or distributions on, or repurchases of, one stock will reduce Sprint funds legally available for dividends on both stocks. Debt incurred by either Group could affect the credit rating of Sprint as a whole and increase borrowing costs for both Groups. Holders of one of the stocks may have different or conflicting interests from the holders of the other stock. For example, conflicts could arise with respect to decisions by the Sprint Board to (1) convert the outstanding shares of PCS stock into shares of FON stock, (2) sell assets of a Group, either to the other Group or to a third party, (3) transfer assets from one Group to the other Group, (4) formulate public policy positions which could have an unequal effect on the interests of the FON Group and the PCS Group, (5) allocate consideration in a merger to holders of FON stock or PCS stock, and (6) make operational and financial decisions with respect to one Group that could be considered to be detrimental to the other Group. Material conflicts are addressed in accordance with the Tracking Stock Policies adopted by the Sprint Board. In addition, the Board has appointed a committee of its members (the Capital Stock Committee) to interpret and oversee the implementation of these policies. Transfers of assets from the FON Group to the PCS Group treated as an equity contribution will result in an increase in the intergroup interest of the FON Group in the PCS Group. This interest is similar to the FON Group holding PCS stock. A transfer of funds from the PCS Group to the FON Group would 1 decrease the intergroup interest. An intergroup interest of the PCS Group in the FON Group cannot be created. If either the FON Group or the PCS Group were a stand-alone entity, a person that does not wish to negotiate with management could seek to acquire such Group by means of a tender offer or proxy contest involving only that entity's shareholders. However, because the FON Group and the PCS Group are each part of Sprint, acquiring either Group without negotiation with Sprint's management would require a proxy contest or tender offer that yielded control of Sprint generally and would likely require solicitations to shareholders of both Groups. Sprint FON Group General Overview of the Sprint FON Group The FON Group is comprised of the global markets division, the local division and the product distribution and directory publishing businesses. The main activities of the global markets division include domestic and international long distance communications (except for consumer long distance services used by customers within Sprint's local franchise territories), Sprint ION(SM), broadband fixed wireless services and certain other ventures. The activities of the local division include local exchange communications and consumer long distance services used by customers within Sprint's local franchise territories. The FON Group is the nation's third-largest provider of long distance services. Global Markets Division The global markets division's financial performance for 2000, 1999 and 1998 is summarized as follows: - ----------------------------------------------
2000 1999 1998 - ---------------------------------------------- (millions) Net operating revenues $10,528 $10,308 $9,541 -------------------------- Operating income(/1/) $ 585 $ 1,175 $1,190 --------------------------
(/1/) Includes a $238 million nonrecurring asset write-down in 2000. Global Markets Division General The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; data communications such as Internet and frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying 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 advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. During 2000, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed data services. The global markets division's operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. The global markets division also reflects the costs of establishing international operations beginning in 2000. This division also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada; Intelig, a long distance provider in Brazil; and certain other telecommunications investments and ventures. Competition The division competes with AT&T, WorldCom and other telecommunications providers in all segments of the long distance communications market. AT&T continues to have the largest market share of the domestic long distance communications market. Emerging competitors are targeting the high-end data market and are offering deeply discounted rates in exchange for high-volume traffic as they attempt to fill their networks with traffic volume. Certain Regional Bell Operating Companies (RBOCS) have obtained authorization to provide in-region long distance service in certain states, which has heightened competition in those states. Competition in long distance is based on price and pricing plans, the types of services offered, customer service, and communications quality, reliability and availability. Strategy In order to achieve profitable market share growth in an increasingly competitive long distance communications environment, the global markets division intends to leverage its principal strategic assets: its high-capacity national fiber-optic network, its tier one IP network, its large base of business and residential customers, its established national brand, and offerings available from other FON Group operating entities and the PCS Group. The long 2 distance operation will focus on expanding its presence in the high-growth data communications markets and intends to become the provider of choice for delivery of end-to-end service to business and residential customers. The FON Group continues to deploy network and systems infrastructure which provides reliability, cost effectiveness and technological improvements. In order to create integrated product offerings for its customers, the FON Group is solidifying the linkage of its long distance operation with Sprint's other operations such as the local division and the PCS Group. The long distance operation also supports Sprint ION activities. Sprint ION's integrated services capability is expected to generate increased demand for Sprint's products and services, and at the same time reduce the costs to provide those services. Sprint ION intends to rely largely on the transmission infrastructure of the long distance operation, Sprint's MMDS capabilities and, to a lesser extent, on the transmission infrastructure of the local division. Sprint will evaluate whether facilities should be built, leased or acquired where they currently do not exist. Because a great amount of future investment will be related to specific customer contracts, Sprint expects to manage its investment in Sprint ION consistent with customer demand. Local Division General The local division (LTD) consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. LTD provides local phone services, access by phone customers and other carriers to LTD's local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. LTD's financial performance for 2000, 1999 and 1998 is summarized as follows: - --------------------------------------------
2000 1999 1998 - -------------------------------------------- (millions) Net operating revenues $6,155 $5,958 $5,599 ----------------------- Operating income $1,763 $1,553 $1,401 -----------------------
AT&T is LTD's largest customer for network access services. The division's net operating revenues from services (mainly network access services) provided to AT&T were 8% in 2000, 10% in 1999 and 12% in 1998. Revenues from AT&T were 3% of the FON Group's revenues in 2000 and 4% in 1999 and 1998. Competition Because LTD operations are largely in secondary and tertiary markets, competition in its markets is occurring more gradually. There is already competition for business and residential customers in urban areas served by LTD and for business customers located in most areas. Telecommunications mergers may accelerate competition in the areas served by LTD. There continues to be significant competition in toll services. Competition in these services is based on price and pricing plans, the types of services offered, customer service, and communications quality, reliability and availability. In addition, wireless services will continue to grow as an alternative to wireline services as a means of reaching local customers. Strategy LTD has embarked on a growth strategy whereby it will aggressively market to its local customers Sprint's entire product portfolio as well as its core product line of advanced network features and data products. LTD also supports the FON Group's initiatives with Sprint ION. See "Global Markets Division-- Strategy" for more details. 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. The financial performance for the product distribution and directory publishing businesses for 2000, 1999 and 1998 is summarized as follows: - --------------------------------------------
2000 1999 1998 - -------------------------------------------- (millions) Net operating revenues $1,936 $1,758 $1,709 ----------------------- Operating income $ 284 $ 242 $ 231 -----------------------
Sprint PCS Group General Overview of the Sprint PCS Group The PCS Group includes Sprint's wireless PCS operations. It operates a 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At year- end 2000, the PCS Group, together with affiliates, operated PCS systems in over 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve the entire U.S. population, including Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches more than 220 million people. The PCS Group provides nationwide service through: . operating its own digital network in major U.S. metropolitan areas, . affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, 3 . roaming on other providers' analog cellular networks using dual- band/dual-mode handsets, and . roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of acquisition and customer service. The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted for using the equity method. The financial performance for the PCS Group for 2000, 1999 and 1998 is summarized as follows: - -----------------------------------------------------
2000 1999 1998 - ----------------------------------------------------- (millions) Net operating revenues(/1/) $ 6,341 $ 3,373 $ 1,294 --------------------------------- Operating loss(/1/),(/2/) $(1,928) $(3,237) $(2,570) --------------------------------- Other partners' loss in Sprint PCS $ -- $ -- $ 1,251 ---------------------------------
(/1/) The PCS Group's 1998 results of operations included SprintCom's operating results as well as Sprint PCS' operating results on a consolidated basis for the entire year. (/2/) Includes a $24 million charge in 2000 for costs associated with the terminated merger between Sprint and WorldCom and a nonrecurring charge to write-off $179 million of acquired in-process research and development costs related to the PCS Restructuring in 1998. For further discussion, see the PCS Group's "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition Each of the markets in which the PCS Group competes is served by other two-way wireless service providers, including cellular and PCS operators and resellers. A majority of the markets will have five or more commercial mobile radio service (CMRS) providers and each of the top 50 metropolitan markets have at least one other PCS competitor in addition to two cellular incumbents. Many of these competitors have been operating for a number of years and currently serve a significant subscriber base. Strategy The business objective of the PCS Group is to expand network coverage and increase market penetration by aggressively marketing competitively priced PCS products and services under the Sprint and Sprint PCS brand names, offering enhanced services and seeking to provide superior customer service. The principal elements of the PCS Group's strategy for achieving these goals are: . Operating a nationwide digital wireless network . Leveraging Sprint's national brand . Utilizing state-of-the-art CDMA technology . Delivering superior value to its customers . Growing its customer base using multiple distribution channels . Continuing to expand coverage . Offering PCS services in combination with FON Group services Regulatory Developments Sprint FON Group Competitive Local Service The Telecommunications Act of 1996 (Telecom Act) was designed to promote competition in all aspects of telecommunications. It eliminated legal and regulatory barriers to entry into local phone markets. It also required incumbent local exchange carriers (ILECs), among other things, to allow local resale at wholesale rates, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements and allow collocation of interconnection equipment by competitors. Sprint has obtained interconnection and collocation agreements with a number of ILECs, and is rolling out Sprint ION in selected cities across the nation, using collocation and unbundled network elements obtained from ILECs. In January 1999, the Supreme Court affirmed the authority of the Federal Communications Commission (FCC) to establish rules and prices relating to interconnection and unbundling of the ILECs' networks. The FCC subsequently reaffirmed in large part the list of network elements incumbents are required to provide on an unbundled basis, and strengthened collocation requirements. It also took steps to speed the deployment of advanced technologies such as xDSL. In July 2000, the U.S. Court of Appeals for the Eighth Circuit invalidated the pricing standards the FCC had adopted for unbundled network elements and resale of ILEC services. The court also refused to reconsider, in light of the Supreme Court decision discussed above, the court's prior holding that ILECs could not be required to combine unbundled network elements on behalf of other carriers. In January 2001, the U.S. Supreme Court granted certiorari of three issues from the Eighth Circuit decision. The Supreme Court will review whether the Telecom Act forecloses the cost methodology adopted by the FCC for interconnection rates with the ILECs. A related 4 issue dealing with whether rejection of historical costs is a taking will also be considered. Finally, the Supreme Court will consider whether ILECs have a duty under the Telecom Act to combine previously uncombined network elements when requested and for a fee. If the Supreme Court affirms the Eighth Circuit's decision, the FCC or the state regulatory commissions would have to formulate new pricing standards for unbundled network elements and interconnection. Separately, in a March 2000 decision, the U.S. Court of Appeals for the District of Columbia Circuit remanded to the FCC the issue of what types of equipment ILECs must allow competitors to collocate in their offices. The FCC has received comments and reply comments on whether and how to change its collocation rules in light of the D.C. Circuit's decision. RBOC Long Distance Entry The Telecom Act also allows RBOCs to provide in-region long distance service once they obtain state certification of compliance with a competitive "checklist," have a facilities-based competitor, and obtain an FCC ruling that the provision of in-region long distance service is in the public interest. The RBOC's have gained authorization to provide in-region long distance service in four states. Verizon obtained FCC authorization for New York in December 1999; SBC obtained FCC authorization to provide in-region services in Texas in June 2000 and in Oklahoma and Kansas in January 2001. RBOCs may gain such authorization in the near future in other states. The entry of the RBOCs into the long distance market will impact competition, but the extent of the impact will depend upon factors such as the RBOCs' competitive ability, the appeal of the RBOC brand to different market segments, and the response of competitors. Some of the impact on Sprint may be offset by wholesale revenues from those RBOCs which choose to resell Sprint services. Customer Service Slamming The Telecom Act also established liability for the unauthorized switching of a consumer's telephone service from one carrier to another (slamming). In late 1998, the FCC adopted new rules intended to prevent slamming and to compensate victims of slamming. The compensation rules were stayed by the Court of Appeals for the District of Columbia Circuit. In May 2000, the FCC modified the process for adjudicating alleged slams. The D.C. Circuit then lifted its stay and the new rules went into effect on November 28, 2000. Mergers A number of mergers received final regulatory approval in 2000 and early 2001. The Qwest-US West merger was approved by the FCC in March 2000; the Bell Atlantic-GTE merger was approved by the FCC in June 2000; and the AT&T-MediaOne merger was approved by the FCC in June 2000. Finally, the AOL-Time Warner merger received approval from the FCC in January 2001. Universal Service Requirements The FCC continues to address issues related to universal service and access reform. In May 2000, the FCC adopted an access reform plan that substantially reduced switched access charges paid by long distance carriers to the large ILECs and created a new universal service fund that offsets a portion of this reduction in access charges. In connection with its advocacy of this plan, Sprint committed that it would flow through the reductions in switched access costs over the five-year life of the plan to both business and residential customers. Sprint also committed to certain other pricing actions, including eliminating charges to residential and single-line business customers which had been used to pass through certain access costs that were eliminated by this plan, and maintaining, for the duration of the plan, at least one pricing option that does not include a minimum usage charge. The FCC order adopting this access reform plan requires Sprint to adhere to these commitments. The FCC's order has been appealed to the U.S. Court of Appeals for the Fifth Circuit. The FCC and many states have established "universal service" programs to ensure affordable, quality local telecommunications services for all Americans. The FON Group's assessment to fund these programs is typically a percentage of interstate and international end-user revenues. Currently, management cannot predict the extent of the FON Group's future federal and state universal service assessments, or its ability to recover its contributions to the universal service fund from its customers. Communications Assistance for Law Enforcement Act The Communications Assistance for Law Enforcement Act (CALEA) was enacted in 1994 to preserve electronic surveillance capabilities authorized by federal and state law. CALEA requires telecommunications companies to meet certain "assistance capability requirements" by the end of June 2000 where circuit- switching is used and by September 2001 where packet-switching is used. Where circuit-switched technology was installed before 1995, reimbursement for hardware and software upgrades to facilitate CALEA compliance was authorized. The U.S. Department of Justice (DOJ) has published guidelines concerning what is required for it to support, at the FCC, petitions for extension of the CALEA enforcement deadlines; however, the FCC did not require carriers to have DOJ concurrence to seek an extension. LTD uses circuit-switching for the bulk of its traffic and most LTD switches were installed before 1995 and qualify 5 for reimbursement if upgrades are required by the DOJ. Sprint ION uses packet switching for its local operations. In the case of Sprint ION, CALEA compliance capabilities are not currently available from equipment and software vendors involved in Sprint ION's deployment. LTD has obtained an extension for CALEA compliance until June 30, 2001 and has been in discussions with the DOJ which resulted in an agreement on a deployment schedule for CALEA within LTD. LTD expects the DOJ to provide a letter of support for use with the FCC in obtaining a further extension consistent with the agreed upon deployment schedule. Sprint ION will apply for an extension for the local packet-based services to allow for development of required hardware and software. Sprint PCS Group The FCC sets rules, regulations and policies to, among other things: . grant licenses for PCS frequencies and license renewals, . rule on assignments and transfers of control of PCS licenses, . govern the interconnection of PCS networks with other wireless and wireline carriers, . establish access and universal service funding provisions, . impose fines and forfeitures for violations of any of the FCC's rules, and . regulate the technical standards of PCS networks. The FCC currently prohibits a single entity from having a combined attributable interest (20% or greater interest in any license) in broadband PCS, cellular and specialized mobile radio licenses totaling more than 45 megahertz (MHz) in any geographic area except that in rural service areas no licensee may have an attributable interest in more than 55 MHz of CMRS spectrum. PCS License Transfers and Assignments The FCC must approve any substantial changes in ownership or control of a PCS license. Noncontrolling interests in an entity that holds a PCS license or operates PCS networks generally may be bought or sold without prior FCC approval. In addition, the FCC now requires only post-consummation notification of certain pro forma assignments or transfers of control. PCS License Conditions All PCS licenses are granted for 10-year terms if the FCC's buildout requirements are followed. Based on those requirements, all 30 MHz broadband major trading area (MTA) licensees must build networks offering coverage to 1/3 of the population within five years and 2/3 within 10 years. In June 2000, the PCS Group met its five-year buildout requirement in all its MTA markets. All 10 MHz broadband PCS licensees must build networks offering coverage to at least 1/4 of the population within five years or make a showing of "substantial service" within that five-year period. Sprint anticipates that it will meet the 10 MHZ five-year buildout requirement by the April 2002 deadline. Licenses may be revoked if the rules are violated. PCS licenses may be renewed for additional 10-year terms. Renewal applications are not subject to auctions. However, third parties may oppose renewal applications. Other FCC Requirements Broadband PCS providers cannot unreasonably restrict or prohibit other companies from reselling their services. They also cannot unreasonably discriminate against resellers. CMRS resale obligations will expire in 2002. Local exchange carriers must program their networks to allow customers to retain, at the same location, existing telephone numbers when switching from one telecommunications carrier to another. This is referred to as service provider number portability. CMRS providers are currently required to deliver calls from their networks to ported numbers anywhere in the country. By November 24, 2002, all covered CMRS providers must provide a database solution for number portability. The solution must be able to support roaming. Covered CMRS providers must provide number portability in the 100 largest metropolitan statistical areas, in compliance with certain FCC performance criteria, but only at the request of another carrier (CMRS provider or local exchange carrier). Broadband PCS and other CMRS providers may provide wireless local loop and other fixed services that would directly compete with the wireline services of local phone companies. Broadband PCS and other CMRS providers must implement enhanced emergency 911 capabilities in a two-tiered manner. In the first phase, wireless carriers must identify the base station from which a call originated. In the second phase, wireless carriers must provide location within a radius as small as fifty meters. Implementation of the more complex Phase II location requirements must begin by October 1, 2001. Communications Assistance for Law Enforcement Act CALEA requires telecommunications carriers, including Sprint, to modify their equipment, facilities and services to allow for authorized electronic surveillance based on either industry or FCC standards. In 1997, industry- setting organizations developed interim standards for wireline, cellular and broadband PCS carriers to comply with CALEA. In 6 August 1999, the FCC supplemented the interim industry standards with six additional capabilities. For interim industry standards, the deadline for compliance was June 30, 2000, and for the additional standards established by the FCC, the deadline is September 30, 2001. In August 2000, an appellate court vacated the FCC's decision relative to four of the capabilities and remanded the matter for further FCC consideration. Sprint PCS believes that it is in compliance with all existing CALEA requirements. However, Sprint PCS filed a petition for an extension of the June 30, 2000 deadline until June 30, 2001 in the event that the FCC determines that Sprint PCS must use a specific vendor solution to automatically provide mobile service assistance information under Section 103 (d) of CALEA. Specifically, this section requires a CMRS carrier to identify (a) whether a customer/interception subject is traveling "in network: but outside the customer's service area," and (b) the service provider if the subject is roaming on another CMRS network. While Sprint PCS is capable of providing this information upon a specific request by law enforcement, it cannot provide the information automatically. The FCC has not ruled on Sprint PCS' motion for an extension of the June 30, 2000 deadline; however, Sprint PCS is deemed to have an extension of the deadline until March 31, 2001 unless the FCC revokes the extension before that deadline or issues a final order with a different deadline. Other Federal Regulations Wireless systems must comply with certain FCC and Federal Aviation Administration regulations about the siting, lighting and construction of transmitter towers and antennas. In addition, FCC environmental regulations may cause certain cell site locations to come under National Environmental Policy Act (NEPA) and National Historic Preservation Act (NHPA) regulation. The FCC's NEPA and NHPA rules require carriers to meet certain land use and radio frequency standards. Universal Service Requirements The FCC and many states have established "universal service" programs to ensure affordable, quality telecommunications services for all Americans. The PCS Group's "contribution" to these programs is typically a percentage of end-user revenues. Currently, management cannot predict the extent of the PCS Group's future federal and state universal service assessments, or its ability to recover its contributions from the universal service fund. Environmental Compliance Sprint's environmental compliance and remediation expenditures mainly result from the operation of standby power generators for its telecommunications equipment. The expenditures arise in connection with standards compliance, permits or occasional remediation, which are usually related to generators, batteries or fuel storage. Sprint has been identified as a potentially responsible party at sites relating to discontinued power generation operations. Sprint's environmental compliance and remediation expenditures have not been material to its financial statements or to its operations and are not expected to have any future material adverse effects on the FON Group or the PCS Group. Patents, Trademarks and Licenses Sprint owns numerous patents, patent applications, service marks and trademarks in the United States and other countries. Sprint expects to apply for and develop trademarks, service marks and patents for the benefit of the Groups in the ordinary course of business. Sprint is a registered trademark of Sprint and Sprint PCS is a registered service mark of Sprint. Sprint is also licensed under domestic and foreign patents and trademarks owned by others. In total, these patents, patent applications, trademarks, service marks and licenses are of material importance to the business. Generally, Sprint's trademarks, trademark licenses and service marks have no limitation on duration; Sprint's patents and licensed patents have remaining lives generally ranging from one to 19 years. Pursuant to certain of the PCS Group's third party supplier contracts, the PCS Group has certain rights to use third party supplier trademarks in connection with the buildout, marketing and operation of its network. Employee Relations At year-end 2000, Sprint had approximately 84,100 employees. Approximately 10,100 FON Group employees were represented by unions. During 2000, Sprint had no material work stoppages caused by labor controversies. Management For information concerning the executive officers of Sprint, see "Executive Officers of the Registrant" in this document. Information as to Business Segments For information required by this section, refer to Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the FON Group's "Management's Discussion and Analysis of Financial Condition and Results of Operations." Also refer to Note 15 of Sprint's "Notes to Consolidated Financial Statements" and Note 14 of the FON Group's "Notes to Combined Financial Statements" sections of the Financial Statements and Financial Statement Schedules filed as part of this document. 7 - -------------------------------------------------------------------------------- Item 2. Properties - -------------------------------------------------------------------------------- Sprint's gross property, plant and equipment totaled $43.1 billion at year-end 2000, of which $16.8 billion relates to the FON Group's local communications services, $12.5 billion relates to the FON Group's global markets communications services, $12.1 billion relates to the PCS Group's PCS wireless services and the remainder relates to the FON Group's product distribution and directory publishing businesses' properties and general support assets. The FON Group's gross property, plant and equipment totaled $31.0 billion at year-end 2000. These properties mainly consist of land, buildings, digital fiber-optic network, switching equipment, microwave radio and cable and wire facilities. Sprint leases certain switching equipment and several general office facilities. The long distance operation has been granted easements, rights-of-way and rights-of-occupancy, mainly by railroads and other private landowners, for its fiber-optic network. The product distribution and directory publishing businesses' properties mainly consist of office and warehouse facilities to support the business units in the distribution of telecommunications products and publication of telephone directories. The PCS Group's properties consist of leased and owned office space for its corporate operations, network monitoring personnel, customer care centers and retail stores, and PCS network assets including base transceiver stations, switching equipment and towers. The PCS Group leases space for base station towers and switch sites for its PCS network. At year-end 2000, the PCS Group had under lease (or options to lease) approximately 17,300 cell sites. Sprint owns its corporate headquarters building and is in the process of building a $1 billion corporate campus in the greater Kansas City metropolitan area. Gross property, plant and equipment totaling $16.1 billion for the FON Group is either pledged as security for first mortgage bonds and certain notes or is restricted for use as mortgaged property. - -------------------------------------------------------------------------------- Item 3. Legal Proceedings - -------------------------------------------------------------------------------- In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders of Sprint have been filed. The PCS Group has been involved in legal proceedings in various states concerning the suspension of the processing or approval of permits for wireless telecommunications towers, the denial of applications for permits and other issues arising in connection with tower siting. There can be no assurance that such litigation and similar actions taken by others seeking to block the construction of individual cell sites of the PCS Group's network will not, in the aggregate, significantly delay further expansion of the PCS Group's network coverage. In early 2000, Sprint utilized the Environmental Protection Agency's (EPA's) self-policing policy and disclosed to the EPA its failure to maintain certain records and file certain reports for a portion of its facilities. Sprint also informed the EPA that it had corrected the violations and implemented policies to prevent a reoccurrence. After discussing the matter with the EPA, Sprint believes that it will be assessed a fine of approximately $250,000, which represents the EPA's estimate of the economic benefits that Sprint derived from the violations. Sprint is involved in various other legal proceedings incidental to the conduct of its business. While it is not possible to determine the ultimate disposition of each of these proceedings, Sprint believes that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on Sprint's, the FON Group's or the PCS Group's financial conditions or results of operations. - -------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders - -------------------------------------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of 2000. 8 - -------------------------------------------------------------------------------- Item 10(b). Executive Officers of the Registrant - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Office Name Age - ------------------------------------------------------------------------------- Chairman and Chief Executive Officer William T. Esrey(/1/) 61 President and Chief Operating Officer Ronald T. LeMay(/2/) 55 President--Local Telecommunications Division Michael B. Fuller(/3/) 56 President--Technology Services Don G. Hallacy(/4/) 44 President--National Integrated Services Arthur A. Kurtze(/5/) 56 President--Global Markets Group Len J. Lauer(/6/) 43 President--Sprint PCS Charles E. Levine(/7/) 47 Executive Vice President--General Counsel and External Affairs J. Richard Devlin(/8/) 50 Executive Vice President--Chief Financial Officer Arthur B. Krause(/9/) 59 Senior Vice President and Treasurer Gene M. Betts(/10/) 48 Senior Vice President--Public Affairs and Brand Management Forrest E. Mattix(/11/) 47 Senior Vice President and Controller John P. Meyer(/12/) 50 Senior Vice President--Strategic Planning/Corporate Development Liane J. Pelletier(/13/) 43 Senior Vice President--Human Resources I. Benjamin Watson(/14/) 52
(/1/) Mr. Esrey was elected Chairman in 1990. He was elected Chief Executive Officer and a member of the Board of Directors in 1985. (/2/) Mr. LeMay was first elected President and Chief Operating Officer in 1996. From July 1997 to October 1997, he served as Chairman and Chief Executive Officer of Waste Management, Inc., a provider of comprehensive waste management services. He was re-elected President and Chief Operating Officer of Sprint effective October 1997. From 1995 to 1996 Mr. LeMay served as Vice Chairman of Sprint. He also served as Chief Executive Officer of Sprint Spectrum Holding Company from 1995 to 1996. Mr. LeMay served on Sprint's Board of Directors from 1993 until he went to work for Waste Management, Inc. He was re-elected to Sprint's Board of Directors in December 1997. (/3/) Mr. Fuller was elected President--Local Telecommunications Division in 1996. From 1990 to 1996, he served as President of United Telephone-- Midwest Group, an operating group of subsidiaries of Sprint. (/4/) Mr. Hallacy was elected President--Technology Services in October 2000. He had served as President of Sprint's Internet business unit since April 2000. Mr. Hallacy served as President and Chief Executive Officer of Eltrax Systems, Inc., a full service Internet application service provider, from April 1999 to April 2000. Prior to joining Eltrax, he had served since 1996 as a Vice President of Sprint/United Management Company, a subsidiary of Sprint. From 1995 to 1996, he was Assistant Vice President, Product Marketing for Sprint/United Management Company. (/5/) Mr. Kurtze was elected President--National Integrated Services in June 2000. He had served as Senior Vice President--One Sprint Strategic Development since February 1999. From 1995 to 1999, he served as Chief Operating Officer of Sprint Spectrum Holding Company. (/6/) Mr. Lauer became President--Global Markets Group in September 2000. He had been elected President--Sprint Business in June 2000. Mr. Lauer served as President--Consumer Services Group of Sprint/United Management Company from 1999 to 2000. He joined Sprint in 1998 as Senior Vice President--Quality, Development and Public Relations. From 1995 to 1998, he had been President and Chief Executive Officer of Bell Atlantic--New Jersey, a telecommunications company. (/7/) Mr. Levine was elected President--Sprint PCS in February 2001. He had served as Chief Operating Officer--PCS since October 2000. He had served as Chief Sales and Marketing Officer of Sprint Spectrum Holding Company since 1998. Mr. Levine joined Sprint Spectrum Holding Company in 1997 as Chief Marketing Officer. Before joining Sprint Spectrum Holding Company, he was President of Octel Link, a voice mail equipment and services provider, and Senior Vice President of Octel Services from 1994 to 1996. (/8/) Mr. Devlin was elected Executive Vice President--General Counsel and External Affairs in 1989. (/9/) Mr. Krause was elected Executive Vice President--Chief Financial Officer in 1988. (/10/) Mr. Betts was elected Senior Vice President in 1990. He was elected Treasurer in December 1998. (/11/) Mr. Mattix was elected Senior Vice President--Public Affairs and Brand Management in August 2000. He had served as Chief Public Relations Officer of Sprint Spectrum Holding Company since 1996. Before joining Sprint Spectrum Holding Company, he was Vice President--Public Relations for US WEST Communications, Inc., a communications company. (/12/) Mr. Meyer was elected Senior Vice President--Controller in 1993. (/13/) Ms. Pelletier was elected Senior Vice President--Strategic Planning/Corporate Development in August 2000. She had served as Vice President--Corporate Strategy of Sprint/United Management Company since 1995. (/14/) Mr. Watson was elected Senior Vice President--Human Resources in 1993. There are no known family relationships between any of the persons named above or between any of these persons and any outside directors of Sprint. Officers are elected annually. 9 Part II - -------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - -------------------------------------------------------------------------------- Common Stock Data - ------------------------------------
2000 Market Price -------------------- End of High Low Period - ------------------------------------ FON Stock First quarter $67.81 $55.13 $63.00 Second quarter 67.00 50.98 51.50 Third quarter 54.81 24.31 29.31 Fourth quarter 29.56 19.63 20.31 PCS Stock(/1/) First quarter 66.94 42.56 65.50 Second quarter 66.00 44.06 59.50 Third quarter 65.88 27.81 35.13 Fourth quarter 39.19 19.38 20.44 - ------------------------------------ 1999 Market Price -------------------- End of High Low Period - ------------------------------------ FON Stock(/2/) First quarter $50.34 $36.88 $49.06 Second quarter 57.47 48.63 53.00 Third quarter 55.69 42.63 54.25 Fourth quarter 75.94 54.00 67.31 PCS Stock(/1/) First quarter 24.16 10.44 22.16 Second quarter 30.38 20.75 28.50 Third quarter 39.13 26.47 37.28 Fourth quarter 57.22 33.41 51.25
(/1/) In the 2000 first quarter, Sprint effected a two-for-one stock split of its Sprint PCS common stock. Market prices prior to the split have been restated. (/2/) In the 1999 second quarter, Sprint effected a two-for-one stock split of its Sprint FON common stock. Market prices prior to the split have been restated. As of February 28, 2001, Sprint had approximately 71,000 FON stock record holders, 64,000 PCS stock record holders and two Class A common stock record holders. The principal trading market for Sprint's FON stock and PCS stock is the New York Stock Exchange. The Class A common stock is not publicly traded. Adjusting for the effects of the two-for-one split of the FON Stock in the 1999 second quarter, Sprint paid a FON stock dividend of $0.125 per share in each of the quarters of 2000 and 1999. Sprint paid Class A common stock dividends of $0.125 per share in each of the quarters of 2000 and each of the last three quarters of 1999 and $0.25 per share in the first quarter of 1999. Sprint does not intend to pay dividends on the PCS stock in the foreseeable future. - -------------------------------------------------------------------------------- Item 6. Selected Financial Data - -------------------------------------------------------------------------------- The information required by Item 6 is incorporated by reference from Annex I, Annex II and Annex III included herein. - -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- The information required by Item 7 is incorporated by reference from Annex I, Annex II and Annex III included herein. - -------------------------------------------------------------------------------- Item 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------------------- Sprint's exposure to market risk--through derivative financial instruments, other financial instruments, such as investments in marketable securities and long-term debt, from changes in interest rates and from changes in foreign currency exchange rates--is not material. - -------------------------------------------------------------------------------- Item 8. Financial Statements and Supplementary Data - -------------------------------------------------------------------------------- The information required by Item 8 is incorporated by reference from Annex I, Annex II and Annex III included herein. - -------------------------------------------------------------------------------- Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure - -------------------------------------------------------------------------------- No reportable items. 10 Part III - -------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant - -------------------------------------------------------------------------------- Pursuant to Instruction G(3) to Form 10-K, the information relating to Directors of Sprint required by Item 10 is incorporated by reference from Sprint's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's fiscal year ended December 31, 2000. For information pertaining to Executive Officers of Sprint, as required by Instruction 3 of Paragraph (b) of Item 401 of Regulation S-K, refer to the "Executive Officers of the Registrant" section of Part I of this document. Pursuant to Instruction G(3) to Form 10-K, the information relating to compliance with Section 16(a) required by Item 10 is incorporated by reference from Sprint's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's fiscal year ended December 31, 2000. - -------------------------------------------------------------------------------- Item 11. Executive Compensation - -------------------------------------------------------------------------------- Pursuant to Instruction G(3) to Form 10-K, the information required by Item 11 is incorporated by reference from Sprint's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's fiscal year ended December 31, 2000. - -------------------------------------------------------------------------------- Item 12. Security Ownership of Certain Beneficial Owners and Management - -------------------------------------------------------------------------------- Pursuant to Instruction G(3) to Form 10-K, the information required by Item 12 is incorporated by reference from Sprint's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's fiscal year ended December 31, 2000. - -------------------------------------------------------------------------------- Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------------------------------- Pursuant to Instruction G(3) to Form 10-K, the information required by Item 13 is incorporated by reference from Sprint's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's fiscal year ended December 31, 2000. 11 Part IV - -------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------------- (a)1. The consolidated financial statements of Sprint and the combined financial statements of the FON Group and the PCS Group, filed as part of this report, are listed in the Index to Financial Statements and Financial Statement Schedules. 2. The consolidated financial statement schedule of Sprint and the combined financial statement schedules of the FON Group and the PCS Group, filed as part of this report, are listed in the Index to Financial Statements and Financial Statement Schedules. 3. The following exhibits are filed as part of this report: EXHIBITS (3) Articles of Incorporation and Bylaws: (a) Articles of Incorporation, as amended (filed as Exhibit 3(a) to Sprint Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference). (b) Bylaws, as amended (filed as Exhibit 3(b) to Sprint Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference). (4) Instruments defining the Rights of Sprint's Security Holders: (a) The rights of Sprint's equity security holders are defined in the Fifth, Sixth, Seventh and Eighth Articles of Sprint's Articles of Incorporation. See Exhibit 3(a). (b) Rights Agreement dated as of November 23, 1998, between Sprint Corporation and UMB Bank, n.a. (filed as Exhibit 4.1 to Amendment No. 1 to Sprint Corporation's Registration Statement on Form 8-A relating to Sprint's PCS Group Rights, filed November 25, 1998, and incorporated herein by reference). (c) Tracking Stock Policies of Sprint Corporation (filed as Exhibit 4D to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference). (d) Amended and Restated Standstill Agreement dated November 23, 1998, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit 4E to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference) as amended by the Master Transfer Agreement dated January 21, 2000 between and among France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH, Atlas Telecommunications, S.A., Sprint Corporation, Sprint Global Venture, Inc. and the JV Entities set forth in Schedule II thereto (filed as Exhibit 2 to Sprint Corporation's Current Report on Form 8-K dated January 26, 2000 and incorporated herein by reference). (e) Indenture, dated as of October 1, 1998, among Sprint Capital Corporation, Sprint Corporation and Bank One, N.A., as Trustee (filed as Exhibit 4(b) to Sprint Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference). (f) First Supplemental Indenture, dated as of January 15, 1999, among Sprint Capital Corporation, Sprint Corporation and Bank One, N.A., as Trustee (filed as Exhibit 4(b) to Sprint Corporation Current Report on Form 8-K dated February 2, 1999 and incorporated herein by reference). (g) Indenture, dated as of October 1, 1998, between Sprint Corporation and Bank One, N.A., as Trustee (filed as Exhibit 4(a) to Sprint Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference). 12 (h) First Supplemental Indenture, dated as of January 15, 1999, between Sprint Corporation and Bank One, N.A., as Trustee (filed as Exhibit 4(a) to Sprint Corporation Current Report on Form 8-K dated February 2, 1999 and incorporated herein by reference). (10) Material Agreements (a) Amended and Restated Stockholders' Agreement among France Telecom, Deutsche Telekom AG and Sprint Corporation, dated as of November 23, 1998 (filed as Exhibit 10(c) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference) as amended by the Master Transfer Agreement dated January 21, 2000 between and among France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH, Atlas Telecommunications, S.A., Sprint Corporation, Sprint Global Venture, Inc. and the JV Entities set forth in Schedule II thereto (filed as Exhibit 2 to Sprint Corporation's Current Report on Form 8-K dated January 26, 2000 and incorporated herein by reference). (b) Amended and Restated Registration Rights Agreement, dated as of November 23, 1998, among Sprint Corporation, France Telecom and Deutsche Telekom A.G. (filed as Exhibit 10.1 to Amendment No. 1 to Sprint Corporation Registration Statement on Form S-3 (No. 333-64241) and incorporated herein by reference) as amended by the Master Transfer Agreement dated January 21, 2000 between and among France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH, Atlas Telecommunications, S.A., Sprint Corporation, Sprint Global Venture, Inc. and the JV Entities set forth in Schedule II thereto (filed as Exhibit 2 to Sprint Corporation's Current Report on Form 8-K dated January 26, 2000 and incorporated herein by reference) and as further amended by the Offering Process Agreement dated as of February 20, 2001 between and among France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH and Sprint Corporation. (c) Registration Rights Agreement, dated as of November 23, 1998, among Sprint Corporation, Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (filed as Exhibit 10.2 to Amendment No. 1 to Sprint Corporation Registration Statement on Form S-3 (No. 333-64241) and incorporated herein by reference). (d) Standstill Agreements, dated May 26, 1996, between Sprint Corporation and each of Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (filed as Exhibit 10(g) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). (e) 364-Day Credit Agreement, dated as of August 4, 2000, among Sprint Corporation and Sprint Capital Corporation, as Borrowers, and the initial Lenders named therein, as Initial Lenders, and Citibank, N.A., as Administrative Agent, and Salomon Smith Barney Inc., as Book Manager and Arranger, and Morgan Guaranty Trust Company of New York, as Syndication Agent, and Bank of America, N.A. and The Chase Manhattan Bank, as Documentation Agents (filed as Exhibit 10(a) to Sprint Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). (f) Five-Year Credit Agreement, dated as of August 7, 1998, among Sprint Corporation and Sprint Capital Corporation, as Borrowers, and the initial Lenders named therein, as Initial Lenders, and Citibank, N.A., as Administrative Agent, and Morgan Guaranty Trust Company of New York, as Syndication Agent, and Bank of America National Trust and Savings Association and The Chase Manhattan Bank, as Documentation Agents (filed as Exhibit 10.24 to Sprint Corporation Registration Statement on Form S-3 (No. 333-64241) and incorporated herein by reference). (10) Executive Compensation Plans and Arrangements: (g) 1990 Stock Option Plan, as amended. (h) 1990 Restricted Stock Plan, as amended (filed as Exhibit 10(h) to Sprint Corporation Annual Report on Form 10-K for the year ended December 3, 1999 and incorporated herein by reference). (i) Executive Deferred Compensation Plan, as amended (filed as Exhibit 10(i) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). Summary of Amendments to the Executive Deferred Compensation Plan. (j) Management Incentive Stock Option Plan, as amended. 13 (k) 1997 Long-Term Stock Incentive Program, as amended (filed as Exhibit 10(d) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). (l) Sprint Supplemental Executive Retirement Plan (filed as Exhibit (10)(i) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). (m) Amended and Restated Centel Directors Deferred Compensation Plan (filed as Exhibit 10(m) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). (n) Restated Memorandum Agreements Respecting Supplemental Pension Benefits between Sprint Corporation (formerly United Telecommunications, Inc.) and two of its current and former executive officers (filed as Exhibit 10(i) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference). (o) Executive Long-Term Incentive Plan (filed as Exhibit 10(j) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (p) Executive Management Incentive Plan (filed as Exhibit 10(k) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (q) Long-Term Incentive Compensation Plan, as amended (filed as Exhibit 10(i) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference). (r) Management Incentive Plan, as amended. (s) Retirement Plan for Directors, as amended (filed as Exhibit (10)(u) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). (t) Key Management Benefit Plan, as amended (filed as Exhibit 10(g) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). (u) Agreements Regarding Special Compensation and Post Employment Restrictive Covenants between Sprint Corporation and certain of its Executive Officers (filed as Exhibit 10(d) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, Exhibit 10(h) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Exhibit 10(w) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1997, Exhibit 10(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and Exhibit 10.4 to Sprint Spectrum L.P. Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference). (v) Director's Deferred Fee Plan, as amended (filed as Exhibit 10 (v) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). (w) Form of Contingency Employment Agreements between Sprint Corporation and certain of its executive officers (filed as Exhibit 10(h) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). (x) Form of Indemnification Agreements between Sprint Corporation (formerly United Telecommunications, Inc.) and its Directors and Officers (filed as Exhibit 10(s) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference). (y) Summary of Executive Officer Benefits and Board of Directors Benefits and Fees. (z) Amended and Restated Centel Director Stock Option Plan (filed as Exhibit 10(aa) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference). (aa) Special Incentive Plan (filed as Exhibit 10(g) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 14 (bb) Employment Agreements dated as of February 26, 2001 by and among Sprint Corporation, Sprint/United Management Company and William T. Esrey and Ronald T. LeMay. (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of Registrant (23) (a) Consent of Ernst & Young LLP (b) Consent of Deloitte & Touche LLP Sprint will furnish to the Securities and Exchange Commission, upon request, a copy of the instruments defining the rights of holders of its long-term debt. The total amount of securities authorized under any of said instruments (other than those listed above) does not exceed 10% of the total assets of Sprint. (b) Reports on Form 8-K On October 17, 2000, Sprint filed a Current Report on Form 8-K dated October 17, 2000, in which it reported that it had announced that its Board of Directors had approved a proposal to offer employees a choice to cancel certain stock options granted to them in 2000 in exchange for new options, to be granted six months and one day from the date the old options are cancelled, to purchase an equal number of the same class of shares. On February 20, 2001, Sprint filed a Current Report on Form 8-K dated December 13, 2000, in which it reported that it had announced fourth quarter 2000 and calendar year 2000 results. It also reported that, on December 13, 2000, a shareholder had filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors. The news release regarding fourth quarter 2000 and calendar year 2000 results, which was included in the Current Report, included the following financial information: FON Group Combined Statements of Operations FON Group Selected Operating Results FON Group Proforma Financial Information FON Group Supplemental Operating Information FON Group Condensed Combined Balance Sheets FON Group Condensed Combined Cash Flow Information PCS Group Combined Statements of Operations PCS Group Supplemental Operating Information PCS Group Net Customer Additions PCS Group Condensed Combined Balance Sheets PCS Group Condensed Combined Cash Flow Information Sprint Corporation Condensed Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information (c) Exhibits are listed in Item 14(a). 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPRINT CORPORATION (Registrant) By /s/ W. T. Esrey ------------------------------------- William T. Esrey Chairman and Chief Executive Officer Date: March 12, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 12th day of March, 2001. /s/ W. T. Esrey ------------------------------------- William T. Esrey Chairman and Chief Executive Officer /s/ Arthur B. Krause ------------------------------------- Arthur B. Krause Executive Vice President and Chief Financial Officer /s/ John P. Meyer ------------------------------------- John P. Meyer Senior Vice President and Controller Principal Accounting Officer 16 SIGNATURES SPRINT CORPORATION (Registrant) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 12th day of March, 2001. /s/ DuBose Ausley /s/ Ronald T. LeMay - ------------------------------------- ------------------------------------- DuBose Ausley, Director Ronald T. LeMay, Director /s/ Warren L. Batts /s/ Linda K. Lorimer - ------------------------------------- ------------------------------------- Warren L. Batts, Director Linda K. Lorimer, Director /s/ W. T. Esrey /s/ Charles E. Rice - ------------------------------------- ------------------------------------- William T. Esrey, Director Charles E. Rice, Director /s/ Irvine O. Hockaday, Jr. /s/ Louis W. Smith - ------------------------------------- ------------------------------------- Irvine O. Hockaday, Jr., Director Louis W. Smith, Director /s/ Harold S. Hook /s/ Stewart Turley - ------------------------------------- ------------------------------------- Harold S. Hook, Director Stewart Turley, Director 17 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page Reference ANNEX I --------- SPRINT CORPORATION Selected Financial Data I-1 Management's Discussion and Analysis of Financial Condition and Results of Operations I-3 Consolidated Financial Statements Management Report I-13 Report of Independent Auditors I-14 Consolidated Statements of Operations for each of the three years ended December 31, 2000 I-15 Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended December 31, 2000 I-17 Consolidated Balance Sheets as of December 31, 2000 and 1999 I-18 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2000 I-19 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 2000 I-20 Notes to Consolidated Financial Statements I-21 Financial Statement Schedule Schedule II--Consolidated Valuation and Qualifying Accounts for each of the three years ended December 31, 2000 I-41 ANNEX II SPRINT FON GROUP Selected Financial Data II-1 Management's Discussion and Analysis of Financial Condition and Results of Operations II-2 Combined Financial Statements Management Report II-10 Report of Independent Auditors II-10 Combined Statements of Operations for each of the three years ended December 31, 2000 II-11 Combined Statements of Comprehensive Income for each of the three years ended December 31, 2000 II-12 Combined Balance Sheets as of December 31, 2000 and 1999 II-13 Combined Statements of Cash Flows for each of the three years ended December 31, 2000 II-14 Notes to Combined Financial Statements II-15 Financial Statement Schedule Schedule II--Combined Valuation and Qualifying Accounts for each of the three years ended December 31, 2000 II-28 ANNEX III SPRINT PCS GROUP Selected Financial Data III-1 Management's Discussion and Analysis of Financial Condition and Results of Operations III-2 Combined Financial Statements Management Report III-8 Report of Independent Auditors III-9 Combined Statements of Operations for each of the three years ended December 31, 2000 III-11 Combined Statements of Comprehensive Loss for each of the three years ended December 31, 2000 III-12 Combined Balance Sheets as of December 31, 2000 and 1999 III-13 Combined Statements of Cash Flows for each of the three years ended December 31, 2000 III-14 Notes to Combined Financial Statements III-15 Financial Statement Schedule Schedule II--Combined Valuation and Qualifying Accounts for each of the three years ended December 31, 2000 III-28
Annex I SPRINT CORPORATION Consolidated Financial Information SELECTED FINANCIAL DATA Sprint Corporation - -------------------------------------------------------------------------------
2000 1999 1998(/1/) 1997(/1/) 1996(/1/) - ------------------------------------------------------------------------------- (millions, except per share data) Results of Operations - ------------------------------------------------------------------------------- Net operating revenues $23,613 $20,265 $17,144 $14,947 $13,874 Operating income (loss)(/2/) 505 (307) 190 2,451 2,267 Income (Loss) from continuing operations(/2/),(/3/) (576) (745) 585 1,094 1,253 Earnings per Share and Dividends - ------------------------------------------------------------------------------- Earnings per common share from Continuing operations:(/2/),(/3/) Diluted $ NA $ NA $ NM $ 2.51 $ 2.93 Basic NA NA NM 2.54 2.97 Dividends per common share NA NA 0.75 1.00 1.00 Earnings (Loss) per Share and Dividends(/4/),(/5/) - ------------------------------------------------------------------------------- Earnings (Loss) per common share from Continuing operations:(/2/),(/3/) Sprint FON Group (diluted) $ 1.45 $ 1.97 $ 1.93 $ 1.73 $ 1.61 Sprint FON Group (basic) 1.47 2.01 1.96 1.76 1.63 Sprint PCS Group (diluted and basic) (1.95) (2.71) (2.21) (1.98) NA Dividends per FON common share 0.50 0.50 0.50 0.50 0.50 Financial Position - ------------------------------------------------------------------------------- Total assets $42,601 $39,250 $33,257 $18,274 $16,915 Property, plant and equipment, net 25,316 21,969 18,983 11,494 10,464 Total debt (including short-term borrowings) 18,719 16,772 12,189 3,880 3,274 Shareholders' equity 13,963 13,560 12,448 9,025 8,520 Cash Flow Data - ------------------------------------------------------------------------------- Net cash from operating activities--continuing operations(/6/) $ 4,315 $ 1,952 $ 4,199 $ 3,372 $ 2,404 Capital expenditures 7,152 6,114 4,231 2,863 2,434
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. (/1/) Sprint's 1998 results of operations include Sprint PCS' operating results on a consolidated basis for the entire year. The cable partners' share of losses through the PCS restructuring date has been reflected as "Other partners' loss in Sprint PCS" in the Consolidated Statements of Operations. Before 1998, Sprint's investment in Sprint PCS was accounted for using the equity method. Sprint PCS' financial position at year-end 1998 has also been reflected on a consolidated basis. Cash flow data reflects Sprint PCS' cash flows only after the PCS restructuring date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" for more information. (/2/) In 2000, the FON Group recorded a nonrecurring charge of $238 million, which principally represents a write-down of goodwill, and a $163 million nonrecurring charge for costs associated with the proposed WorldCom merger, which was terminated. The PCS Group recorded costs associated with the terminated WorldCom merger of $24 million. These charges reduced operating income by $425 million and increased the loss from continuing operations by $273 million. In 1998, the PCS Group recorded a nonrecurring charge to write off $179 million of acquired in-process research and development costs related to the PCS restructuring. This charge reduced operating income and income from continuing operations by $179 million. The FON Group recorded nonrecurring charges of $20 million in 1997 and $60 million in 1996 related to litigation within the global markets division. These charges reduced income from continuing operations by $13 million in 1997 and $36 million in 1996. (/3/) In 2000, the FON Group recorded nonrecurring charges of $122 million related to write-downs of certain equity investments. These charges increased the loss from continuing operations by $109 million. Also in 2000, the FON Group recorded net nonrecurring gains of $71 million from the sale of an independent directory publishing operation and from investment activities, which reduced the loss from continuing operations by $44 million. In 2000, the PCS Group recorded a net nonrecurring gain of $28 million from the sale of customers and network infrastructure to a PCS affiliate. This gain reduced the loss from continuing operations by $18 million. In 1999, the FON Group recorded net nonrecurring gains of $54 million from investment activities which reduced the loss from continuing operations by $35 million. In 1998, the FON Group recorded net nonrecurring gains of $104 million mainly from the sale of local exchanges. This increased income from continuing operations by $62 million. In 1997, the FON Group recorded nonrecurring gains of $71 million mainly from sales of local exchanges and certain investments. These gains increased income from continuing operations by $44 million. (/4/) In the 2000 first quarter, Sprint effected a two-for-one stock split of Sprint's PCS common stock. In the 1999 second quarter, Sprint effected a two-for-one stock split of its Sprint FON common stock. As a result, diluted and basic earnings per common share and dividends for Sprint FON common stock and diluted and basic loss per common share for Sprint PCS common stock have been restated for periods before these stock splits. I-1 (/5/) Earnings per share and dividends for the FON Group for periods prior to 1999 are on a pro forma basis and assume the FON shares created in the 1998 recapitalization of Sprint's common stock existed for such periods. Loss per share for the PCS Group for periods prior to 1999 is on a pro forma basis and assumes the PCS restructuring, the recapitalization, the purchase of 5.1 million PCS shares by France Telecom and Deutsche Telekom that occurred in connection with the restructuring and the PCS Group's write-off of $179 million of acquired in-process research and development costs occurred at the beginning of 1997. These pro forma amounts are for comparative purposes only and do not necessarily represent what actual results of operations would have been had the transactions occurred at the beginning of 1997, nor do they indicate the results of future operations. (/6/) The 1996 amount was reduced by $600 million for cash required to terminate an accounts receivable sales agreement. NM = Not meaningful NA = Not applicable I-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Corporation - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. (WorldCom) announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187 million for costs associated with the terminated merger. In the 2000 fourth quarter, Sprint completed its analysis of the valuation of various FON Group assets and investments resulting from its reassessment of the FON Group's business strategies in response to recent changes in the overall telecommunications industry. This analysis resulted in two asset impairment charges. The first was a $238 million pre-tax charge primarily related to goodwill associated with Sprint's Paranet operations. The second was an $87 million pre-tax charge related to the write-down of an equity method investment. In January 2000, Sprint reached a definitive agreement with France Telecom (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 in Sprint's earnings for all periods presented. In November 1998, Sprint's shareholders approved the formation of the FON Group and the PCS Group and the creation of the FON stock and the PCS stock. In addition, Sprint purchased the remaining ownership interests in Sprint Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired these ownership interests from Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued the Cable Partners special low-vote PCS shares and warrants to acquire additional PCS shares. Sprint also issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. The purchase of the Cable Partners' interests is referred to as the PCS Restructuring. In the 1999 second quarter, Cox Communications, Inc. exercised a put option requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint issued additional low vote PCS shares in exchange for this interest. Also in November 1998, Sprint reclassified each of its publicly traded common shares into one share of FON stock and 1/2 share of PCS stock. This recapitalization was tax-free to shareholders. Each Class A common share owned by FT and DT was reclassified to represent an equity interest in the FON Group and the PCS Group that entitles FT and DT to one share of FON stock and 1/2 share of PCS stock. These transactions are referred to as the Recapitalization. In connection with the PCS Restructuring, FT and DT purchased 5.1 million additional PCS shares (pre-split basis) to maintain their voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's 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. During 2000, Sprint changed the FON Group's segment reporting to align financial reporting with changes in how Sprint manages the FON Group's operations and assesses its performance. The FON group operates in the following segments: . Global markets division . Local division . Product distribution and directory publishing businesses. 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. I-3 - -------------------------------------------------------------------------------- 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 associated with providing new services and entering new markets necessary to provide nationwide or global services; . the ability of the PCS Group to continue to grow a significant market presence; . the effects of mergers and consolidations within the telecommunications industry; . the uncertainties related to Sprint's strategic investments; . the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; . unexpected results of litigation filed against Sprint; . the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes, including the impact of the Telecommunications Act of 1996 (Telecom Act), or other external factors over which Sprint has no control; and . other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward- looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward- looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- General Overview of the Sprint FON Group - -------------------------------------------------------------------------------- Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; data communications such as Internet and frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(SM). 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 advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. During 2000, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed data services. Global markets division's operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. This division also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada; Intelig, a long distance provider in Brazil; and certain other telecommunications investments and ventures. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other 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. I-4 - -------------------------------------------------------------------------------- General Overview of the Sprint PCS Group - -------------------------------------------------------------------------------- The PCS Group includes Sprint's wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At year- end 2000, the PCS Group, together with affiliates, operated PCS systems in over 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 280 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including affiliates, now reaches more than 220 million people. The PCS Group provides nationwide service through: . operating its own digital network in major U.S. metropolitan areas, . affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, . roaming on other providers' analog cellular networks using dual- band/dual-mode handsets, and . roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS Group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of acquisition and customer service. The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted for using the equity method. The wireless industry, including the PCS Group, typically generates a significantly higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions. - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Consolidated Total net operating revenues were as follows: - -------------------------------------------
2000 1999 1998 - ------------------------------------------- (millions) FON Group $17,688 $17,160 $15,958 PCS Group 6,341 3,373 1,294 Intergroup eliminations (416) (268) (108) - ------------------------------------------- Net operating revenues $23,613 $20,265 $17,144 -------------------------
Income (Loss) from continuing operations was as follows: - --------------------------------------------
2000 1999 1998 - -------------------------------------------- (millions) FON Group $ 1,292 $ 1,736 $ 1,675 PCS Group (1,868) (2,481) (1,090) - -------------------------------------------- Income (Loss) from continuing operations $ (576) $ (745) $ 585 -------------------------
Income (loss) from continuing operations as presented in the above table includes nonrecurring items. In 2000, these items include charges of $152 million primarily related to a write-down of goodwill within the FON Group, $121 million for costs associated with the terminated WorldCom merger, $109 million for the write-downs of certain equity investments within the FON Group, net gains of $44 million from the sale of an independent directory publishing operation and investment activities in the FON Group, and a $18 million gain from the sale of customers and network infrastructure to a PCS affiliate. 1999 includes a gain of $35 million from investment activities in the FON Group. 1998 includes a charge to write-off $179 million of acquired in-process research and development costs related to the PCS restructuring, and a gain of $62 million mainly from the sale of local exchanges by the FON Group. Sprint FON Group - --------------------------------------------
2000 1999 1998 - -------------------------------------------- (millions) Net operating revenues $17,688 $17,160 $15,958 Operating expenses 15,255 14,230 13,198 - -------------------------------------------- Operating income $ 2,433 $ 2,930 $ 2,760 ------------------------- Operating margin 13.8% 17.1% 17.3% ------------------------- Capital expenditures $ 4,105 $ 3,534 $ 3,159 -------------------------
Operating expenses in 2000 include charges of $238 million, primarily related to a write-down of goodwill within the global markets division, and a $163 million charge for costs associated with the terminated WorldCom merger. These items have been excluded from the following discussions. Beginning in 2000, the FON Group combined its long distance operation, Sprint ION, broadband fixed wireless services and certain other ventures into one division, global markets, to align financial reporting with changes in how Sprint manages operations and assesses performance. The global markets division now includes four major revenue streams: voice, data, Internet and other. In connection with the resegmentation, the FON Group shifted the recognition of consumer long distance revenues and expenses associated with customers in its local franchise territories from the global markets division to the local division. Prior periods have been restated to reflect these changes. I-5 Net Operating Revenues Net operating revenues increased 3% in 2000 and 8% in 1999. These increases reflect growth in each of the three FON Group segments: global markets, local and product distribution and directory publishing. Global Markets Division Net operating revenues increased 2% in 2000 and 8% in 1999. The increases mainly reflect strong data communications services revenue growth. A more competitive pricing environment and a change in the mix of products sold more than offset minute growth of 18% in 2000. Strong minute growth of 22% in 1999 was partly offset by a more competitive pricing environment and a change in the mix of products sold. The minute growth in 2000 was also offset by a reduction in access cost pass-throughs resulting from the implementation of the Coalition for Affordable Local and Long Distance Service proposal (CALLS). Voice revenues decreased 5% in 2000 and increased 5% in 1999. The 2000 decrease was largely due to a decline in consumer voice revenues as a result of a more competitive pricing environment, lower calling card usage due to the increased use of wireless phones, and the implementation of CALLS. The 1999 increase mainly reflects increased wholesale voice revenues due to strong minute growth mainly from international calls and increased inbound and outbound toll-free calls. Data revenues reflect sales of current-generation data services, including asynchronous transfer mode and frame relay services. These revenues increased 14% in 2000 and 21% in 1999 due to increased sales as a result of an increased emphasis on these services. Internet revenues increased 50% in 2000 and 42% in 1999 due to strong growth in dial-up Internet service provider-related revenues and dedicated service revenues. Internet revenues showed strong growth because of continued demand and increased use of the Internet. Other revenues increased 5% in 2000 and decreased 13% in 1999. The 2000 increase was due to sales of capacity on transoceanic cable and the inclusion of a full year of revenues from the cable TV service operations of the broadband fixed wireless companies purchased in 1999 largely offset by a decline in legacy data services. The 1999 decrease was due to a decline in legacy data services. Local Division Beginning in July 2000, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. In addition, Sprint's local division sold a customer service and telemarketing organization to the PCS Group at the beginning of the 2000 second quarter. In November 1998, Sprint sold approximately 81,000 access lines in Illinois. For comparative purposes, the following discussion of local division results assumes the transfer pricing change, the sale of the customer service and telemarketing organization, and the sale of exchanges occurred at the beginning of 1998. Net operating revenues increased 5% in 2000 and 7% in 1999. These increases mainly reflect increased sales of network-based services such as Caller ID and Call Waiting, increased long distance revenues, and customer access line growth. Sales of network-based services and long distance services increased due to strong demand for bundled services which combine local service, network- based features and long distance calling. Customer access lines increased 4% in 2000 and 5% in 1999. Local service revenues, derived from local exchange services, grew 6% in 2000 and 9% in 1999 because of continued demand for network-based services, customer access line growth and growth in data products. Revenue growth in 1999 also reflects increased revenues from maintaining customer wiring and equipment. Network access revenues, derived from long distance phone companies using the local network to complete calls, increased 4% in 2000 and 2% in 1999. These revenues reflect increased revenues from special access services and a 2% and 4% increase in minutes of use in 2000 and 1999, respectively. These increases were offset by FCC-mandated access rate reductions. Access rate reductions took effect in January and July 1998, July 1999 and July 2000. Toll service revenues are mainly derived from providing consumer long distance services to customers within Sprint's local franchise territories and other long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues increased 17% in 2000 and 22% in 1999. These increases reflect the success of bundled services which include long distance calling. Other revenues decreased 11% in 2000 and 1% in 1999. The decrease in 2000 was mainly due to a decrease in equipment sales as a result of a planned shift in focus to selling higher margin products. Product Distribution & Directory Publishing Businesses Net operating revenues increased 10% in 2000 and 3% in 1999. Nonaffiliated revenues accounted for over 60% of revenues in 2000 and 1999. These revenues increased 11% in 2000 and 12% in 1999. The increase in nonaffiliated revenues in 2000 was I-6 mainly due to the consolidation of a directory publishing partnership. In the second half of 2000, the directory publishing partnership, previously accounted for as an equity method investment, was fully consolidated due to a restructuring in the partnership management. Sales to affiliates increased 8% in 2000 and decreased 10% in 1999 due to changes in the local divisions capital program. Operating Expenses The FON Group's operating expenses increased 4% in 2000 and 8% in 1999, mainly to support revenue growth. Global Markets Division Global markets division total operating expenses increased 6% in 2000 and 9% in 1999. Costs of services and products include interconnection costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers, costs to operate and maintain the long distance network, costs of equipment and transmission capacity sales, and costs related to the development and deployment of Sprint ION. Costs of services and products increased 12% in 2000 and 3% in 1999. Interconnection costs remained flat in 2000 and increased 3% in 1999. Reductions in per-minute international access costs as well as domestic access costs offset the impact of increased calling volumes in 2000. Increased calling volumes in 1999 were partly offset by reductions in per-minute costs for both domestic and international access. The domestic rate reductions were generally due to the FCC-mandated access rate reductions that took effect in January and July 1998, July 1999 and July 2000. The access rate reductions in July 2000 included the implementation of CALLS. All other costs of services and products increased 42% in 2000 and 5% in 1999. The 2000 increase was largely due to the expansion of Sprint ION business services nationwide and the launch of consumer services in select markets as well as increased sales of capacity on transoceanic cable. Increased costs of services and products in both 2000 and 1999 were driven by growth in data services. The 1999 increase was also impacted by increases in network equipment operating leases expense. Selling, general and administrative (SG&A) expense decreased 4% in 2000 and increased 19% in 1999. The 2000 decrease is due to a strong emphasis on cost control. The 1999 increase mainly reflects the overall growth of the business as well as increased marketing and promotions to support products and services, including the rollout of an airline alliance program which enabled customers to earn frequent flyer miles when they used Sprint's services. SG&A expense includes costs associated with the continued development and deployment activities for Sprint ION, including costs for systems and operations development, product development and advertising associated with market launches. Depreciation and amortization expense increased 7% in 2000 and 13% in 1999. The increases mainly reflect a rapidly increasing asset base for Sprint ION as well as an increased asset base to enhance network reliability, meet increased demand for voice and data-related services and upgrade capabilities for providing new products and services. Local Division The following local division discussion assumes the transfer pricing changes, the sale of the customer service and telemarketing organization and sales of exchanges occurred at the beginning of 1998. See "Net Operating Revenues--Local Division" for more details. Local division operating expenses increased 1% in 2000 and increased 5% in 1999. Costs of services and products include costs to operate and maintain the local network and costs of equipment sales. These costs decreased 1% in 2000 and increased 6% in 1999. The 2000 decrease was due to the decline in equipment sales and the success of cost control initiatives. The 1999 increase was driven by customer access line growth, increased equipment sales, an increased emphasis on service levels, increased telemarketing expenses and storm related costs. SG&A expense decreased 1% in 2000 and remained flat in 1999. The 2000 decrease was due to a strong emphasis on cost control. In 1999, increased marketing costs to promote new products and services and increased customer service costs related to customer access line growth was offset by a strong emphasis on cost control. Depreciation and amortization expense increased 7% in 2000 and 9% in 1999, mainly from increased capital expenditures in switching and transport technologies which have shorter asset lives. Product Distribution & Directory Publishing Businesses The product distribution and directory publishing businesses' costs of services and products increased 9% in 2000 and increased 1% in 1999 reflecting increased equipment sales. The 2000 increase was also due to the consolidation of the directory publishing partnership. SG&A expense increased 14% in 2000 and 1999. The 2000 increase was due to costs related to the transformation of the product distribution business to a web-enabled business as well as the consolidation of the directory publishing partnership. The 1999 increase was the result of staffing demands related to nonaffiliated sales growth. I-7 Sprint PCS Group - --------------------------------------------------
2000 1999 1998 - -------------------------------------------------- (millions) Net operating revenues $ 6,341 $ 3,373 $ 1,294 Operating expenses 8,269 6,610 3,864 - -------------------------------------------------- Operating loss $(1,928) $(3,237) $(2,570) ------------------------------ Capital expenditures $ 3,047 $ 2,580 $ 1,072 ------------------------------
The PCS Group's 1999 results of operations reflect the first full year of combined results after the PCS Restructuring. The PCS Group's 1998 results of operations included SprintCom's operating results as well as Sprint PCS' operating results on a consolidated basis for the entire year. (See "Pro Forma Sprint PCS Group" section below for a discussion of pro forma results of operations.) In 2000, operating expenses include a nonrecurring charge of $24 million for costs associated with the terminated WorldCom merger. In 1998, operating expenses include a write-off of $179 million associated with the cost of nine in-process research and development projects acquired in connection with the PCS Restructuring. The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 25% of net operating revenues in 2000, 28% in 1999 and 25% in 1998. Pro Forma Sprint PCS Group To provide a more meaningful analysis of the PCS Group's underlying operating results, the following supplemental discussion presents 1998 on a pro forma basis and assumes the PCS Restructuring and the write-off of acquired in- process research and development costs occurred prior to 1998. - -------------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------------- (millions) Net operating revenues $ 6,341 $ 3,373 $ 1,294 Operating expenses 8,269 6,610 3,934 - ------------------------------------------------------------------------- Operating loss $(1,928) $(3,237) $(2,640) ----------------------------------------------------- Capital expenditures (including capital lease obligations) $ 3,047 $ 2,616 $ 2,904 -----------------------------------------------------
Net Operating Revenues Net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges, usage charges and activation fees. Subscriber revenues increased 94% in 2000 mainly reflecting an increase in the average number of customers. The PCS Group added 3.8 million customers in 2000 to end the year with over 9.5 million customers in more than 300 metropolitan markets nationwide. Average monthly service revenue per user (ARPU) was $59 for 2000 compared to $58 in 1999 and $60 in 1998. The increase in ARPU in 2000 was partly due to the implementation of activation charges in the second quarter. Subscriber revenues were also aided by the increase in resale customers. The companies that the PCS Group serves on a wholesale basis added 238,000 customers in 2000, ending the year with approximately 310,000 customers. In 2000, the customer churn rate improved to 2.8% from 3.4% in 1999 and 3.3% in 1998. The improvement reflects expanded network coverage and the success of several customer retention initiatives. Revenues from sales of handsets and accessories were approximately 14% of net operating revenues in 2000, 17% in 1999 and 18% in 1998. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses Costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 25% in 2000 and 79% in 1999 reflecting the significant growth in customers and expanded market coverage, partly offset by a reduction in handset unit costs. SG&A expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 25% in 2000 and 70% in 1999 reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Acquisition costs per gross customer addition, including equipment subsidies and marketing costs, have improved approximately 19% in 2000 and 26% in 1999. Lower handset unit costs and scale benefits from greater customer additions have contributed to the improvement. Cash costs per user (CCPU) consists of costs of service revenues, service delivery and other general and administrative costs. CCPU was $35 in 2000, $48 in 1999 and $73 in 1998. The improvements reflect successful expense management and scale benefits resulting from the increased customer base. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce. I-8 Depreciation and amortization expense increased 23% in 2000 and 47% in 1999 mainly reflecting depreciation of the network assets placed in service during 2000 and 1999. The increases also reflect amortization of intangible assets acquired in the Cox PCS purchase in the 1999 second quarter. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense The effective interest rates in the following table reflect interest expense on long-term debt only. Interest costs on short-term borrowings classified as long-term debt, deferred compensation plans and customer deposits have been excluded so as not to distort the effective interest rates on long-term debt. - --------------------------------------------
2000 1999 1998 - -------------------------------------------- Effective interest rate on long-term debt(/1/) 6.9% 7.0% 8.6% ---------------------
(/1/) The effective interest rate on long-term debt for 1998 is on a pro forma basis as if Sprint PCS' long-term debt had been included in Sprint's outstanding long-term debt balance all year. Sprint's effective interest rate on long-term debt decreased in 1999 and 2000. In the 1998 fourth quarter, Sprint refinanced $3.3 billion of the PCS Group's debt with borrowings which have lower interest rates. The decreases also reflect additional borrowings with lower interest rates. Other Partners' Loss in Sprint PCS Sprint PCS' results of operations for 1998 have been consolidated for the entire year. The Cable Partners' share of losses through the PCS Restructuring date has been reflected as "Other partners' loss in Sprint PCS" in the Consolidated Statements of Operations. Other Income (Expense), Net Other income (expense) consisted of the following: - ------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------ (millions) Dividend and interest income $ 30 $ 23 $ 93 Equity in net losses of affiliates (236) (73) (41) Gains on sales of assets 92 102 156 Net losses from investments (102) (15) -- Other, net (1) 38 (37) - ------------------------------------------------------ Total $(217) $ 75 $171 ------------------------------
Dividend and interest income for all years reflects dividends earned on cost method investments and interest earned on temporary investments. For 1998, it also reflects interest earned on loans to unconsolidated affiliates, interest earned on partner contributions from the Sprint PCS partners prior to the PCS restructuring and interest earned on short-term investments following Sprint's $5.0 billion debt offering in late 1998. Equity in net losses of affiliates mainly includes losses from Intelig, Call- Net, EarthLink and Pegaso. The 2000 increase is mainly due to increased Intelig losses and losses from Pegaso after the PCS Group's 2000 second quarter initial investment. Gain on sales of assets in 2000 include the sale of an independent publishing operation and the sale of certain wireless customers and associated network infrastructure. The 1999 gains include a gain on the sale of an investment security and a gain on the sale of network infrastructure. The 1998 gains mainly reflect net gains on sales of local exchanges. Net losses from investments in 2000 mainly include write-downs of certain equity investments. Income Taxes Sprint's consolidated effective tax rates were 17.9% in 2000, 30.5% in 1999 and 43.7% in 1998. See Note 9 of Notes to Consolidated Financial Statements for information about the differences that caused the effective income tax rates to vary from the statutory federal rate for income taxes related to continuing operations. Discontinued Operation, Net In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, 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. In 2000, Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million. Sprint recorded after-tax losses related to Global One of $130 million in 1999 and $135 million in 1998. Extraordinary Items, Net In 2000, Sprint redeemed, prior to scheduled maturities, $25 million of the FON Group's debt and $127 million of the PCS Group's debt. These borrowings had interest rates ranging from 7.8% to 9.7%. This resulted in a $4 million after- tax extraordinary loss for Sprint. In 1999, Sprint redeemed, prior to scheduled maturities, $575 million of the broadband fixed wireless companies' debt assumed by the FON Group and $2.2 billion of the PCS Group's revolving credit facilities and other borrowings. These borrowings had interest rates ranging from 5.6% to 14.5%. This resulted in a $60 million after-tax extraordinary loss for Sprint. I-9 In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of the FON Group's debt and $3.3 billion of the PCS Group's debt. These borrowings had interest rates ranging from 7.9% to 9.3%. This resulted in a $36 million after- tax extraordinary loss for Sprint. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- - ------------------------------------
2000 1999 - ------------------------------------ (millions) Consolidated assets $42,601 $39,250 ---------------
Sprint's consolidated assets increased $3.4 billion in 2000. Net property, plant and equipment increased $3.3 billion reflecting capital expenditures to support the PCS network buildout, long distance and local network enhancements, and Sprint ION development and hardware deployment, partly offset by depreciation and network asset sales. Investments in affiliates and other assets increased $715 million, mainly reflecting capital contributions to Sprint's equity method investees, partly offset by equity in net losses of those affiliates and the write-down of certain equity method investments. Offsetting decreases in Sprint's consolidated assets primarily include the exchange of investments in equity securities for certain notes payable, the write-down of goodwill and the sale of the net assets of the Global One discontinued operation. Sprint's debt-to-capital ratio was 57.3% at year-end 2000 versus 55.3% at year-end 1999. See "Liquidity and Capital Resources" for more information about changes in Sprint's Consolidated Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Consolidated cash flows for 1998 include Sprint PCS' cash flows only after the PCS Restructuring date. Operating Activities - ---------------------------------------------------------------------
2000 1999 1998 - --------------------------------------------------------------------- (millions) FON Group $4,323 $ 3,713 $3,915 PCS Group (8) (1,692) (159) Intergroup eliminations -- (69) 443 ----------------------- Cash flows provided by operating activities $4,315 $ 1,952 $4,199 -----------------------
Operating cash flows increased $2.4 billion in 2000 and decreased $2.2 billion in 1999. The 2000 increase reflects decreases in working capital requirements in both the FON Group and the PCS Group and improved operating results in the PCS Group. The 1999 decrease mainly reflects increases in working capital in both the FON Group and the PCS Group and the increased operating losses of the PCS Group, partly offset by the FON Groups improved operating results. Investing Activities - -------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------- (millions) FON Group $(3,336) $(4,349) $(3,366) PCS Group (3,054) (2,509) (861) Intergroup eliminations (17) (299) (259) - ------------------------------------------------------------------- Cash flows used by investing activities $(6,407) $(7,157) $(4,486) -------------------------
The FON Group's capital expenditures totaled $4.1 billion in 2000, $3.5 billion in 1999 and $3.2 billion in 1998. Global markets division capital expenditures were incurred mainly to enhance network reliability, meet increased demand for voice and data-related services, upgrade capabilities for providing new products and services and to continue development and hardware deployment of Sprint ION. The local division incurred capital expenditures to accommodate access line growth, provide additional capacity for increased Internet traffic and expand capabilities for providing enhanced services. Other FON Group capital expenditures were incurred mainly for Sprint's World Headquarters Campus. PCS Group capital expenditures, totaling $3.0 billion in 2000, $2.6 billion in 1999 and $1.1 billion in 1998, were incurred to support the PCS network buildout. (See the PCS Group's MD&A for a pro forma presentation of capital expenditures.) In 2000, investing activities include $1.4 billion of proceeds from the sale of the FON Group's interest in Global One. Investing activities also include proceeds from sales of other assets totaling $258 million in 2000, $243 million in 1999 and $230 million in 1998. In 1999, Sprint purchased several broadband fixed wireless companies for $618 million excluding assumed debt. "Investments in and loans to affiliates, net" were $889 million in 2000, $135 million in 1999 and $423 million in 1998. These amounts were for investments in affiliates accounted for using the equity method, primarily EarthLink, Intelig and Pegaso. Amounts for 1998 also include contributions and advances to Sprint PCS prior to the PCS Restructuring. I-10 Financing Activities - -------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------- (millions) FON Group $ (969) $ 308 $ (219) PCS Group 3,163 4,044 1,193 Intergroup eliminations 17 368 (184) - ------------------------------------------------------------------- Cash flows provided by financing activities $2,211 $4,720 $ 790 ----------------------------------------------
Financing activities reflect net proceeds from long-term debt of $2.3 billion in 2000, $4.0 billion in 1999 and $1.4 billion in 1998. These net proceeds were used mainly for capital investments and to fund the PCS Group's operating losses. Sprint paid dividends of $448 million in 2000, $441 million in 1999 and $430 million in 1998. Also included in financing activities is proceeds from Sprint's employee stock purchase plan of $182 million in 2000, $136 million in 1999 and $24 million in 1998. Capital Requirements Sprint's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to require cash of $9.8 to $10.3 billion. FON Group capital expenditures are expected to range between $6.0 and $6.2 billion, and PCS Group capital expenditures are expected to be between $3.3 and $3.5 billion. Investments in affiliates are expected to be between $450 and $550 million. Dividend payments are expected to approximate $455 million in 2001. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement that provides for the allocation of income taxes between the FON Group and 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 in the near future and from using the PCS Group's net operating loss carryforwards. These payments reflect the PCS Group's incremental cumulative effect on Sprint's consolidated federal and state tax liability and tax credit position. The PCS Group received payments from the FON Group totaling $872 million in 2000, $764 million in 1999 and $20 million in 1998. See Note 1 of Notes to Consolidated Financial Statements, "Allocation of Federal and State Income Taxes," for more details. Liquidity Sprint mainly uses commercial paper to fund its short-term working capital needs. Sprint also uses the long-term bond market as well as other debt markets to fund its needs. Sprint intends to continue borrowing funds through the U.S. and international money and capital markets and bank credit markets to fund capital expenditures and operating and working capital requirements. Sprint also intends to sell $3 billion of PCS common stock in an underwritten public offering when market or other conditions indicate that such a course of action is advisable. Sprint currently has revolving credit facilities with syndicates of domestic and international banks totaling $5 billion; $3 billion of which is a 364 day facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year facility expiring in 2003. Commercial paper and certain bank notes are supported by Sprint's revolving credit facilities. Certain other notes payable relate to a separate revolving credit facility which expires in 2002. At year- end 2000, Sprint had total unused lines of credit of $1.8 billion. In June 2000, Sprint issued $1.25 billion of debt securities under its $4 billion shelf registration statement with the SEC. These borrowings mature in 2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000, Sprint had issued a total of $2 billion of debt securities under the shelf. In January 2001, Sprint issued debt securities using the remainder of the shelf. See Note 18 of Notes to Consolidated Financial Statements. In June 1999, Sprint entered into a $1 billion financing agreement to sell, on a continuous basis with recourse, undivided percentage ownership interests in a designated pool of its accounts receivable. Subsequent collections of receivables sold to investors are typically reinvested in new receivables. At year-end 2000, Sprint had borrowed $900 million with a weighted average interest rate of 6.9% under this agreement. These borrowings mature in 2002. Any borrowings Sprint may incur are ultimately limited by certain debt covenants. Sprint could borrow up to an additional $9.6 billion at year-end 2000 under the most restrictive of its debt covenants. - -------------------------------------------------------------------------------- Regulatory Developments - -------------------------------------------------------------------------------- See "Regulatory Developments" in the FON Group's MD&A and the PCS Group's MD&A. - -------------------------------------------------------------------------------- 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 I-11 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. 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, results of operations or cash flows at year-end 2000. In addition, foreign currency transaction gains and losses were not material to Sprint's 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. - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- See Note 16 of Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. I-12 MANAGEMENT REPORT Sprint Corporation's management is responsible for the integrity and objectivity of the information contained in this document. Management is responsible for the consistency of reporting this information and for ensuring that accounting principles generally accepted in the United States are used. In discharging this responsibility, management maintains a comprehensive system of internal controls and supports an extensive program of internal audits, has made organizational arrangements providing appropriate divisions of responsibility and has established communication programs aimed at assuring that its policies, procedures and principles of business conduct are understood and practiced by its employees. The financial statements included in this document have been audited by Ernst & Young LLP, independent auditors. Their audits were conducted using auditing standards generally accepted in the United States and their reports are included herein. The Board of Director's responsibility for these financial statements is pursued mainly through its Audit Committee. The Audit Committee, composed entirely of directors who are not officers or employees of Sprint, meets periodically with the internal auditors and independent auditors, both with and without management present, to assure that their respective responsibilities are being fulfilled. The internal and independent auditors have full access to the Audit Committee to discuss auditing and financial reporting matters. /s/ W. T. Esrey - -------------------------------------------------------------------------------- William T. Esrey Chairman and Chief Executive Officer /s/ Arthur B. Krause - -------------------------------------------------------------------------------- Arthur B. Krause Executive Vice President and Chief Financial Officer I-13 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Sprint Corporation We have audited the accompanying consolidated balance sheets of Sprint Corporation (Sprint) as of December 31, 2000 and 1999, and the related consolidated statements of operations, comprehensive income (loss), cash flows and shareholders' equity for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index to Financial Statements and Financial Statement Schedules. These financial statements and the schedule are the responsibility of the management of Sprint. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We did not audit the 1998 consolidated financial statements of Sprint Spectrum Holding Company, L.P., a wholly owned subsidiary of Sprint as of December 31, 1998 and an investment in which Sprint had a 40% interest through November 23, 1998 (as discussed in Note 1). Such financial statements reflect revenues of $1.2 billion for the year ended December 31, 1998. The consolidated financial statements and financial statement schedule of Sprint Spectrum Holding Company, L.P. have been audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the 1998 revenues for Sprint Spectrum Holding Company, L.P., is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sprint at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 7 to the consolidated financial statements, in 2000 Sprint changed its accounting for service activation and certain installation fee revenues. Ernst & Young LLP Kansas City, Missouri February 1, 2001 REPORT OF INDEPENDENT AUDITORS The Board of Directors of Sprint Corporation and Partners of Sprint Spectrum Holding Company, L.P. We have audited the consolidated statements of operations and cash flows of Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended December 31, 1998. Our audit also included the 1998 financial statement schedule (Schedule II). These financial statements and Schedule II are the responsibility of Partnership management. Our responsibility is to express an opinion on these consolidated financial statements and Schedule II based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended December 31,1998, in conformity with generally accepted accounting principles. Also, in our opinion, Schedule II, when considered in relation to the basic 1998 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Kansas City, Missouri February 2, 1999 I-14 CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Corporation (millions) - -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Net Operating Revenues $23,613 $20,265 $17,144 - ------------------------------------------------------------------------------- Operating Expenses Costs of services and products 11,620 10,363 8,813 Selling, general and administrative 6,919 6,557 5,252 Depreciation 3,538 3,146 2,548 Amortization 606 506 162 Asset write-down and merger related costs 425 -- -- Acquired in-process research and development costs -- -- 179 - ------------------------------------------------------------------------------- Total operating expenses 23,108 20,572 16,954 - ------------------------------------------------------------------------------- Operating Income (Loss) 505 (307) 190 Interest expense (990) (860) (718) Other partners' loss in Sprint PCS -- -- 1,251 Minority interest -- 20 145 Other income (expense), net (217) 75 171 - ------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (702) (1,072) 1,039 Income tax (expense) benefit 126 327 (454) - ------------------------------------------------------------------------------- Income (Loss) from Continuing Operations (576) (745) 585 Discontinued operation, net 675 (130) (135) Extraordinary items, net (4) (60) (36) Cumulative effect of change in accounting principle (2) -- -- - ------------------------------------------------------------------------------- Net Income (Loss) $ 93 $ (935) $ 414 -------------------------
See accompanying Notes to Consolidated Financial Statements. I-15 CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation (millions, except per share data) - -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998(/1/) - ------------------------------------------------------------------------------- FON COMMON STOCK Earnings applicable to common stock $ 1,971 $ 1,574 $ 118 ------------------------- Diluted Earnings per Common Share(/2/) Continuing operations $ 1.45 $ 1.97 $ 0.18 Discontinued operation 0.76 (0.15) (0.04) Extraordinary items -- (0.04) -- - --------------------------------------------------------------------- Total $ 2.21 $ 1.78 $ 0.14 ------------------------- Diluted weighted average common shares 892.4 887.2 869.0 ------------------------- Basic Earnings per Common Share(/2/) Continuing operations $ 1.47 $ 2.01 $ 0.18 Discontinued operation 0.77 (0.15) (0.04) Extraordinary items -- (0.05) -- - --------------------------------------------------------------------- Total $ 2.24 $ 1.81 $ 0.14 ------------------------- Basic weighted average common shares 880.9 868.0 855.2 ------------------------- PCS COMMON STOCK Loss applicable to common stock $(1,885) $(2,517) $ (559) ------------------------- Basic and Diluted Loss per Common Share(/2/) Continuing operations $ (1.95) $ (2.71) $(0.63) Extraordinary items -- (0.02) (0.04) - --------------------------------------------------------------------- Total $ (1.95) $ (2.73) $(0.67) ------------------------- Basic and diluted weighted average common shares 966.5 920.4 831.6 ------------------------- SPRINT COMMON STOCK Earnings applicable to common stock $ 853 ------- Diluted Earnings per Common Share Continuing operations $ 2.19 Discontinued operation (0.23) Extraordinary items (0.01) - --------------------------------------------------------------------- Total $ 1.95 ------- Diluted weighted average common shares 438.6 ------- Basic Earnings per Common Share Continuing operations $ 2.23 Discontinued operation (0.24) Extraordinary items (0.01) - --------------------------------------------------------------------- Total $ 1.98 ------- Basic weighted average common shares 430.8 ------- DIVIDENDS PER COMMON SHARE FON common stock(/2/) $ 0.50 $ 0.50 $0.125 ------------------------- Class A common stock $ 0.50 $ 0.625 $ 1.00 ------------------------- Sprint common stock $ 0.75 -------
(/1/) As discussed in Note 1 of Notes to Consolidated Financial Statements, the Recapitalization occurred in November 1998. As a result, earnings per share for Sprint common stock reflects earnings through the Recapitalization date, while earnings (loss) per share for FON common stock and PCS common stock reflects results from that date to year-end 1998. (/2/) 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 Sprint FON common stock. As a result, basic and diluted earnings per common share, weighted average common shares and dividends for Sprint FON common stock and Sprint PCS common stock have been restated for periods prior to these stock splits. See accompanying Notes to Consolidated Financial Statements. I-16 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation (millions) - ------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------ Net Income (Loss) $ 93 $(935) $414 - ------------------------------------------------------------------------------ Other Comprehensive Income (Loss) Unrealized holding gains (losses) on securities (64) 54 21 Income tax (expense) benefit 23 (20) (8) - ------------------------------------------------------------------------------ Net unrealized holding gains (losses) on securities during the period (41) 34 13 Reclassification adjustment for net gains included in net income (10) (57) -- - ------------------------------------------------------------------------------ Total net unrealized holding gains (losses) on securities (51) (23) 13 Foreign currency translation adjustments (9) -- (2) - ------------------------------------------------------------------------------ Total other comprehensive income (loss) (60) (23) 11 - ------------------------------------------------------------------------------ Comprehensive Income (Loss) $ 33 $(958) $425 -----------------
See accompanying Notes to Consolidated Financial Statements. I-17 CONSOLIDATED BALANCE SHEETS Sprint Corporation (millions, except per share data) - -------------------------------------------------------------------------------
December 31, 2000 1999 - ------------------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 239 $ 120 Accounts receivable, net of allowance for doubtful accounts of $389 and $274 4,028 3,408 Inventories 949 777 Prepaid expenses 366 340 Income tax receivable -- 411 Investments in equity securities -- 317 Other 391 207 - ------------------------------------------------------------------------------- Total current assets 5,973 5,580 Investments in securities 66 147 Property, plant and equipment FON Group 30,998 27,687 PCS Group 12,117 9,411 - ------------------------------------------------------------------------------- Total property, plant and equipment 43,115 37,098 Accumulated depreciation (17,799) (15,129) - ------------------------------------------------------------------------------- Net property, plant and equipment 25,316 21,969 Investments in and advances to affiliates 607 452 Intangible assets Goodwill 5,425 5,745 PCS licenses 3,059 3,060 Other 1,588 1,453 - ------------------------------------------------------------------------------- Total intangible assets 10,072 10,258 Accumulated amortization (1,134) (691) - ------------------------------------------------------------------------------- Net intangible assets 8,938 9,567 Net assets of discontinued operation -- 394 Other assets 1,701 1,141 - ------------------------------------------------------------------------------- Total $42,601 $39,250 ---------------- Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 1,205 $ 1,087 Accounts payable 2,285 1,462 Construction obligations 997 1,039 Accrued interconnection costs 547 683 Accrued taxes 440 410 Advance billings 607 323 Payroll and employee benefits 498 638 Other 1,389 1,190 - ------------------------------------------------------------------------------- Total current liabilities 7,968 6,832 Long-term debt and capital lease obligations 17,514 15,685 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,360 1,511 Postretirement and other benefit obligations 1,077 1,064 Other 719 598 - ------------------------------------------------------------------------------- Total deferred credits and other liabilities 3,156 3,173 Shareholders' equity Common stock Class A common stock, 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 and 1/2 PCS share) 216 216 FON, par value $2.00 per share, 4,200.0 shares authorized, 798.8 and 788.0 shares issued and 798.4 and 788.0 shares outstanding 1,598 1,576 PCS, par value $1.00 per share, 2,350.0 shares authorized, 933.1 and 910.4 shares issued and 933.1 and 910.4 shares outstanding 933 910 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 9,380 8,569 Retained earnings 1,578 1,961 Treasury stock, at cost, 0.4 and 0.0 shares (10) (2) Accumulated other comprehensive income 21 81 Other -- 2 - ------------------------------------------------------------------------------- Total shareholders' equity 13,963 13,560 - ------------------------------------------------------------------------------- Total $42,601 $39,250 ----------------
See accompanying Notes to Consolidated Financial Statements. I-18 CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Corporation (millions) - -----------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------- Operating Activities Net income (loss) $ 93 $ (935) $ 414 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Discontinued operation, net (675) 130 135 Extraordinary items, net 4 60 32 Equity in net losses of affiliates 256 70 892 Depreciation and amortization 4,144 3,652 2,042 Acquired in-process research and development costs -- -- 179 Deferred income taxes and investment tax credits (205) (333) 127 Net gains on sales of assets (130) (183) (104) Net losses on write-down of assets 365 102 -- Changes in assets and liabilities, excluding the PCS Restructuring in 1998: Accounts receivable, net (640) (700) 101 Inventories and other current assets 146 (778) (189) Accounts payable and other current liabilities 947 906 733 Noncurrent assets and liabilities, net (26) (63) (126) Other, net 36 24 (37) - ----------------------------------------------------------------------------- Net cash provided by operating activities 4,315 1,952 4,199 - ----------------------------------------------------------------------------- Investing Activities Capital expenditures (7,152) (6,114) (4,231) Investments in and loans to affiliates, net (889) (135) (423) Net proceeds from sales of assets 258 243 230 Purchase of broadband fixed wireless companies, net of cash acquired -- (618) -- Other, net (27) (149) 206 - ----------------------------------------------------------------------------- Net cash used by continuing operations (7,810) (6,773) (4,218) Proceeds from the sale of Global One 1,403 -- -- Net investing activities of discontinued operation -- (384) (268) - ----------------------------------------------------------------------------- Net cash used by investing activities (6,407) (7,157) (4,486) - ----------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt 3,613 6,921 5,213 Payments on long-term debt (1,356) (2,949) (3,822) Proceeds from common stock issued 269 957 85 Proceeds from treasury stock issued 12 134 60 Dividends paid (448) (441) (430) Treasury stock purchased (61) (48) (321) Other, net 182 146 5 - ----------------------------------------------------------------------------- Net cash provided by financing activities 2,211 4,720 790 - ----------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents 119 (485) 503 - ----------------------------------------------------------------------------- Cash and Equivalents at Beginning of Year 120 605 102 - ----------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 239 $ 120 $ 605 -------------------------
See accompanying Notes to Consolidated Financial Statements. I-19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Sprint Corporation (millions) - ----------------------------------------------------------------------------------------------
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 1998 balance $1,092 $ -- $ -- $4,458 $3,693 $(293) $75 $ 9,025 Net income -- -- -- -- 414 -- -- 414 Common stock dividends -- -- -- -- (345) -- -- (345) Class A common stock dividends -- -- -- -- (86) -- -- (86) Sprint common stock recapitalized (876) 701 175 -- -- -- -- -- PCS Series 2 common stock issued -- -- 195 3,005 -- -- -- 3,200 PCS Series 3 common stock issued -- -- 5 80 -- -- -- 85 PCS preferred stock issued -- -- 247 -- -- -- -- 247 Treasury stock purchased -- -- -- -- -- (321) -- (321) Treasury stock issued -- -- -- -- (24) 188 -- 164 Tax benefit from stock compensation -- -- -- 49 -- -- -- 49 Other, net -- -- -- (6) (1) -- 23 16 - ---------------------------------------------------------------------------------------------- Ending 1998 balance 216 701 622 7,586 3,651 (426) 98 12,448 Net loss -- -- -- -- (935) -- -- (935) FON common stock dividends -- -- -- -- (380) -- -- (380) Class A common stock dividends -- -- -- -- (54) -- -- (54) PCS preferred stock dividends -- -- -- -- (8) -- -- (8) FON Series 3 common stock issued -- 2 -- 50 -- -- -- 52 PCS Series 1 common stock issued -- -- 27 674 -- -- -- 701 PCS Series 2 common stock issued -- -- 24 1,122 -- -- -- 1,146 PCS Series 3 common stock issued -- -- 7 210 -- -- -- 217 Two-for-one stock splits -- 873 477 (1,350) -- -- -- -- Treasury stock purchased -- -- -- -- -- (48) -- (48) Treasury stock issued -- -- -- -- (315) 472 -- 157 Tax benefit from stock compensation -- -- -- 254 -- -- -- 254 Other, net -- -- -- 23 2 -- (15) 10 - ---------------------------------------------------------------------------------------------- Ending 1999 balance 216 1,576 1,157 8,569 1,961 (2) 83 13,560 Net income -- -- -- -- 93 -- -- 93 FON common stock dividends -- -- -- -- (398) -- -- (398) Class A common stock dividends -- -- -- -- (44) -- -- (44) PCS preferred stock dividends -- -- -- -- (7) -- -- (7) FON Series 1 common stock issued -- 22 -- 180 -- -- -- 202 PCS Series 1 common stock issued -- -- 23 207 -- -- -- 230 Treasury stock purchased -- -- -- -- -- (61) -- (61) Treasury stock issued -- -- -- -- (29) 53 -- 24 Tax benefit from stock compensation -- -- -- 424 -- -- -- 424 Other, net -- -- -- -- 2 -- (62) (60) - ---------------------------------------------------------------------------------------------- Ending 2000 balance $ 216 $1,598 $1,180 $9,380 $1,578 $ (10) $21 $13,963 --------------------------------------------------------------------- Shares Outstanding - -------------------------------------------------- Beginning 1998 balance 430.0 -- -- Sprint common stock recapitalized (350.3) 350.3 175.2 Treasury shares recapitalized 5.4 (5.4) (2.7) Treasury stock purchased (4.2) (0.5) -- Treasury stock issued 5.3 0.1 -- PCS Series 2 common stock issued -- -- 195.1 PCS Series 3 common stock issued -- -- 5.1 PCS preferred stock issued -- -- 0.2 - -------------------------------------------------- Ending 1998 balance 86.2 344.5 372.9 FON Series 3 common stock issued -- 1.2 -- PCS Series 1 common stock issued -- -- 27.1 PCS Series 2 common stock issued -- -- 24.3 PCS Series 3 common stock issued -- -- 6.9 Two-for-one stock splits -- 433.5 476.7 Treasury stock purchased -- (0.6) -- Treasury stock issued -- 9.4 2.7 - -------------------------------------------------- Ending 1999 balance 86.2 788.0 910.6 FON Series 1 common stock issued -- 10.8 -- PCS Series 1 common stock issued -- -- 22.7 Treasury stock purchased -- (2.0) -- Treasury stock issued -- 1.6 -- - -------------------------------------------------- Ending 2000 balance 86.2 798.4 933.3 -------------------------
See accompanying Notes to Consolidated Financial Statements. I-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- Tracking Stock Formation In November 1998, Sprint's shareholders approved the formation of the FON Group and the PCS Group and the creation of the FON stock and the PCS stock. In addition, Sprint purchased the remaining ownership interests in Sprint Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired these ownership interests from Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued the Cable Partners special low-vote PCS shares and warrants to acquire additional PCS shares. Sprint also issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. The purchase of the Cable Partners' interests is referred to as the PCS Restructuring. In the 1999 second quarter, Sprint acquired the remaining minority interest in Cox PCS. Also in November 1998, Sprint reclassified each of its publicly traded common shares into one share of FON stock and 1/2 share of PCS stock. This recapitalization was tax-free to shareholders. Each Class A common share owned by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to represent an equity interest in the FON Group and the PCS Group that entitles FT and DT to one share of FON stock and 1/2 share of PCS stock. These transactions are referred to as the Recapitalization. In connection with the PCS Restructuring, FT and DT purchased 5.1 million additional PCS shares (pre-split basis) to maintain their voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. Basis of Consolidation and Presentation The consolidated financial statements include the accounts of Sprint and its wholly owned and majority-owned subsidiaries. Sprint PCS' results of operations for 1998 have been consolidated for the entire year. The Cable Partners' share of losses through the PCS Restructuring date has been reflected as "Other partners' loss in Sprint PCS" in the Consolidated Statements of Operations. Sprint PCS' financial position has been reflected on a consolidated basis at year-end 1998. Before 1998, Sprint's investment in Sprint PCS was accounted for using the equity method. Sprint's cash flows include Sprint PCS' cash flows only after the PCS Restructuring date. Investments in entities in which Sprint exercises significant influence, but does not control, are accounted for using the equity method (see Note 3). 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. Classification of Operations Sprint FON Group Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; data communications such as Internet and frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(SM). 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 advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. During 2000, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed I-21 data services. The global markets division's operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. This division 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; Intelig, a long distance provider in Brazil; and certain other telecommunications investments and ventures. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local services, access by phone customers and other carriers to the local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. Product Distribution & 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 PCS Group The PCS Group includes Sprint's wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At year- end 2000, the PCS Group, together with affiliates, operated PCS systems in over 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each Group. Sprint believes that the costs allocated are comparable to the costs that would be incurred if the Groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two Groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's board of directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Allocation of Group Financing Financing activities for the Groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the Groups is specifically allocated to and reflected in the financial statements of the applicable Group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. Under Sprint's centralized cash management program, one Group may advance funds to the other Group. These advances are accounted for as short-term borrowings between the Groups and bear interest at a market rate that is substantially equal to the rate that Group would be able to obtain from third parties on a short-term basis. The allocation of Group financing activities may change at the discretion of Sprint and does not require shareholder approval. Income Taxes Sprint records deferred income taxes based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. I-22 Revenue Recognition Sprint recognizes operating revenues as services are rendered or as products are delivered to customers. Service activation and certain installation fees are deferred and amortized over the average life of the service. Sprint's directory publishing business recognizes revenues for directory services over the life of the related directory (amortization method). Cash and Equivalents Cash equivalents generally include highly liquid investments with original maturities of three months or less. They are stated at cost, which approximates market value. Sprint uses controlled disbursement banking arrangements as part of its cash management program. Outstanding checks in excess of cash balances, which were included in accounts payable, totaled $636 million at year-end 2000 and $204 million at year-end 1999. Sprint had sufficient funds available to fund the outstanding checks when they were presented for payment. Investments in Equity Securities Investments in equity securities are classified as available for sale and reported at fair value (estimated based on quoted market prices). Gross unrealized holding gains and losses are reflected in the Consolidated Balance Sheets as adjustments to "Shareholders' equity--Accumulated other comprehensive income," net of related income taxes. Inventories Inventories for the FON Group are stated at the lower of cost (principally first-in, first-out method) or market value. Inventories for the PCS Group are stated at the lower of cost (principally first-in, first-out) or replacement value. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Generally, ordinary asset retirements and disposals are charged against accumulated depreciation with no gain or loss recognized. The cost of property, plant and equipment is generally depreciated on a straight-line basis over estimated economic useful lives. Repair and maintenance costs are expensed as incurred. Capitalized Interest Capitalized interest totaled $175 million in 2000, $151 million in 1999 and $167 million in 1998. Capitalized interest mainly reflects capitalized costs related to the PCS Group's network buildout and PCS licenses as well as the FON Group's construction of capital assets. Intangible Assets Sprint evaluates the recoverability of intangible assets when events or circumstances indicate that such assets might be impaired. Sprint determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying value. In the event impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for as purchases. Goodwill is being amortized over five to 40 years using the straight-line method. Accumulated amortization totaled $259 million at year-end 2000 and $210 million at year-end 1999. PCS Licenses The PCS Group acquired licenses from the Federal Communications Commission to operate as a PCS service provider. These licenses are granted for up to 10-year terms with renewals for additional 10-year terms if license obligations are met. These licenses are recorded at cost and are amortized on a straight-line basis over 40 years when service begins in a specific geographic area. Accumulated amortization totaled $206 million at year-end 2000 and $130 million at year-end 1999. Earnings per Share Earnings per share (EPS) was calculated on a consolidated basis until the PCS stock and FON stock were created as part of the November 1998 PCS Restructuring and Recapitalization. From that time forward, EPS is computed individually for the FON Group and PCS Group. 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 split of its FON common stock. As a result, basic and diluted earnings per common share and weighted average common shares for Sprint FON common stock and Sprint PCS common stock and dividends for Sprint FON common stock have been restated for periods prior to these stock splits. The FON Group's convertible preferred dividends totaled $1 million in 2000 and 1999 and dilutive securities (mainly options) totaled 11.5 million shares in 2000 and 19.2 million shares in 1999. From the Recapitalization date to year- end 1998, the FON Group's convertible preferred dividends totaled $0.1 million and dilutive securities (mainly options) totaled 13.8 million shares. Dilutive securities for the PCS Group mainly include options, warrants and convertible preferred stock. These securities did not have a dilutive effect on loss per share because the PCS Group incurred net losses for 2000, 1999 and 1998. As a result, diluted loss per share equaled basic loss per share. Sprint's convertible preferred dividends totaled $0.5 million in 1998 through the Recapitalization date. Dilutive securities, such as options, included in the I-23 calculation of diluted weighted average common shares totaled 7.8 million in 1998 through the Recapitalization. Stock-based Compensation Sprint adopted the pro forma disclosure requirements under Statement of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation," and continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to its stock option and employee stock purchase plans. - -------------------------------------------------------------------------------- 2. Business Combinations - -------------------------------------------------------------------------------- Broadband Fixed Wireless Companies In the second half of 1999, Sprint acquired People's Choice TV Corp. (PCTV), American Telecasting, Inc. (ATI), Videotron USA and the operating subsidiaries of WBS America, LLC. These companies own broadband fixed wireless licenses in the Midwest, Southwest, North Central, Western and Southeastern United States. Sprint paid $618 million for the companies' outstanding stock and assumed $575 million of the companies' debt. These notes were redeemed, prior to scheduled maturities, in the 1999 fourth quarter (see Note 10). These acquisitions were accounted for as purchases. The results of these companies have been included in Sprint's consolidated financial statements after the acquisition dates. The excess of the purchase price over the net liabilities acquired totaled $835 million and was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. Cox PCS In the 1999 second quarter, Cox Communications, Inc. exercised a put option requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's existing 59.2% interest in Cox PCS was reflected in Sprint's consolidated financial statements on a consolidated basis. Sprint issued 24.3 million shares of low-vote PCS stock (pre-split basis) in exchange for the remaining interest. The shares were valued at $1.1 billion. Sprint accounted for the transaction as a purchase. The excess of the purchase price over the fair value of the net liabilities acquired was allocated as follows: - -------------------------------------------------------------------------
1999 - ------------------------------------------------------------------------- (millions) Purchase price $1,146 Net liabilities acquired 99 Fair value assigned to customer base acquired (45) Fair value assigned to PCS licenses (99) Deferred taxes established on acquired assets and liabilities 88 - ------------------------------------------------------------------------- Goodwill $1,189 ------
Goodwill is being amortized on a straight-line basis over 40 years. PCS Restructuring In November 1998, Sprint acquired the remaining interest in Sprint PCS (except for the minority interest in Cox PCS) from the Cable Partners. In exchange, Sprint issued the Cable Partners 195.1 million low-vote shares of PCS stock and 12.5 million warrants to purchase additional shares of PCS stock (on a pre- split basis). The purchase price was $3.2 billion. In addition, Sprint issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. Sprint accounted for the transaction as a purchase. The excess of the purchase price over the fair value of the net liabilities acquired was allocated as follows: - -------------------------------------------------------------------------
1998 - ------------------------------------------------------------------------- (millions) Purchase price including transaction costs $3,226 Net liabilities acquired 281 Fair value assigned to customer base acquired (681) Fair value assigned to assembled workforce acquired (45) Increase in property, plant and equipment to fair value (204) Mark-to-market of long-term debt 85 Deferred taxes established on acquired assets and liabilities 678 In-process research and development costs (179) - ------------------------------------------------------------------------- Goodwill $3,161 ------
Goodwill is being amortized on a straight-line basis over 40 years. With respect to the purchase price attributed to in-process research and development (IPR&D), the acquired IPR&D was limited to significant new products under development that were intended to address new and emerging market needs and requirements, such as the rapid adoption of the Internet and the rapid convergence of voice, data, and video. No routine research and development projects, minor refinements, normal enhancements, or production activities were included in the acquired IPR&D. The income approach was the primary technique utilized in valuing the acquired IPR&D. This approach included, but was not limited to, an analysis of (1) the markets for each product; (2) the completion costs for projects; (3) the expected cash flows attributable to the IPR&D projects; (4) the risks related to achieving these cash flows; and (5) the stage of development of each project. The issue of alternative future use was extensively evaluated and these technologies, once completed, could only be economically used for their intended purposes. I-24 Pro Forma Results The following unaudited pro forma consolidated results of operations assume the PCS Restructuring, Recapitalization, Top-up and the write-off of acquired IPR&D costs occurred prior to 1998. These pro forma amounts are for comparative purposes only and do not necessarily represent what actual results of operations would have been had the transactions occurred prior to 1998, nor do they indicate the results of future operations. Pro forma results were as follows: - ---------------------------------------------
1998 - --------------------------------------------- (millions, except per share data) Net operating revenues $17,144 -------------- Loss from continuing operations $ (172) -------------- Net loss $ (343) -------------- Basic and diluted loss per PCS common share: Loss before extraordinary item $ (2.21) Extraordinary item (0.04) - --------------------------------------------- Total $ (2.25) --------------
- -------------------------------------------------------------------------------- 3. Investments - -------------------------------------------------------------------------------- Investments in Securities The cost of investments in securities was $13 million at year-end 2000 and $154 million at year-end 1999. Gross unrealized holding gains were $53 million at year-end 2000 and $310 million at year-end 1999. The accumulated unrealized gains on investments in securities, net of income taxes and the impact of the related debt instruments, were $33 million at year- end 2000 and $84 million at year-end 1999 and are included in "Accumulated other comprehensive income" in the Sprint Consolidated Balance Sheets. In the 2000 fourth quarter, Sprint recorded a write-down of securities with a cost basis of $48 million due to a decline in market value that was considered other than temporary. The $48 million charge was included in "Other income (expense), net" in Sprint's Consolidated Statements of Operations. During 2000, Sprint used equity securities with a cost basis of $94 million to retire debt instruments (see Note 10). Sprint recorded a $45 million gain associated with the transaction which was included in "Other income (expense), net" in Sprint's Consolidated Statements of Operations. At year-end 1999, the fair value of these equity securities were classified as current assets. During 1999, Sprint sold available-for-sale securities with a cost basis of $14 million for $104 million. The $90 million gain was included in "Other income (expense), net" in Sprint's Consolidated Statements of Operations. Investments in and Advances to Affiliates At year-end 2000, investments accounted for using the equity method consisted of the FON Group's investments in Intelig, EarthLink and other strategic investments and the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. In February 2001, Sprint modified its relationship with EarthLink which resulted in its investment being accounted for as a cost method investment beginning that month (see Note 18). In the 2000 fourth quarter, Sprint completed an analysis of the valuation of its equity method investments in response to changes in the overall telecommunications industry. The analysis resulted in an $87 million charge for the write-down of an equity method investment which was included in "Other income (expense), net" in Sprint's Consolidated Statements of Operations. In November 1998, Sprint assumed 100% ownership of Sprint PCS; as a result, Sprint consolidated Sprint PCS' results in 1998. Combined, unaudited, summarized financial information (100% basis) of other entities accounted for using the equity method was as follows: - -------------------------------------------------
2000 1999 1998 - ------------------------------------------------- (millions) Results of operations Net operating revenues $ 2,195 $1,571 $1,242 ---------------------------- Operating income (loss) $ (826) $ (192) $ 67 ---------------------------- Net loss $(1,062) $ (329) $ (145) ---------------------------- Financial position Current assets $ 1,470 $1,524 $1,038 Noncurrent assets 2,900 2,749 2,401 - ------------------------------------------------- Total $ 4,370 $4,273 $3,439 ---------------------------- Current liabilities $ 1,102 $ 599 $ 538 Noncurrent liabilities 533 1,644 1,004 Owners' equity 2,735 2,030 1,897 - ------------------------------------------------- Total $ 4,370 $4,273 $3,439 ----------------------------
- -------------------------------------------------------------------------------- 4. Asset Write-down - -------------------------------------------------------------------------------- In the 2000 fourth quarter, Sprint completed its analysis of the valuation of various FON Group assets resulting from its reassessment of the FON Group's business strategies in response to recent changes within the overall telecommunications industry. This analysis resulted in a $238 million pre-tax charge, primarily related to the impairment of goodwill associated with the global markets division's Paranet operations. I-25 - -------------------------------------------------------------------------------- 5. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187 million for costs associated with the terminated merger. - -------------------------------------------------------------------------------- 6. Discontinued Operation - -------------------------------------------------------------------------------- In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, Sprint's gain on the sale and equity share of the results of Global One have been reported as a discontinued operation for all periods presented. In 2000, Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million. Sprint recorded after-tax losses related to Global One totaling $130 million in 1999 and $135 million in 1998. - -------------------------------------------------------------------------------- 7. Cumulative Effect of Change in Accounting Principle - -------------------------------------------------------------------------------- Sprint implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," during the fourth quarter of 2000, effective as of the beginning of the year. This bulletin requires activation and installation fee revenues that do not represent a separate earnings process to be deferred and recognized over the estimated service period. Associated incremental direct costs may also be deferred, but only to the extent of revenues subject to deferral. The FON Group recorded a $2 million charge for the cumulative effect of change in accounting principle in 2000. The effect of the change on the nine months ended September 30, 2000 was to decrease revenues and expenses by $68 million. - -------------------------------------------------------------------------------- 8. Employee Benefit Plans - -------------------------------------------------------------------------------- Defined Benefit Pension Plan Most FON Group and PCS Group employees are covered by a noncontributory defined benefit pension plan. Benefits for plan participants belonging to unions are based on negotiated schedules. For non-union participants, pension benefits are based on years of service and the participants' compensation. Sprint's policy is to make plan contributions equal to an actuarially determined amount consistent with federal tax regulations. The funding objective is to accumulate funds at a relatively stable rate over the participants' working lives so benefits are fully funded at retirement. The following table shows the changes in the projected benefit obligation: - --------------------------------------
2000 1999 - -------------------------------------- (millions) Beginning balance $2,401 $2,579 Service cost 77 86 Interest cost 194 177 Amendments 8 7 Actuarial (gain) loss 90 (326) Benefits paid (136) (122) - -------------------------------------- Ending balance $2,634 $2,401 --------------
The following table shows the changes in plan assets: - ---------------------------------------------
2000 1999 - --------------------------------------------- (millions) Beginning balance $3,669 $3,169 Actual return on plan assets (157) 622 Benefits paid (136) (122) - --------------------------------------------- Ending balance $3,376 $3,669 --------------
At year-end, the funded status and amounts recognized in the Consolidated Balance Sheets for the plan were as follows: - --------------------------------------------------------------------------
2000 1999 - -------------------------------------------------------------------------- (millions) Plan assets in excess of the projected benefit obligation $ 742 $ 1,268 Unrecognized net gains (396) (1,016) Unrecognized prior service cost 96 100 Unamortized transition asset (47) (72) - -------------------------------------------------------------------------- Prepaid pension cost $ 395 $ 280 -------------- Discount rate 8.00% 8.25% -------------- Expected blended rate of future pay raises 4.50% 5.25% --------------
The net pension credit consisted of the following: - -------------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------------- (millions) Service cost--benefits earned during the year $ 77 $ 86 $ 72 Interest on projected benefit obligation 194 177 165 Expected return on plan assets (336) (300) (265) Amortization of unrecognized transition asset (25) (25) (25) Recognition of prior service cost 12 12 11 Recognition of actuarial gains (37) (8) (4) - ------------------------------------------------------------------------- Net pension credit $ (115) $ (58) $ (46) ---------------------- Discount rate 8.25% 7.00% 7.25% ---------------------- Expected long-term rate of return on plan assets 10.00% 10.00% 10.00% ---------------------- Expected blended rate of future pay raises 5.25% 4.00% 4.25% ----------------------
I-26 Defined Contribution Plans Sprint sponsors defined contribution employee savings plans covering most FON Group and PCS Group employees. Participants may contribute portions of their pay to the plans. For union employees, Sprint matches contributions based on negotiated amounts. Sprint also matches contributions of non-union employees in FON stock and PCS stock. The matching is equal to 50% of participants' contributions up to 6% of their pay. In addition, Sprint may, at the discretion of the Board of Directors, provide additional matching contributions based on the performance of FON stock and PCS stock compared to other telecommunications companies' stock. Sprint's matching contributions were $112 million in 2000, $83 million in 1999 and $54 million in 1998. At year-end 2000, the plans held 34 million FON shares and 31 million PCS shares. Prior to January 1999, Sprint PCS sponsored a savings and retirement program for certain employees. Sprint PCS matched contributions equal to 50% of the contribution of each participant, up to the first 6% that the employee elected to contribute. Expense under the savings plan was $7 million in 1998. Postretirement Benefits Sprint provides postretirement benefits (mainly medical and life insurance) to most FON Group and PCS Group employees. Employees retiring before certain dates are eligible for benefits at no cost, or at a reduced cost. Employees retiring after certain dates are eligible for benefits on a shared-cost basis. Sprint funds the accrued costs as benefits are paid. The following table shows the changes in the accumulated postretirement benefit obligation: - --------------------------------
2000 1999 - -------------------------------- (millions) Beginning balance $ 876 $ 864 Service cost 17 21 Interest cost 71 59 Actuarial gains (2) (30) Benefits paid (52) (38) - -------------------------------- Ending balance $ 910 $ 876 ------------
Amounts included in the Consolidated Balance Sheets at year-end were as follows: - --------------------------------------------------------------
2000 1999 - -------------------------------------------------------------- (millions) Accumulated postretirement benefit obligation $ 910 $ 876 Unrecognized prior service cost 74 53 Unrecognized net gains 75 120 - -------------------------------------------------------------- Accrued postretirement benefits cost $1,059 $1,049 -------------- Discount rate 8.00% 8.25% --------------
The assumed 2001 annual health care cost trend rates are 9.0% before Medicare eligibility and 9.5% after Medicare eligibility. Both rates gradually decrease to an ultimate level of 5% by 2010. A 1% increase in the rates would have increased the 2000 accumulated postretirement benefit obligation by an estimated $161 million. A 1% decrease would have reduced the obligation by an estimated $119 million. The net postretirement benefits cost consisted of the following: - ----------------------------------------------------------------------------
2000 1999 1998 - ---------------------------------------------------------------------------- (millions) Service cost--benefits earned during the year $ 17 $ 21 $ 20 Interest on accumulated postretirement benefit obligation 71 59 58 Recognition of prior service cost (9) (8) (6) Recognition of actuarial gains (17) (17) (21) - ---------------------------------------------------------------------------- Net postretirement benefits cost $ 62 $ 55 $ 51 ---------------- Discount rate 8.25% 7.00% 7.25% ----------------
For measurement purposes, the assumed 2000 weighted average annual health care cost trend rates were 9.6% before Medicare eligibility and 10.0% after Medicare eligibility. Both rates gradually decrease to an ultimate level of 5% by 2010. A 1% increase in the rates would have increased the 2000 postretirement benefits service and interest costs by an estimated $17 million. A 1% decrease would have reduced the 2000 postretirement benefits service and interest costs by an estimated $12 million. - -------------------------------------------------------------------------------- 9. Income Taxes - -------------------------------------------------------------------------------- Income tax expense (benefit) allocated to continuing operations consists of the following: - ---------------------------------------
2000 1999 1998 - --------------------------------------- (millions) Current income tax expense (benefit) Federal $ 24 $ (34) $283 State 55 40 44 - --------------------------------------- Total current 79 6 327 - --------------------------------------- Deferred income tax expense (benefit) Federal (173) (309) 120 State (32) (24) 7 - --------------------------------------- Total deferred (205) (333) 127 - --------------------------------------- Total $(126) $(327) $454 ------------------
I-27 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: - -------------------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------------------- (millions) Income tax expense (benefit) at the federal statutory rate $(246) $(375) $364 Effect of: State income taxes, net of federal income tax effect 15 10 33 Equity in losses of foreign joint ventures 48 18 6 Write down of equity method investment 30 -- -- Write-off of in-process research and development costs -- -- 63 Goodwill amortization 52 37 3 Other, net (25) (17) (15) - ------------------------------------------------------------------------------- Income tax expense (benefit) $(126) $(327) $454 ------------------- Effective income tax rate 17.9% 30.5% 43.7% -------------------
Income tax expense (benefit) allocated to other items was as follows: - ---------------------------------------------------------------------------
2000 1999 1998 - --------------------------------------------------------------------------- (millions) Discontinued operation $370 $(111) $(62) Extraordinary items (3) (34) (23) Unrealized holding gains (losses) on investments(/1/) (29) (13) 8 Stock ownership, purchase and options arrangements(/2/) (424) (254) (49) - ---------------------------------------------------------------------------
(/1/) These amounts have been recorded directly to "Shareholders' equity-- Accumulated other comprehensive income" in the Consolidated Balance Sheets. (/2/) These amounts have been recorded directly to "Shareholders' equity-- Capital in excess of par or stated value" in the Consolidated Balance Sheets. Sprint recognizes deferred income taxes for the temporary differences between the carrying amounts of its assets and liabilities for financial statement purposes and their tax bases. The sources of the differences that give rise to the deferred income tax assets and liabilities at year-end 2000 and 1999, along with the income tax effect of each, were as follows: - -----------------------------------------------------------
2000 Deferred Income Tax ------------------ Assets Liabilities - ----------------------------------------------------------- (millions) Property, plant and equipment $ -- $3,161 Intangibles -- 386 Postretirement and other benefits 428 Reserves and allowances 214 -- Unrealized holding gains on investments -- 19 Operating loss carryforwards 2,011 -- Tax credit carryforwards 127 -- Other, net 162 -- - ----------------------------------------------------------- 2,942 3,566 Less valuation allowance 598 -- - ----------------------------------------------------------- Total $2,344 $3,566 ------------------ - ----------------------------------------------------------- 1999 Deferred Income Tax ------------------ Assets Liabilities - ----------------------------------------------------------- (millions) Property, plant and equipment $ -- $2,473 Intangibles -- 452 Postretirement and other benefits 422 -- Reserves and allowances 149 -- Unrealized holding gains on investments -- 48 Operating loss carryforwards 1,203 -- Tax credit carryforwards 75 -- Other, net 177 -- - ----------------------------------------------------------- 2,026 2,973 Less valuation allowance 480 -- - ----------------------------------------------------------- Total $1,546 $2,973 ------------------
Management believes it is more likely than not that these deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities or ordinary operations. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets. The valuation allowance related to deferred income tax assets increased $118 million in 2000 and $231 million in 1999. In 1999, Sprint acquired approximately $193 million of potential tax benefits related to net operating loss carryforwards in the acquisitions of the broadband I-28 fixed wireless companies. In 1998, Sprint acquired approximately $229 million of potential tax benefits related to net operating loss carryforwards in the PCS Restructuring. The benefits from the acquisitions and PCS Restructuring are subject to certain realization restrictions under various tax laws. A valuation allowance was provided for the total of these benefits. If these benefits are subsequently recognized, they will reduce goodwill or other noncurrent intangible assets resulting from the application of the purchase method of accounting for these transactions. In connection with the PCS Restructuring, the PCS Group is required to reimburse the FON Group and the Cable Partners for net operating loss and tax credit carryforward benefits generated prior to the PCS Restructuring if realization by the PCS Group produces a cash benefit that would not otherwise have been realized. The reimbursement will equal 60% of the net cash benefit received by the PCS Group and will be made to the FON Group in cash and to the Cable Partners in shares of Series 2 PCS stock. The carryforward benefits subject to this requirement total $259 million, which includes the $229 million acquired in the PCS Restructuring. At year-end 2000, Sprint had federal operating loss carryforwards of approximately $4.7 billion and state operating loss carryforwards of approximately $8.1 billion. Related to these loss carryforwards are federal tax benefits of $1.6 billion and state tax benefits of $575 million. In addition, Sprint had available for income tax purposes federal alternative minimum tax credit carryforwards of $33 million, state alternative minimum tax credit carryforwards of $5 million, federal alternative minimum tax net operating loss carryforwards of $2.2 billion and state alternative minimum tax net operating loss carryforwards of $682 million. The loss carryforwards expire in varying amounts through 2020. - -------------------------------------------------------------------------------- 10. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint's consolidated long-term debt and capital lease obligations at year-end was as follows: - ------------------------------------------------------------------------------------------
2000 1999 --------------------------- --------------------------- Sprint Sprint Sprint Sprint FON PCS FON PCS Maturing Group Group Consolidated Group Group Consolidated - ------------------------------------------------------------------------------------------ (millions) Senior notes 5.7% to 7.6%(/1/) 2001 to 2028 $1,105 $ 9,395 $10,500 $1,105 $ 8,145 $ 9,250 8.1% to 9.8% 2000 to 2003 382 -- 382 632 -- 632 11.0% to 12.5%(/2/) 2001 to 2006 -- 776 607 -- 734 584 Debentures and notes 5.8% to 9.6% 2000 to 2022 500 -- 500 565 -- 565 Notes payable and commercial paper -- 157 3,797 3,954 294 1,971 2,265 First mortgage bonds 5.9% to 9.9% 2000 to 2025 1,085 -- 1,085 1,295 -- 1,295 Capital lease obligations 5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555 Revolving credit facilities Variable rates 2002 900 -- 900 900 -- 900 Other 2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726 - ------------------------------------------------------------------------------------------ 4,508 14,380 18,719 5,433 11,489 16,772 Less: current maturities(/2/) 1,026 244 1,205 902 185 1,087 - ------------------------------------------------------------------------------------------ Long-term debt and capital lease obligations(/2/) $3,482 $14,136 $17,514 $4,531 $11,304 $15,685 ------------------------------------------------------
(/1/) These borrowings were incurred by Sprint and allocated to the applicable Group. Sprint's weighted average interest rate related to these borrowings was 6.7% at year-end 2000 and 6.6% at year-end 1999. The weighted average interest rate related to the borrowings allocated to the PCS Group was approximately 8.8% at year-end 2000 and 8.7% at year-end 1999. See Note 1 for a more detailed description of how Sprint allocates financing to each of the Groups. (/2/) Consolidated debt does not equal the total of PCS Group and FON Group debt due to intergroup debt eliminated in consolidation. The FON Group had an investment in the PCS Group's Senior Discount notes totaling $169 million at year-end 2000, including $65 million classified as current, and $150 million at year-end 1999. I-29 Scheduled principal payments, excluding reclassified short-term borrowings, during each of the next five years are as follows: - -------------------------------
Sprint Sprint FON PCS Group Group Sprint - ------------------------------- (millions) 2001(/1/) $1,026 $ 258 $1,214 2002 1,339 1,309 2,648 2003 372 1,060 1,432 2004 144 1,062 1,206 2005 122 61 183 - -------------------------------
(/1/) The 2001 scheduled principal payments do not equal current maturities as these amounts reflect the maturity value of the scheduled payment on the PCS Group's Senior Discount notes. Included in the above schedule are payments on PCS Group debt that are to be made in Japanese yen. The yen needed to satisfy the obligations is currently held on deposit by the PCS Group and included in "Other assets" on the PCS Group's Combined Balance Sheets. The scheduled yen payments included in the above schedule are $1 million in 2003, $20 million in 2004 and $43 million in 2005. Sprint Short-term Borrowings Sprint had bank notes payable totaling $676 million at year-end 2000 and $670 million at year-end 1999. In addition, Sprint had commercial paper borrowings totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999. Though these borrowings are renewable at various dates throughout the year, they were classified as long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis through unused credit facilities and unissued debt under Sprint's shelf registration. Sprint currently has revolving credit facilities with syndicates of domestic and international banks totaling $5 billion; $3 billion of which is a 364 day facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year facility expiring in 2003. Commercial paper and certain bank notes are supported by Sprint's revolving credit facilities. Certain other notes payable relate to a separate revolving credit facility which expires in 2002. At year- end 2000, Sprint had total unused lines of credit of $1.8 billion. Bank notes outstanding had weighted average interest rates of 7.1% at year-end 2000 and 6.3% at year-end 1999. The weighted average interest rate of commercial paper was 7.5% at year-end 2000 and 6.4% at year-end 1999. Long-term Debt In June 2000, Sprint issued $1.25 billion of debt securities under its $4 billion shelf registration statement with the SEC. These borrowings mature in 2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000, Sprint had issued a total of $2 billion of debt securities under the shelf. In January 2001, Sprint issued securities using the remaining amount of the shelf (see Note 18). In June 1999, Sprint entered into a $1 billion financing agreement to sell, on a continuous basis with recourse, undivided percentage ownership interests in a designated pool of its accounts receivable. Subsequent collections of receivables sold to investors are typically reinvested in new receivables. At year-end 2000, Sprint had borrowed $900 million with a weighted average interest rate of 6.9% under this agreement. These borrowings mature in 2002. Sprint FON Group In 2000, the FON Group received an allocation of $344 million of debt from Sprint. This debt was mainly used to repay existing debt and to fund new capital investments. See Note 1 for a more detailed description of how Sprint allocates debt to the Groups. In the 2000 fourth quarter, Sprint redeemed, prior to scheduled maturities, $25 million of FON Group debt with a weighted average interest rate of 9.6%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. 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 the 1999 fourth quarter, Sprint redeemed, prior to scheduled maturities, $575 million of the assumed broadband fixed wireless companies' debt with interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million after-tax extraordinary loss for the FON Group. In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5 million after-tax extraordinary loss for the FON Group. FON Group gross property, plant and equipment totaling $16.1 billion was either pledged as security for first mortgage bonds and certain notes or is restricted for use as mortgaged property. Sprint PCS Group In 2000, Sprint allocated $3.3 billion of debt to the PCS Group. This debt was mainly used to fund new capital investments and to repay existing debt. I-30 In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. In 1999, the PCS Group repaid $2.2 billion of its revolving credit facilities and other borrowings prior to scheduled maturities. This resulted in a $21 million after-tax extraordianary loss. In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS Group debt with a weighted average interest rate of 8.3%. This resulted in a $31 million after-tax extraordinary loss for the PCS Group. Other Sprint, including the FON Group and the PCS Group, had complied with all restrictive or financial covenants relating to its debt arrangements at year- end 2000. - ------------------------------------------------------------------------------- 11. Common Stock - ------------------------------------------------------------------------------- Sprint FON Stock and Sprint PCS Stock On December 14, 1999, the Sprint 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. On April 20, 1999, the Sprint 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. All share, earnings per share and dividends per share amounts have been restated to reflect the stock splits. In November 1998, Sprint recapitalized its common stock into FON stock and PCS stock and restructured its interests in Sprint PCS. As a result, Sprint created the following series of common stock: . Series 1 FON stock and Series 1 PCS stock Existing Sprint common shareholders received one share of FON stock and 1/2 share of PCS stock for each Sprint share owned. Authorized shares totaled 2.5 billion for the Series 1 FON stock and 1.25 billion for the Series 1 PCS stock. Shares issued at year-end 2000 were 710.2 million and 507.4 million, respectively. Shares outstanding at year-end 2000 were 709.8 million and 507.4 million, respectively. . Series 2 FON stock and Series 2 PCS stock The Cable Partners received PCS shares for their ownership interests in Sprint PCS. These shares have 1/10 the voting power of the Series 1 and Series 3 PCS shares. Authorized shares totaled 500 million for both the Series 2 FON stock and Series 2 PCS stock. PCS shares issued and outstanding at year-end 2000 were 355.4 million. No FON shares have been issued. . Series 3 FON stock and Series 3 PCS stock To maintain their voting power, FT and DT purchased a combined total of 5.1 million Series 3 PCS shares (pre-split basis) for $85 million at the time of the restructuring. Series 3 FON and PCS stock is also used whenever FT and DT purchase stock to maintain their voting power and could be used if FT and DT were to elect to convert their Class A common shares into FON and PCS stock. Authorized shares totaled 1.2 billion for the Series 3 FON stock and 600 million for the Series 3 PCS stock. Shares issued and outstanding at year-end 2000 were 88.6 million and 70.3 million, respectively. At year-end 1999, Sprint had 22 thousand PCS treasury shares, which were recorded at cost. The PCS shares were held by the FON Group and represented an intergroup interest in the PCS Group which was eliminated in the Sprint Consolidated financial statements. Beginning in November 2001, Sprint has the option to convert PCS shares into FON shares. Class A and Series 3 Common Stock FT and DT own Series 3 FON common shares, Series 3 PCS common shares and Class A common shares which represent approximately 19% of Sprint's voting power at year end 2000. Sprint declared and paid Class A common dividends of 50 cents per share in 2000, 62.5 cents per share in 1999 and $1.00 per share in 1998. In February 1999, FT and DT purchased an aggregate of 12.2 million Series 3 PCS shares for $169 million in conjunction with the registered public offering of 48.8 million shares of Series 1 PCS stock. During 1999, FT and DT purchased an aggregate of 1.2 million shares of Series 3 FON shares and 1.6 million additional Series 3 PCS shares for $100 million to maintain their voting power. Additionally, during 1999, FT and DT bought Series 1 FON and Series 1 PCS shares on the open market to maintain their voting power. These shares converted into Series 3 FON and Series 3 PCS shares. FT and DT did not purchase any FON or PCS shares from Sprint or on the open market during 2000. I-31 In November 1998, 86.2 million Class A common shares were reclassified to represent an equity interest in the FON Group (86.2 million shares) and the PCS Group (43.1 million shares). FT and DT maintained their voting power in Sprint by purchasing an additional 10.2 million Series 3 PCS shares for $85 million. FT and DT may purchase additional shares of FON stock and PCS stock from Sprint to maintain their current ownership level. FT and DT have entered into a standstill agreement with Sprint restricting their ability to acquire Sprint voting shares (other than as intended by their agreements with Sprint). The standstill agreement also contains customary provisions restricting FT and DT from initiating or participating in any proposal with respect to the control of Sprint. In February 2001, a registration statement covering the FON shares FT and DT own was filed with the SEC (see Note 18). PCS Preferred Stock As part of the PCS Restructuring, Sprint issued to the Cable Partners a new class of convertible preferred stock convertible into PCS shares. Common Stock Reserved for Future Grants At year-end 2000, common stock reserved for future grants under stock option plans or for future issuances under various other arrangements was as follows: Sprint FON Group - -------------------------------------------------------------------
Shares - ------------------------------------------------------------------- (millions) Employees Stock Purchase Plan 10.5 Employee savings plans 5.4 Automatic Dividend Reinvestment Plan 2.3 Officer and key employees' and directors' stock options 22.1 Other 1.4 - ------------------------------------------------------------------- 41.7 ----------------------------------
Sprint PCS Group - -------------------------------------------------------------------
Shares - ------------------------------------------------------------------- (millions) Employees Stock Purchase Plan 3.7 Employee savings plans 2.3 Officer and key employees' and directors' stock options 19.8 Warrants issued to Cable Partners 24.9 Conversion of preferred stock and other 18.5 - ------------------------------------------------------------------- 69.2 ----------------------------------
Shareholder Rights Plan Under Sprint's Shareholder Rights Plan, one half of a preferred stock purchase right is attached to each share of FON stock and PCS stock and one preferred stock purchase right is attached to each share of Class A common stock. The rights may be redeemed by Sprint at $0.01 per right and will expire in June 2007, unless extended. The rights are exercisable only if certain takeover events occur and are entitled to the following: . Each FON stock right entitles the holder to purchase 1/1,000 of a share (Unit) of a no par Preferred Stock-Sixth Series at $275 per Unit. . Each PCS stock right entitles the holder to purchase a Unit of a no par Preferred Stock-Eighth Series at $150 per Unit. . Each Class A right entitles the holder to purchase 1/2 Unit of Preferred Stock-Sixth Series at $137.50 per 1/2 Unit and 1/4 Unit of Preferred Stock-Eighth Series at $37.50 per 1/4 Unit. Preferred Stock-Sixth Series is voting, cumulative and accrues dividends on a quarterly basis generally equal to the greater of $100 per share or 2,000 times the total per share amount of all FON stock common dividends. Preferred Stock- Eighth Series has the same features as the Sixth Series, but applies to PCS shares. No Preferred Stock-Sixth Series or Preferred Stock-Eighth Series were issued or outstanding at year-end 2000 or 1999. Other The indentures and financing agreements of certain of Sprint's subsidiaries contain provisions limiting cash dividend payments on subsidiary common stock held by Sprint. As a result, $545 million of those subsidiaries' $1.6 billion total retained earnings was restricted at year-end 2000. The flow of cash in the form of advances from the subsidiaries to Sprint is generally not restricted. - -------------------------------------------------------------------------------- 12. Stock-based Compensation - -------------------------------------------------------------------------------- Due to the Recapitalization and the FON and PCS stock splits, the number of shares and the related exercise prices have been adjusted to maintain both the total fair value of common stock underlying the options and Employee Stock Purchase Plan (ESPP) share elections, and the relationship between the market value of the common stock and the exercise prices of the options and ESPP share elections. During 2000, the FON Group paid $80 million to the PCS Group to compensate for the net amount of PCS stock-based compensation granted to FON Group employees and FON stock-based compensation granted to PCS Group employees. The value paid for stock-based compensation is determined at the time of the grants. I-32 During 2000, options outstanding for more than one year at the date of shareholder approval of Sprint's proposed merger with WorldCom became fully vested as of that date. During 2000, the Sprint Board of Directors approved an Exchange Program to give Sprint employees a choice to cancel stock options granted to them in 2000 in exchange for an equal number of new options in the future. The new options will be granted on May 11, 2001, and the exercise price will be the market price on that date. No members of Sprint's Board of Directors were eligible for the Exchange Program. Options cancelled on November 10, 2000 under the terms of the Exchange Program were 16.2 million FON options and 13.1 million PCS options. Management Incentive Stock Option Plan Under the Management Incentive Stock Option Plan (MISOP), Sprint has granted stock options to employees who are eligible to receive annual incentive compensation. Eligible employees are entitled to receive stock options in lieu of a portion of the target incentive under Sprint's management incentive plans. The options generally become exercisable on December 31 of the year granted and have a maximum term of 10 years. MISOP options are granted with exercise prices equal to the market price of the underlying common stock on the grant date. At year-end 2000, authorized FON shares under this plan approximated 27.4 million and authorized PCS shares approximated 16.8 million. The authorized number of shares was increased by approximately 7.2 million FON shares and 7.8 million PCS shares on January 1, 2001. Stock Option Plan Under the Sprint Stock Option Plan (SOP), Sprint has granted stock options to officers and key employees. The options generally become exercisable at the rate of 25% per year, beginning one year from the grant date, and have a maximum term of 10 years. SOP options are granted with exercise prices equal to the market price of the underlying common stock on the grant date. At year-end 2000, authorized FON shares under this plan approximated 54.8 million and authorized PCS shares approximated 42.6 million. In 2000, Sprint granted special stock options (Retention) to executives who agreed to defer the benefit of the accelerated vesting of stock options until the close or cancellation of the proposed WorldCom merger. These options were designed to retain these executives following Sprint's special meeting of shareholders in connection with the proposed WorldCom merger. In addition, Sprint granted a portion of the annual options grants (Accelerated) normally expected to be made in early 2001 to officers and key employees. The granting of these options was accelerated to help retain employees. In 1997, Sprint granted performance-based stock options to certain key executives. The FON Group expensed $5 million in 2000, $9 million in 1999 and $14 million in 1998 and the PCS Group expensed $3 million in 2000, $5 million in 1999 and $1 million in 1998 related to these performance-based stock options. The 2000 amount reflects expense through the date of the shareholder approval of the proposed WorldCom merger. At that time, all of these options became vested. An additional $29 million of expense related to these options was included in "Asset write-down and merger related costs" in Sprint's Consolidated Statements of Operations. Employees Stock Purchase Plan Under Sprint's ESPP, employees may elect to purchase FON common stock or PCS common stock at a price equal to 85% of the market value on the grant or exercise date, whichever is less. At year-end 2000, authorized FON shares under this plan approximated 12.1 million and authorized PCS shares approximated 7.6 million. Sprint PCS Long-term Incentive Plan Prior to 1999, PCS Group employees meeting certain eligibility requirements were included in Sprint PCS' long-term incentive plan (LTIP). Under this plan, participants received appreciation units based on independent appraisals. Appreciation on the units was based on annual independent appraisals. The 1997 plan year appreciation units vested 25% per year beginning one year from the grant date and also expire after 10 years. In connection with the PCS Restructuring, Sprint discontinued the Sprint PCS LTIP plan. The appreciation units were converted to PCS shares and options to buy PCS shares, based on a formula designed to replace the appreciated value of the units at the beginning of July 1998. For vested units at year-end 1998, participants could elect to receive the appreciation in cash, or in shares and options. Most elected to receive shares and options. In 1999, Sprint began issuing the shares, and options became exercisable, based on the vesting requirements of the converted units. At the end of 2000, all replacement options and shares were fully vested. Pro Forma Disclosures Pro forma net income (loss) and earnings (loss) per share have been determined as if Sprint had used the fair value method of accounting for its stock option grants and ESPP share elections. Under this method, compensation expense is recognized over the applicable vesting periods and is based on the I-33 shares under option and their related fair values on the grant date. The FON Group's pro forma net income was $1,668 million for 2000 and $1,434 million for 1999 and pro forma diluted EPS was $1.88 for 2000 and $1.63 for 1999. From the Recapitalization date through year-end 1998, the FON Group's pro forma net income was $103 million and pro forma diluted EPS was $0.12. The FON Group's pro forma net income was reduced by $10 million or $0.01 per FON share in 2000 and 1999, and $19 million or $0.02 per FON share in 1998 due to additional compensation resulting from modifications to terms of options and ESPP share elections related to the Recapitalization. The PCS Group's pro forma net loss was $2,135 million in 2000 and $2,578 million in 1999 and pro forma diluted loss per share was $2.22 in 2000 and $2.82 in 1999. The application of SFAS No. 123 did not have a material impact on the PCS Group's pro forma net loss from the Recapitalization date through year-end 1998. Prior to the Recapitalization date, Sprint's pro forma net income was $785 million in 1998 and pro forma diluted earnings per share was $1.79 in 1998. Fair Value Disclosures The following tables reflect the weighted average fair value per option granted, as well as the significant weighted average assumptions used in determining those fair values using the Black-Scholes pricing model: FON Common Stock - -----------------------------------------------
2000 MISOP SOP - ----------------------------------------------- Fair value on grant date $24.24 $23.86 Risk-free interest rate 6.8% 6.1% Expected volatility 26.7% 26.6% Expected dividend yield 0.8% 0.8% Expected life (years) 6 6 - ----------------------------------------------- 2000 Accelerated Retention - ----------------------------------------------- Fair value on grant date $13.77 $22.92 Risk-free interest rate 6.1% 6.6% Expected volatility 33.2% 26.7% Expected dividend yield 1.4% 0.8% Expected life (years) 6 6 - ----------------------------------------------- 1999 MISOP SOP - ----------------------------------------------- Fair value on grant date $ 9.86 $12.09 Risk-free interest rate 4.8% 4.8% Expected volatility 26.6% 26.6% Expected dividend yield 1.3% 1.3% Expected life (years) 4 6
PCS Common Stock - -----------------------------------------------
2000 MISOP SOP - ----------------------------------------------- Fair value on grant date $33.06 $33.93 Risk-free interest rate 6.8% 6.1% Expected volatility 63.2% 67.7% Expected dividend yield -- -- Expected life (years) 6 6 - ----------------------------------------------- 2000 Accelerated Retention - ----------------------------------------------- Fair value on grant date $35.30 $34.83 Risk-free interest rate 6.1% 6.6% Expected volatility 63.8% 63.2% Expected dividend yield -- -- Expected life (years) 6 6 - ----------------------------------------------- 1999 MISOP SOP - ----------------------------------------------- Fair value on grant date $ 8.55 $10.12 Risk-free interest rate 4.8% 4.8% Expected volatility 67.7% 67.7% Expected dividend yield -- -- Expected life (years) 4 6 - ----------------------------------------------- 1998 SOP - ----------------------------------------------- Fair value on grant date $ 5.44 Risk-free interest rate 4.4% Expected volatility 75.0% Expected dividend yield -- Expected life (years) 6
Sprint Common Stock - -----------------------------------------
1998 MISOP SOP - ----------------------------------------- Fair value on grant date $14.58 $16.00 Risk-free interest rate 5.5% 5.5% Expected volatility 21.7% 21.7% Expected dividend yield 1.7% 1.7% Expected life (years) 5 6
Employees Stock Purchase Plan During 2000, FON Group and PCS Group employees elected to purchase 2.3 million FON and 5.4 million PCS ESPP shares. Using the Black-Scholes pricing model, the weighted average fair value was $12.99 per share for each FON election and $20.68 per share for each PCS election. During 1999, FON Group and PCS Group employees elected to purchase 1.3 million FON and 6.5 million PCS ESPP shares. Using the Black-Scholes pricing model, the weighted average fair value was $11.12 per share for each FON election and $8.08 per share for each PCS election. During 1998, FON Group employees elected to purchase 2.1 million ESPP shares with each election having a weighted average fair value (using the Black- Scholes pricing model) of $13.90 per share. I-34 Stock Options Stock option plan activity was as follows: FON Common Stock - -----------------------------------------------
Weighted Average per Sprint Share FON Exercise Shares Price - ----------------------------------------------- (millions) Converted in November 1998 47.6 $21.01 Exercised (0.2) 15.95 ----- Outstanding, year-end 1998 47.4 21.03 Granted 20.9 41.51 Exercised (13.5) 18.93 Forfeited/Expired (2.8) 28.61 ----- Outstanding, year-end 1999 52.0 29.48 Granted 24.3 58.61 Exercised (11.5) 26.32 Forfeited/Expired (20.0) 58.48 ----- Outstanding, year-end 2000 44.8 $33.12 ----------------------
PCS Common Stock - -----------------------------------------------
Weighted Average per Sprint Share PCS Exercise Shares Price - ----------------------------------------------- (millions) Converted in November 1998 23.8 $ 4.58 Granted 5.4 7.92 ----- Outstanding, year-end 1998 29.2 5.20 Granted 21.8 17.67 Exercised (9.2) 6.05 Forfeited/Expired (2.0) 9.64 ----- Outstanding, year-end 1999 39.8 11.64 Granted 19.1 52.68 Exercised (16.2) 10.84 Forfeited/Expired (15.8) 52.08 ----- Outstanding, year-end 2000 26.9 $17.43 ----------------------
Sprint Common Stock - ---------------------------------------------------
Weighted Average per Share Sprint Exercise Shares Price - --------------------------------------------------- (millions) Outstanding, beginning of 1998 18.7 $37.85 Granted 9.1 59.73 Exercised (3.4) 33.54 Forfeited/Expired (0.6) 47.28 ---- Converted in November 1998 23.8 $46.60 -------------------------
The following tables summarize outstanding and exercisable options at year-end 2000: FON Common Stock - -----------------------------------------------
Options Outstanding -------------------------------- Weighted Average Weighted Range of Remaining Average Exercise Number Contractual Exercise Prices Outstanding Life Price - ----------------------------------------------- (millions) (years) $ 5.00-$ 9.99 0.2 0.5 $ 8.67 10.00- 19.99 8.1 5.2 16.62 20.00- 29.99 14.4 6.8 24.73 30.00- 39.99 14.8 8.0 38.51 40.00- 49.99 2.3 5.9 44.64 50.00- 59.99 0.7 5.5 53.63 60.00- 69.99 3.9 7.9 64.71 70.00- 79.99 0.4 5.6 74.02 - -----------------------------------------------
- -----------------------------------
Options Exercisable -------------------- Weighted Range of Average Exercise Number Exercise Prices Exercisable Price - ----------------------------------- (millions) $ 5.00-$ 9.99 0.2 $ 8.67 10.00- 19.99 8.1 16.62 20.00- 29.99 14.3 24.71 30.00- 39.99 13.9 38.63 40.00- 49.99 1.4 45.60 50.00- 59.99 0.4 52.08 60.00- 69.99 1.5 64.73 70.00- 79.99 0.4 74.02 - -----------------------------------
PCS Common Stock - --------------------------------------------------------------------------------
Options Outstanding -------------------------------- Weighted Average Weighted Range of Remaining Average Exercise Number Contractual Exercise Prices Outstanding Life Price - ----------------------------------------------- (millions) (years) $ 2.00-$ 9.99 11.5 6.2 $ 5.26 10.00- 19.99 10.6 8.0 15.60 20.00- 29.99 0.3 5.8 26.59 30.00- 39.99 0.3 6.4 33.16 40.00- 49.99 0.4 6.3 46.44 50.00- 59.99 3.4 8.4 53.07 60.00- 69.99 0.4 7.3 62.82 - -----------------------------------------------
- -----------------------------------
Options Exercisable -------------------- Weighted Range of Average Exercise Number Exercise Prices Exercisable Price - ----------------------------------- (millions) $ 2.00-$ 9.99 11.5 $ 5.26 10.00- 19.99 10.6 15.60 20.00- 29.99 0.2 27.10 30.00- 39.99 0.2 32.78 40.00- 49.99 0.2 45.88 50.00- 59.99 1.4 52.32 - -----------------------------------
I-35 - -------------------------------------------------------------------------------- 13. Commitments and Contingencies - -------------------------------------------------------------------------------- Litigation, Claims and Assessments In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to Sprint's consolidated financial statements. Commitments The PCS Group has purchase commitments with various vendors to purchase handsets and other equipment through 2001. Outstanding commitments at year-end 2000 were approximately $830 million. Purchases under these commitments during 2000 totaled approximately $2 million. Operating Leases Sprint's minimum rental commitments at year-end 2000 for all noncancelable operating leases, consisting mainly of leases for data processing equipment, real estate, cell and switch sites, and office space, are as follows: - ----------------------
(millions) 2001 $577 2002 409 2003 283 2004 194 2005 119 Thereafter 364 - ----------------------
Sprint's gross rental expense totaled $1.0 billion in 2000, $890 million in 1999 and $730 million in 1998. Rental commitments for subleases, contingent rentals and executory costs were not significant. The table excludes renewal options related to certain cell and switch site leases. These renewal options generally have five-year terms and may be exercised from time to time. - -------------------------------------------------------------------------------- 14. Financial Instruments - -------------------------------------------------------------------------------- Fair Value of Financial Instruments Sprint estimates the fair value of its financial instruments using available market information and appropriate valuation methodologies. As a result, the following estimates do not necessarily represent the values Sprint could realize in a current market exchange. Although management is not aware of any factors that would affect the year-end 2000 estimated fair values, those amounts have not been comprehensively revalued for purposes of these financial statements since that date. Therefore, estimates of fair value after year-end 2000 may differ significantly from the amounts presented below. The carrying amounts and estimated fair values of Sprint's financial instruments at year-end were as follows: - -----------------------------------------------------------------
2000 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 239 $ 239 Investments in securities 66 66 Long-term debt and capital lease obligations 18,719 17,823 - ----------------------------------------------------------------- - ----------------------------------------------------------------- 1999 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 120 $ 120 Investments in securities 464 464 Long-term debt and capital lease obligations 16,772 16,126 - -----------------------------------------------------------------
The carrying amounts of Sprint's cash and equivalents approximate fair value at year-end 2000 and 1999. The estimated fair value of investments in equity securities was based on quoted market prices. The estimated fair value of long- term debt was based on quoted market prices for publicly traded issues. The estimated fair value of all other issues was based on the present value of estimated future cash flows using a discount rate based on the risks involved. Concentrations of Credit Risk Sprint's accounts receivable are not subject to any concentration of credit risk. Sprint controls credit risk of its interest rate swap agreements and foreign currency contracts through credit approvals, dollar exposure limits and internal monitoring procedures. In the event of nonperformance by the counterparties, Sprint's accounting loss would be limited to the net amount it would be entitled to receive under the terms of the applicable interest rate swap agreement or foreign currency contract. I-36 However, Sprint does not anticipate nonperformance by any of the counterparties to these agreements. Interest Rate Swap Agreements Sprint uses interest rate swap agreements as part of its interest rate risk management program. Net interest paid or received related to these agreements is recorded using the accrual method and is recorded as an adjustment to interest expense. Sprint had interest rate swap agreements with notional amounts of $1.0 billion outstanding at year-end 2000 and $598 million outstanding at year-end 1999. Net interest expense related to interest rate swap agreements was $2 million in 2000, $1 million in 1999 and $0.1 million in 1998. In 1998, Sprint deferred losses from the termination of interest rate swap agreements used to hedge a portion of a $5.0 billion debt offering. These losses, totaling $75 million, are being amortized to interest expense using the effective interest method over the term of the debt. At year-end 2000, the remaining unamortized deferred loss totaled $61 million. Foreign Currency Contracts As part of its foreign currency exchange risk management program, Sprint purchases and sells over-the-counter forward contracts and options in various foreign currencies. Sprint had outstanding open forward contracts to buy various foreign currencies of $23 million at year-end 2000 and $14 million at year-end 1999. Sprint had outstanding open purchase option contracts to call various foreign currencies of $1 million at year-end 1999. There were no such contracts open at year-end 2000. The premium paid for an option is deferred and amortized over the life of the option. The forward contracts and options open at year-end 2000 and 1999 all had original maturities of six months or less. The net gain or loss recorded to reflect the fair value of these contracts is recorded in the period incurred. Including hedge costs, a net gain of $0.4 million was recorded in 2000, a net loss of $0.3 million was recorded in 1999, and a net loss of $0.6 million was recorded in 1998. - -------------------------------------------------------------------------------- 15. Additional Financial Information - -------------------------------------------------------------------------------- Segment Information The FON Group operates in three business segments, based on how Sprint manages the FON Group's operations and assesses its performance: the global markets division, the local division and the product distribution and directory publishing businesses. See Note 14 of Sprint FON Group's Notes to the Combined Financial Statements for more information about the FON Group's business segments. The PCS Group businesses operate in a single segment. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value. I-37 Segment financial information was as follows: - ---------------------------------------------------------------------------
Sprint Sprint Intergroup FON Group PCS Group Eliminations(/1/) Consolidated - --------------------------------------------------------------------------- (millions) 2000 Net operating revenues $17,688 $ 6,341 $(416) $23,613 Intergroup revenues 381 35 (416) -- Depreciation and amortization 2,267 1,877 -- 4,144 Operating expenses 15,255 8,269 (416) 23,108 Operating income (loss) 2,433 (1,928) -- 505 Operating margin 13.8% NM -- 2.1% Equity in losses of affiliates (181) (55) -- (236) Capital expenditures 4,105 3,047 -- 7,152 Total assets 23,649 19,763 (811) 42,601 1999 Net operating revenues $17,160 $ 3,373 $(268) $20,265 Intergroup revenues 264 4 (268) -- Depreciation and amortization 2,129 1,523 -- 3,652 Operating expenses 14,230 6,610 (268) 20,572 Operating income (loss) 2,930 (3,237) -- (307) Operating margin 17.1% NM -- NM Equity in losses of affiliates (73) -- -- (73) Capital expenditures 3,534 2,580 -- 6,114 Total assets 21,803 17,924 (477) 39,250 1998 Net operating revenues $15,958 $ 1,294 $(108) $17,144 Intergroup revenues 108 -- (108) -- Depreciation and amortization 1,921 789 -- 2,710 Operating expenses 13,198 3,864 (108) 16,954 Operating income (loss) 2,760 (2,570) -- 190 Operating margin 17.3% NM -- NM Other partners' loss in Sprint PCS -- 1,251 -- 1,251 Equity in losses of affiliates (41) -- -- (41) Capital expenditures 3,159 1,072 -- 4,231 Total assets 19,001 15,165 (909) 33,257
NM = Not meaningful (/1/) FON Group revenues eliminated in consolidation consist principally of long-distance services provided to the PCS Group for resale to PCS customers and for internal business use and telemarketing services provided by the FON Group for PCS sales programs. More than 95% of Sprint's revenues are from domestic customers located within the United States. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers represent approximately 25% of the PCS Group's net operating revenues in 2000, 28% in 1999 and 25% in 1998. I-38 Supplemental Cash Flows Information Sprint's cash paid (received) for interest and income taxes was as follows: - -----------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------- (millions) Interest (net of capitalized interest) $1,022 $ 714 $217 ------------------------------------ Income taxes $ (386) $(131) $307 ------------------------------------
Sprint's noncash activities included the following: - -----------------------------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------------------------- (millions) Tax benefit from stock options exercised $424 $ 254 $ 49 ------------------------------------------------------- Stock received for stock options exercised $ 69 $ 118 $ 18 ------------------------------------------------------- Noncash extinguishment of debt $275 $ 78 $ -- ------------------------------------------------------- Common stock issued under Sprint's employee benefit stock plans $255 $ 144 $ 99 ------------------------------------------------------- Capital lease obligations $-- $ 77 $ 460 ------------------------------------------------------- Common stock issued for Cox PCS acquisition $-- $1,146 $ -- ------------------------------------------------------- Debt assumed in the broadband fixed wireless acquisitions $-- $ 575 $ -- ------------------------------------------------------- Common stock issued to the Cable Partners to purchase Sprint PCS $-- $ -- $3,200 ------------------------------------------------------- Preferred stock issued to the Cable Partners in exchange for interim financing $-- $ -- $ 247 -------------------------------------------------------
See Note 2 for more details about the assets and liabilities acquired in business combinations. Related Party Transactions The Cable Partners advanced PhillieCo $26 million in 1998. This advance was repaid in the 1999 first quarter. - -------------------------------------------------------------------------------- 16. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires all derivatives to be recorded on the balance sheet as either assets or liabilities and be measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative is used and whether it qualifies for hedge accounting. When this statement was adopted in January 2001, it had no material impact on Sprint's consolidated financial statements. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and provides consistent standards for distinguishing transfers from sales and secured borrowings. This statement is effective for transactions occurring after March 31, 2001 and is not expected to have a material impact on Sprint's consolidated financial statements. I-39 - -------------------------------------------------------------------------------- 17. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Quarter -------------------------------- 2000 1st 2nd 3rd 4th(/1/) - ----------------------------------------------------------------------- (millions, except per share data) Net operating revenues(/2/)(/3/) $5,529 $5,821 $6,040 $6,223 Operating income (loss) 156 122 357 (130) Loss from continuing operations (65) (91) (6) (414) Net income (loss)(/3/) 605 (91) (6) (415) Earnings (Loss) per common share from continuing operations FON common stock Diluted 0.50 0.41 0.43 0.11 Basic 0.51 0.42 0.44 0.11 PCS common stock Diluted and Basic (0.54) (0.48) (0.41) (0.53) - ----------------------------------------------------------------------- Quarter -------------------------------- 1999 1st 2nd 3rd 4th - ----------------------------------------------------------------------- (millions, except per share data) Net operating revenues(/2/) $4,735 $4,982 $5,158 $5,390 Operating income (loss) (90) 28 (64) (181) Loss from continuing operations (171) (103) (196) (275) Net loss (220) (169) (256) (290) Earnings (Loss) per common share from continuing operations(/4/),(/5/) FON common stock Diluted 0.49 0.51 0.48 0.49 Basic 0.50 0.52 0.49 0.50 PCS common stock Diluted and Basic (0.71) (0.61) (0.65) (0.75) - -----------------------------------------------------------------------
(/1/) See Notes 3 and 4 of Notes to Consolidated Financial Statements for information about nonrecurring charges recorded in the 2000 fourth quarter. (/2/) Certain reclassifications were made between net operating revenues and operating expenses from amounts reported in the 2000 reports on Form 10-Q to conform to industry events or practices. These reclassifications had no impact on operating income (loss) as previously reported. (/3/) In the 2000 fourth quarter, Sprint adopted SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB 101). As required by SAB 101, 2000 net operating revenues have been restated from amounts reported in the 2000 quarterly reports on Form 10-Q. Net operating revenues were reduced by $4 million in the 2000 first quarter, $31 million in the 2000 second quarter and $33 million in the 2000 third quarter. Sprint also restated the 2000 first quarter net income by recording a $2 million loss for the cumulative effect of change in accounting principle at the effective adoption date of SAB 101. (/4/) In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON stock. FON Group earnings per share for prior periods have been restated to reflect this stock split. (/5/) In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS stock. PCS Group loss per share for prior periods have been restated to reflect this stock split. - -------------------------------------------------------------------------------- 18. Subsequent Events (Unaudited) - -------------------------------------------------------------------------------- In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2 billion of unissued securities under its existing shelf registration statement with the SEC, and registered an additional $400 million prior to the issuance. These borrowings have interest rates ranging from 7.1% to 7.6% and have scheduled maturities in 2006 and 2011. The proceeds were allocated to the PCS Group and used mainly to repay existing debt. In February 2001, Sprint agreed to end its exclusive alliance with EarthLink and relinquished its seats on EarthLink's Board of Directors. As a result of these changes, Sprint will now treat its investment in EarthLink as a cost method investment. In February 2001, Sprint filed a registration statement with the SEC for a secondary offering of 174.8 million shares of FON stock (including 22.8 million shares to cover over-allotments) owned by FT and DT, including the FON stock underlying the Class A common stock. Sprint will not receive any of the proceeds from the sale of this stock. In February 2001, 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 March 30, 2001. I-40 SPRINT CORPORATION SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2000, 1999 and 1998
Additions (Deductions) --------------------------------- Balance Charged Balance Beginning PCS Charged to Other Other End of of Year Restructuring to Income Accounts Deductions Year - --------------------------------------------------------------------------------------------- (millions) 2000 Allowance for doubtful accounts $274 $-- $666 $ 8 $(559)(/1/) $389 ------------------------------------------------------------------ Valuation allowance-- deferred income tax assets $480 $-- $115 $ 3 $ -- $598 ------------------------------------------------------------------ 1999 Allowance for doubtful accounts $182 $-- $584 $ 7 $(499)(/1/) $274 ------------------------------------------------------------------ Valuation allowance-- deferred income tax assets $249 $-- $ 47 $193(/4/) $ (9) $480 ------------------------------------------------------------------ 1998 Allowance for doubtful accounts $147 $ 8(/2/) $367 $ 3 $(343)(/1/) $182 ------------------------------------------------------------------ Valuation allowance-- deferred income tax assets $ 12 $229(/3/) $-- $ 16 $ (8) $249 ------------------------------------------------------------------
(/1/) Accounts written off, net of recoveries. (/2/) As discussed in Note 2, the PCS Group's assets and liabilities were recorded at their fair values on the PCS Restructuring date. Therefore, the data presented in this Schedule reflects activity since the PCS Restructuring. (/3/) Represents a valuation allowance for deferred income tax assets recorded in connection with the PCS Restructuring. (/4/) Represents a valuation allowance for deferred income tax assets relating to the net operating loss carryforwards acquired in the purchase of the broadband fixed wireless companies. I-41 [SPRINT Logo] Annex II Sprint FON Group Combined Financial Information SELECTED FINANCIAL DATA Sprint FON Group - ------------------------------------------------------------------------------
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------ (millions, except per share data) Results of Operations - ------------------------------------------------------------------------------ Net operating revenues $17,688 $17,160 $15,958 $14,947 $13,874 Operating income(/1/) 2,433 2,930 2,760 2,470 2,268 Income from continuing operations(/1/),(/2/) 1,292 1,736 1,675 1,513 1,373 Earnings per Share and Dividends(/3/) - ------------------------------------------------------------------------------ Earnings per common share from continuing operations(/1/),(/2/),(/3/) Diluted $ 1.45 $ 1.97 $ 1.93 $ 1.73 $ 1.61 Basic 1.47 2.01 1.96 1.76 1.63 Dividends per common share $ .50 $ .50 $ .50 $ .50 $ .50 Financial Position - ------------------------------------------------------------------------------ Total assets $23,649 $21,803 $19,001 $16,581 $15,655 Property, plant and equipment, net 15,833 14,002 12,464 11,307 10,464 Total debt (including short-term borrowings) 4,508 5,433 4,442 3,880 3,274 Group equity 12,343 10,514 9,024 7,639 7,332 Cash Flow Data - ------------------------------------------------------------------------------ Cash from operating activities(/4/) $ 4,323 $ 3,713 $ 3,915 $ 2,899 $ 2,267 Capital expenditures 4,105 3,534 3,159 2,709 2,434
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. The FON Group was created as a result of the PCS Restructuring and Recapitalization. See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" for more information. (/1/) In 2000, the FON Group recorded a nonrecurring charge of $238 million which principally represents a write-down of goodwill, and a $163 million nonrecurring charge for costs associated with the proposed WorldCom merger, which was terminated. These charges reduced operating income by $401 million and income from continuing operations by $257 million. The FON Group recorded nonrecurring charges of $20 million in 1997 and $60 million in 1996 related to litigation within the global markets division. These charges reduced income from continuing operations by $13 million in 1997 and $36 million in 1996. (/2/) In 2000, the FON Group recorded nonrecurring charges of $122 million related to write-downs of certain equity investments. These charges reduced income from continuing operations by $109 million. Also in 2000, the FON Group recorded net nonrecurring gains of $71 million from the sale of an independent directory publishing operation and from investment activities, which increased income from continuing operations by $44 million. In 1999, the FON Group recorded net nonrecurring gains of $54 million from investment activities which increased income from continuing operations by $35 million. In 1998, the FON Group recorded net nonrecurring gains of $104 million mainly from the sale of local exchanges. This increased income from continuing operations by $62 million. In 1997, the FON Group recorded nonrecurring gains of $71 million mainly from sales of local exchanges and certain investments. These gains increased income from continuing operations by $44 million. (/3/) In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON common stock. As a result, diluted and basic earnings per common share and dividends have been restated for periods before this stock split. Earnings per common share and dividends for the FON Group for periods before 1999 are on a pro forma basis and assume the FON shares created in the 1998 recapitalization of Sprint's common stock existed for all periods presented. (/4/) The 1996 amount was reduced by $600 million for cash required to terminate an accounts receivable sales agreement. II-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint FON Group FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- General - ------------------------------------------------------------------------------- See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" for more information. - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- Sprint FON Group - ------------------------------------------------------------------------------- During 2000, the FON Group changed its segment reporting to align financial reporting with changes in how Sprint manages the FON Group's operations and assesses its performance. The FON Group operates in three business segments: the global markets division, the local division and the product distribution and directory publishing businesses. Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; data communications such as Internet and frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(SM). 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 advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. During 2000, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed data services. Global markets operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. This division 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; Intelig, a long distance provider in Brazil; and certain other telecommunications investments and ventures. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. 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. - ------------------------------------------------------------------------------- Results of Operations - ------------------------------------------------------------------------------- - -----------------------------------------
2000 1999 1998 - ----------------------------------------- (millions) Net operating revenues $17,688 $17,160 $15,958 Operating expenses 15,255 14,230 13,198 - ----------------------------------------- Operating income $ 2,433 $ 2,930 $ 2,760 ---------------------- Income from continuing operations $ 1,292 $ 1,736 $ 1,675 ---------------------- Capital expenditures $ 4,105 $ 3,534 $ 3,159 ----------------------
In 2000, operating expenses include nonrecurring charges of $238 million primarily related to a write-down of goodwill, and $163 million for costs associated with the terminated WorldCom merger. These charges reduced operating income by $401 million and income from continuing operations by $257 million. Income from continuing operations in II-2 2000 also includes a nonrecurring charge of $109 million related to the write- downs of certain equity investments and net nonrecurring gains of $44 million from the sale of an independent directory publishing operation and from investment activities. In 1999, income from continuing operations includes net nonrecurring gains of $35 million from investment activities. In 1998, income from continuing operations includes a nonrecurring gain of $62 million mainly from the sale of local exchanges. Excluding nonrecurring items, operating income was $2.8 billion in 2000, $2.9 billion in 1999 and $2.8 billion in 1998; income from continuing operations was $1.6 billion in 2000, $1.7 billion in 1999 and $1.6 billion in 1998. - -------------------------------------------------------------------------------- Segmental Results of Operations - -------------------------------------------------------------------------------- Beginning in 2000, the FON Group combined its long distance operation, Sprint ION, broadband fixed wireless services and certain other ventures into one division, global markets, to align financial reporting with changes in how Sprint manages operations and assesses performance. The global markets division now includes four major revenue streams: voice, data, Internet and other. In connection with the resegmentation, the FON Group shifted the recognition of consumer long distance revenues and expenses associated with customers in its local franchise territories from the global markets division to the local division. Prior periods have been restated to reflect these changes. Global Markets Division - --------------------------------------------
2000 1999 1998 - -------------------------------------------- (millions) Net operating revenues Voice $ 7,094 $ 7,445 $7,079 Data 1,937 1,696 1,396 Internet 920 615 434 Other 577 552 632 - -------------------------------------------- Total net operating revenues 10,528 10,308 9,541 - -------------------------------------------- Operating expenses Costs of services and products 5,558 4,947 4,784 Selling, general and administrative 3,026 3,141 2,639 Depreciation and amortization 1,121 1,045 928 Asset write-down 238 -- -- - -------------------------------------------- Total operating expenses 9,943 9,133 8,351 - -------------------------------------------- Operating income $ 585 $ 1,175 $1,190 ------------------------- Operating margin 5.6% 11.4% 12.5% ------------------------- Capital expenditures $ 2,294 $ 1,774 $1,518 -------------------------
Net Operating Revenues Net operating revenues increased 2% in 2000 and 8% in 1999. The increases mainly reflect strong data communications services revenue growth. A more competitive pricing environment and a change in the mix of products sold more than offset minute growth of 18% in 2000. Strong minute growth of 22% in 1999 was partly offset by a more competitive pricing environment and a change in the mix of products sold. The minute growth in 2000 was also offset by a reduction in access cost pass-throughs resulting from the implementation of the Coalition for Affordable Local and Long Distance Service proposal (CALLS). Voice Revenues Voice revenues decreased 5% in 2000 and increased 5% in 1999. The 2000 decrease was largely due to a decline in consumer voice revenues as a result of a more competitive pricing environment, lower calling card usage due to the increased use of wireless phones, and the implementation of CALLS. The 1999 increase mainly reflects increased wholesale voice revenues due to strong minute growth mainly from international calls and increased inbound and outbound toll-free calls. Data Revenues Data revenues reflect sales of current-generation data services including asynchronous transfer mode and frame relay services. These revenues increased 14% in 2000 and 21% in 1999 due to increased sales as a result of an increase emphasis on these services. Internet Revenues Internet revenues increased 50% in 2000 and 42% in 1999 due to strong growth in dial-up Internet service provider-related revenues and dedicated service revenues. Internet revenues showed strong growth because of continued demand and increased use of the Internet. Other Revenues Other revenues increased 5% in 2000 and decreased 13% in 1999. The 2000 increase was due to sales of capacity on transoceanic cable and the inclusion of a full year of revenues from the cable TV service operations of the broadband fixed wireless companies purchased in 1999 largely offset by a decline in legacy data services. The 1999 decrease was due to a decline in legacy data services. Costs of Services and Products Costs of services and products include interconnection costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers, costs to operate and maintain the long distance network, costs of equipment and transmission capacity sales, and costs related to the II-3 development and deployment of Sprint ION. These costs increased 12% in 2000 and 3% in 1999. Interconnection costs remained flat in 2000 and increased 3% in 1999. Reductions in per-minute international access costs as well as domestic access costs offset the impact of increased calling volumes in 2000. Increased calling volumes in 1999 were partly offset by reductions in per-minute costs for both domestic and international access. The domestic rate reductions were generally due to the FCC-mandated access rate reductions that took effect in January and July 1998, July 1999 and July 2000. The access rate reductions in July 2000 included the implementation of CALLS. All other costs of services and products increased 42% in 2000 and 5% in 1999. The 2000 increase was largely due to the expansion of Sprint ION business services nationwide and the launch of consumer services in select markets as well as increased sales of capacity on transoceanic cable. Increased costs of services and products in both 2000 and 1999 were driven by growth in data services. The 1999 increase was also impacted by increases in network equipment operating leases expense. Total costs of services and products for global markets were 52.8% of net operating revenues in 2000, 48.0% in 1999 and 50.1% in 1998. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense decreased 4% in 2000 and increased 19% in 1999. The 2000 decrease is due to a strong emphasis on cost control. The 1999 increase mainly reflects the overall growth of the business as well as increased marketing and promotions to support products and services, including the rollout of an airline alliance program which enabled customers to earn frequent flyer miles when they used Sprint's services. SG&A expense includes costs associated with the continued development and deployment activities for Sprint ION, including costs for systems and operations development, product development and advertising associated with market launches. SG&A expense for Sprint ION was $281 million in 2000, $320 million in 1999 and $138 million in 1998. Total SG&A expense for the global markets division was 28.7% of net operating revenues in 2000, 30.5% in 1999 and 27.7% in 1998. Depreciation and Amortization Expense Depreciation and amortization expense increased 7% in 2000 and 13% in 1999. The increases mainly reflect a rapidly increasing asset base for Sprint ION as well as an increased asset base to enhance network reliability, meet increased demand for voice and data-related services and upgrade capabilities for providing new products and services. Depreciation and amortization expense was 10.6% of net operating revenues in 2000, 10.1% in 1999 and 9.7% in 1998. Local Division - -------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------- (millions) Net operating revenues Local service $2,846 $2,677 $2,469 Network access 1,987 1,918 1,894 Toll service 717 611 503 Other 605 752 733 - ------------------------------------------------------------- Total net operating revenues $6,155 $5,958 $5,599 - ------------------------------------------------------------- Operating expenses Costs of services and products 1,965 2,016 1,889 Selling, general and administrative 1,288 1,320 1,325 Depreciation and amortization 1,139 1,069 984 - ------------------------------------------------------------- Total operating expenses 4,392 4,405 4,198 - ------------------------------------------------------------- Operating income $1,763 $1,553 $1,401 ---------------------------------------- Operating margin 28.6% 26.1% 25.0% ---------------------------------------- Capital expenditures $1,371 $1,354 $1,374 ----------------------------------------
Beginning in July 2000, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. The main effect of this change was a reduction in the local division's "Net Operating Revenues--Other Revenues." In addition, Sprint's local division sold a customer service and telemarketing organization to the PCS Group at the beginning of the 2000 second quarter and sold approximately 81,000 access lines in Illinois in November 1998. For comparative purposes, the following discussion of local division results assumes the transfer pricing change, the sale of the customer service and telemarketing organization, and the sale of exchanges occurred at the beginning of 1998. Adjusting for these changes, operating margins would have been 28.4% in 2000, 25.7% in 1999 and 24.4% in 1998. Net Operating Revenues Net operating revenues increased 5% in 2000 and 7% in 1999. These increases mainly reflect increased sales of network-based services such as Caller ID and Call Waiting, increased long distance revenues, and customer access line growth. Sales of network-based services and long distance services increased due to strong demand for bundled services which combine local service, network- based features and long distance calling. Customer access lines increased 4% in 2000 and 5% in 1999. Net operating revenues were $6.1 billion in 2000, $5.8 billion in 1999 and $5.5 billion in 1998. II-4 Local Service Revenues Local service revenues, derived from local exchange services, grew 6% in 2000 and 9% in 1999 because of continued demand for network-based services, customer access line growth and growth in data products. Revenue growth in 1999 also reflects increased 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 4% in 2000 and 2% in 1999. These revenues reflect increased revenues from special access services and a 2% and 4% increase in minutes of use in 2000 and 1999, respectively. These increases were offset by FCC-mandated access rate reductions. Access rate reductions took effect in January and July 1998, July 1999 and July 2000. Toll Service Revenues Toll service revenues are mainly derived from providing consumer long distance services to customers within Sprint's local franchise territories and other long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues increased 17% in 2000 and 22% in 1999. These increases reflect the success of bundled services which include long distance calling. Other Revenues Other revenues decreased 11% in 2000 and 1% in 1999. The decrease in 2000 was mainly due to a decrease in equipment sales as a result of a planned shift in focus to selling higher margin products. Costs of Services and Products Costs of services and products include costs to operate and maintain the local network and costs of equipment sales. These costs decreased 1% in 2000 and increased 6% in 1999. The 2000 decrease was due to a decline in equipment sales and the success of cost control initiatives. The 1999 increase was driven by customer access line growth, an increased emphasis on service levels and storm related costs. Costs of services and products were 31.9% of net operating revenues in 2000, 33.8% in 1999 and 34.1% in 1998. Selling, General and Administrative Expense SG&A expenses decreased 1% in 2000 and remained flat in 1999. The 2000 decrease was due to a strong emphasis on cost control. In 1999, increased marketing costs to promote new products and services and increased customer service costs related to customer access line growth was offset by a strong emphasis on cost control. SG&A expense was 21.0% of net operating revenues in 2000, 22.3% in 1999 and 23.6% in 1998. Depreciation and Amortization Expense Depreciation and amortization expense increased 7% in 2000 and 9% in 1999, mainly from increased capital expenditures in switching and transport technologies which have shorter asset lives. Depreciation and amortization expense was 18.7% of net operating revenues in 2000, 18.2% in 1999 and 17.9% in 1998. Product Distribution and Directory Publishing Businesses - -------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------- (millions) Net operating revenues $1,936 $1,758 $1,709 - ------------------------------------------------------------- Operating expenses Costs of services and products 1,460 1,345 1,330 Selling, general and administrative 176 154 135 Depreciation and amortization 16 17 13 - ------------------------------------------------------------- Total operating expenses 1,652 1,516 1,478 - ------------------------------------------------------------- Operating income $ 284 $ 242 $ 231 ---------------------------------------- Operating margin 14.7% 13.8% 13.5% ---------------------------------------- Capital expenditures $ 8 $ 36 $ 9 ----------------------------------------
Net operating revenues increased 10% in 2000 and 3% in 1999. Nonaffiliated revenues accounted for over 60% of revenues in 2000 and 1999. These revenues increased 11% in 2000 and 12% in 1999. The increase in nonaffiliated revenues in 2000 was mainly due to the consolidation of a directory publishing partnership. In the second half of 2000, the directory publishing partnership, previously accounted for as an equity method investment, was fully consolidated due to a restructuring in the partnership management. Sales to affiliates increased 8% in 2000 and decreased 10% in 1999 due to changes in the local division's capital program. Costs of services and products increased 9% in 2000 and increased 1% in 1999 reflecting increased equipment sales. The 2000 increase was also due to the consolidation of the directory publishing partnership. SG&A expense increased 14% in 2000 and 1999. The 2000 increase was due to costs related to the transformation of the product distribution business to a web-enabled business as well as the consolidation of the directory publishing partnership. The 1999 increase was the result of staffing demands related to nonaffiliated sales growth. II-5 - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense Effective with the PCS Restructuring, interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on the rates the PCS Group could obtain from third parties. These interest rates are higher than the rates Sprint obtains on the borrowings. 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 as follows: - ----------------------------------------------
2000 1999 1998 - ---------------------------------------------- (millions) FON Group interest costs $ 311 $ 349 $254 Credit from the PCS Group (235) (167) (11) - ---------------------------------------------- Interest expense $ 76 $ 182 $243 ----------------------
See Note 1 of Notes to Combined Financial Statements for a more detailed description about the allocation of Group financing. The effective interest rates in the following table reflect interest costs on long-term debt only. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings, deferred compensation plans, customer deposits and the credit from the PCS Group detailed above have been excluded so as not to distort the effective interest rates on long-term debt. - -----------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------- Effective interest rate on long-term debt 7.4% 7.8% 7.9% ----------------------------------
The decreases in effective interest rates mainly reflect the retirement of debt with higher interest rates. Other Income (Expense), Net Other income (expense) consisted of the following: - ------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------ (millions) Dividend and interest income $ 48 $ 35 $ 74 Equity in net losses of affiliates (181) (73) (41) Gains on sales of assets 45 77 156 Net losses from investments (102) (15) -- Other, net 3 25 (36) - ------------------------------------------------------ Total $(187) $ 49 $153 ------------------------------
Dividend and interest income for all years reflects dividends earned on cost method investments and interest earned on temporary investments. For 1998, it also reflects interest earned on loans to unconsolidated affiliates and interest earned on short-term investments following Sprint's $5.0 billion debt offering in late 1998. Equity in net losses of affiliates mainly includes losses from Intelig, Call- Net and EarthLink. The 2000 increase is mainly due to increased Intelig losses. Gains on sales of assets in 2000 reflect the sale of an independent publishing operation. The 1999 gains mainly include the gain on the sale of an investment security. The 1998 gains mainly reflect net gains on sales of local exchanges. In 2000, net losses from investments mainly include the write-downs of certain equity investments. Income Taxes The FON Group's effective tax rates were 40.5% in 2000, 37.9% in 1999 and 37.3% in 1998. See Note 9 of Notes to Combined Financial Statements for information about the differences that caused the effective income tax rates to vary from the statutory federal rate for income taxes related to continuing operations. Discontinued Operation, Net In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, 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. In 2000, the FON Group recorded an after-tax gain related to the sale of its interest in Global One of $675 million. The FON Group recorded after-tax losses related to Global One of $130 million in 1999 and $135 million in 1998. Extraordinary Items, Net In 2000, Sprint redeemed, prior to scheduled maturities, $25 million of the FON Group's debt with interest rates ranging from 9.6% to 9.7%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. In 1999, Sprint redeemed, prior to scheduled maturities, $575 million of the broadband fixed wireless companies' debt, assumed by the FON Group, with interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million after-tax extraordinary loss for the FON Group. In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5 million after-tax extraordinary loss. II-6 - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- - --------------------------------
2000 1999 - -------------------------------- (millions) Combined assets $23,649 $21,803 ---------------
The FON Group's combined assets increased $1.8 billion in 2000. Net property, plant and equipment increased $1.8 billion reflecting capital expenditures to support long distance and local network enhancements and Sprint ION development and hardware deployment, partly offset by depreciation. Investments in affiliates and other assets increased $475 million mainly reflecting capital contributions to the FON Group's equity method investees, partly offset by equity in net losses of those affiliates and the write-down of certain equity investments. Offsetting decreases in the FON Group's combined assets primarily reflect the exchange of investments in equity securities for certain notes payable, the write-down of goodwill and other related assets of the FON Group's professional services business and the sale of the net assets of the Global One discontinued operation. See "Liquidity and Capital Resources" for more information about changes in the Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Operating Activities - -----------------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------------- (millions) Cash flows provided by operating activities $4,323 $3,713 $3,915 --------------------
Operating cash flows increased $610 million in 2000 and decreased $202 million in 1999. The 2000 increase mainly reflects decreases in working capital requirements. The 1999 decrease mainly reflects increases in working capital partly offset by improved operating results. Investing Activities - -------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------- (millions) Cash flows used by investing activities $(3,336) $(4,349) $(3,366) -------------------------
Capital expenditures, which are the FON Group's largest investing activity, totaled $4.1 billion in 2000, $3.5 billion in 1999 and $3.2 billion in 1998. Global markets division capital expenditures were incurred mainly to enhance network reliability, meet increased demand for voice and data-related services, upgrade capabilities for providing new products and services and to continue development and hardware deployment of Sprint ION. The local division incurred capital expenditures to accommodate access line growth, provide additional capacity for increased Internet traffic and expand capabilities for providing enhanced services. Other FON Group capital expenditures were incurred mainly for Sprint's World Headquarters Campus. In 2000, investing activities include $1.4 billion of proceeds from the sale of the FON Group's interest in Global One. Investing activities also include proceeds from sales of other assets totaling $51 million in 2000, $90 million in 1999 and $230 million in 1998. In 1999, Sprint purchased the net assets of several broadband fixed wireless companies for $618 million, excluding assumed debt. "Investments in and loans to other affiliates, net" includes the FON Group's investment in EarthLink, Intelig and other affiliates. In 1999, the FON Group received a payment of $314 million from the PCS Group on its outstanding loan. The FON Group had advances to the PCS Group and loans to Sprint PCS to fund capital and operating requirements. Loans to Sprint PCS in 1998 were partly offset by the repayment of a vendor financing loan. Equity transfers to the PCS Group were also used to fund its capital and operating requirements and were offset by current tax benefits used by the FON Group. Financing Activities - ----------------------------------------------------------------------
2000 1999 1998 - ---------------------------------------------------------------------- (millions) Cash flows provided (used) by financing activities $(969) $308 $(219) -----------------
Financing activities mainly reflect net payments on long-term debt of $605 million in 2000, and net proceeds of $491 million in 1999 and $397 million in 1998. The FON Group paid dividends of $433 million in 2000, $426 million in 1999 and $430 million in 1998. The indicated annual dividend rate on FON stock is $0.50 per share. Also included in the 2000 financing activities is an $80 million payment to the PCS Group to compensate for the net amount of PCS stock-based compensation granted to FON Group employees and FON stock-based compensation granted to PCS Group employees. In addition, the FON Group received net proceeds from Sprint's employee stock purchase plan of $50 million in 2000, $136 million in 1999 and $24 million in 1998. Capital Requirements The FON Group's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to require cash of $6.1 to II-7 $6.3 billion. FON Group capital expenditures are expected to range between $6.0 and $6.2 billion in 2001. The global markets division and local division will require the majority of this total. Investments in affiliates are expected to require cash of approximately $100 million. Dividend payments are expected to approximate $440 million. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement that provides for the allocation of income taxes between the FON Group and 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 in the near future and from using the PCS Group's net operating loss carryforwards. These payments reflect the PCS Group's incremental cumulative effect on Sprint's consolidated federal and state tax liability and tax credit position. The PCS Group received payments from the FON Group totaling $872 million in 2000, $764 million in 1999 and $20 million in 1998. See Note 1 of Notes to Combined Financial Statements, "Allocation of Federal and State Income Taxes" for more details. Liquidity See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" for a discussion of liquidity. - -------------------------------------------------------------------------------- Regulatory Developments - -------------------------------------------------------------------------------- Competitive Local Service The Telecommunications Act of 1996 (Telecom Act) was designed to promote competition in all aspects of telecommunications. It eliminated legal and regulatory barriers to entry into local phone markets. It also required incumbent local exchange carriers (ILECs), among other things, to allow local resale at wholesale rates, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements and allow collocation of interconnection equipment by competitors. Sprint has obtained interconnection and collocation agreements with a number of ILECs, and is rolling out Sprint ION in selected cities across the nation, using collocation and unbundled network elements obtained from ILECs. In January 1999, the Supreme Court affirmed the FCC's authority to establish rules and prices relating to interconnection and unbundling of the ILECs' networks. The FCC subsequently reaffirmed in large part the list of network elements ILECs are required to provide on an unbundled basis, and strengthened collocation requirements. It also took steps to speed the deployment of advanced technologies such as xDSL. In July 2000, the U.S. Court of Appeals for the Eighth Circuit invalidated the pricing standards the FCC had adopted for unbundled network elements and resale of ILEC services. The court also refused to reconsider, in light of the Supreme Court decision discussed above, the court's prior holding that ILECs could not be required to combine unbundled network elements on behalf of other carriers. In January 2001, the U.S. Supreme Court granted certiorari of three issues from the Eighth Circuit decision. The Supreme Court will review whether the Telecom Act forecloses the cost methodology adopted by the FCC for interconnection rates with the ILECs. A related issue dealing with whether rejection of historical costs is a taking will also be considered. Finally, the Supreme Court will consider whether ILECs have a duty under the Telecom Act to combine previously uncombined network elements when requested and for a fee. If the Supreme Court affirms the Eighth Circuit's decision, the FCC or the state regulatory commissions would have to formulate new pricing standards for unbundled network elements and interconnection. Separately, in a March 2000 decision, the U.S. Court of Appeals for the District of Columbia Circuit remanded to the FCC the issue of what types of equipment ILECs must allow competitors to collocate in their offices. The FCC has received comments and reply comments on whether and how to change its collocation rules in light of the D.C. Circuit's decision. RBOC Long Distance Entry The Telecom Act also allows RBOCs to provide in-region long distance service once they obtain state certification of compliance with a competitive "checklist," have a facilities-based competitor, and obtain an FCC ruling that the provision of in-region long distance service is in the public interest. The RBOC's have gained authorization to provide in-region long distance service in four states. Verizon obtained FCC authorization for New York in December 1999; SBC obtained FCC authorization to provide in-region services in Texas in June 2000 and in Oklahoma and Kansas in January 2001. RBOCs may gain such authorization in the near future in other states. The entry of the RBOCs into the long distance market will impact competition, but the extent of the impact will depend upon factors such as the RBOCs' competitive ability, the appeal of the RBOC brand to different market segments, and the response of competitors. Some of the impact on Sprint may be offset by wholesale revenues from those RBOCs that choose to resell Sprint services. Customer Service Slamming The Telecom Act also established liability for the unauthorized switching of a consumer's telephone service from one carrier to another (slamming). In II-8 late 1998, the FCC adopted new rules intended to prevent slamming and to compensate victims of slamming. The compensation rules were stayed by the Court of Appeals for the District of Columbia Circuit. In May 2000, the FCC modified the process for adjudicating alleged slams. The D.C. Circuit then lifted its stay and the new rules went into effect on November 28, 2000. Mergers A number of mergers received final regulatory approval in 2000 and early 2001. The Qwest- US West merger was approved by the FCC in March 2000; the Bell Atlantic-GTE merger was approved by the FCC in June 2000; and the AT&T-MediaOne merger was approved by the FCC in June 2000. Finally, the AOL-Time Warner merger received approval from the FCC in January 2001. Universal Service Requirements The FCC continues to address issues related to universal service and access reform. In May 2000, the FCC adopted an access reform plan that substantially reduced switched access charges paid by long distance carriers to the large ILECs and created a new universal service fund that offsets a portion of this reduction in access charges. In connection with its advocacy of this plan, Sprint committed that it would flow through the reductions in switched access costs over the five-year life of the plan to both business and residential customers. Sprint also committed to certain other pricing actions, including eliminating charges to residential and single-line business customers which had been used to pass through certain access costs that were eliminated by this plan, and maintaining, for the duration of the plan, at least one pricing option that does not include a minimum usage charge. The FCC order adopting this access reform plan requires Sprint to adhere to these commitments. The FCC's order has been appealed to the U.S. Court of Appeals for the Fifth Circuit. The FCC and many states have established "universal service" programs to ensure affordable, quality local telecommunications services for all Americans. The FON Group's assessment to fund these programs is typically a percentage of interstate and international end-user revenues. Currently, management cannot predict the extent of the FON Group's future federal and state universal service assessments, or its ability to recover its contributions to the universal service fund from its customers. Communications Assistance for Law Enforcement Act The Communications Assistance for Law Enforcement Act (CALEA) was enacted in 1994 to preserve electronic surveillance capabilities authorized by federal and state law. CALEA requires telecommunications companies to meet certain "assistance capability requirements" by the end of June 2000 where circuit- switching is used and by September 2001 where packet-switching is used. Where circuit-switched technology was installed before 1995, reimbursement for hardware and software upgrades to facilitate CALEA compliance was authorized. The U.S. Department of Justice (DOJ) has published guidelines concerning what is required for it to support, at the FCC, petitions for extension of the CALEA enforcement deadlines; however, the FCC did not require carriers to have DOJ concurrence to seek an extension. LTD uses circuit-switching for the bulk of its traffic and most LTD switches were installed before 1995 and qualify for reimbursement if upgrades are required by the DOJ. Sprint ION uses packet switching for its local operations. In the case of Sprint ION, CALEA compliance capabilities are not currently available from equipment and software vendors involved in Sprint ION's deployment. LTD has obtained an extension for CALEA compliance until June 30, 2001 and has been in discussions with the DOJ which resulted in an agreement on a deployment schedule for CALEA within LTD. LTD expects the DOJ to provide a letter of support for use with the FCC in obtaining a further extension consistent with the agreed upon deployment schedule. Sprint ION will apply for an extension for the local packet-based services to allow for development of required hardware and software. - -------------------------------------------------------------------------------- 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." - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- See Note 15 of Notes to Combined Financial Statements for a discussion of recently issued accounting pronouncements. II-9 MANAGEMENT REPORT Sprint Corporation's management is responsible for the integrity and objectivity of the information contained in this annex. Management is responsible for the consistency of reporting this information and for ensuring that accounting principles generally accepted in the United States are used. In discharging this responsibility, management maintains a comprehensive system of internal controls and supports an extensive program of internal audits, has made organizational arrangements providing appropriate divisions of responsibility and has established communication programs aimed at assuring that its policies, procedures and principles of business conduct are understood and practiced by its employees. The combined financial statements included in this annex have been audited by Ernst & Young LLP, independent auditors. Their audits were conducted using auditing standards generally accepted in the United States and their report is included herein. The Board of Director's responsibility for these combined financial statements is pursued mainly through its Audit Committee. The Audit Committee, composed entirely of directors who are not officers or employees of Sprint, meets periodically with the internal auditors and independent auditors, both with and without management present, to assure that their respective responsibilities are being fulfilled. The internal and independent auditors have full access to the Audit Committee to discuss auditing and financial reporting matters. /s/ W. T. Esrey - ------------------------------------------------------------------------------- William T. Esrey Chairman and Chief Executive Officer /s/ Arthur B. Krause - ------------------------------------------------------------------------------- Arthur B. Krause Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Sprint Corporation We have audited the accompanying combined balance sheets of the Sprint FON Group (as described in Note 1) as of December 31, 2000 and 1999, and the related combined statements of operations, comprehensive income and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index to Financial Statements and Financial Statement Schedules. These financial statements and the schedule are the responsibility of the management of Sprint Corporation (Sprint). Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Sprint FON Group at December 31, 2000 and 1999, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 7 to the combined financial statements, in 2000 the Sprint Fon Group changed its accounting for service activation and certain installation fee revenues. As more fully discussed in Note 1, the combined financial statements of the Sprint FON Group should be read together with the audited consolidated financial statements of Sprint. Ernst & Young LLP Kansas City, Missouri February 1, 2001 II-10 COMBINED STATEMENTS OF OPERATIONS Sprint FON Group (millions, except per share data) - -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Net Operating Revenues $17,688 $17,160 $15,958 - ------------------------------------------------------------------------------- Operating Expenses Costs of services and products 8,094 7,481 7,163 Selling, general and administrative 4,493 4,620 4,114 Depreciation 2,199 2,086 1,878 Amortization 68 43 43 Asset write-down and merger related costs 401 -- -- - ------------------------------------------------------------------------------- Total operating expenses 15,255 14,230 13,198 - ------------------------------------------------------------------------------- Operating Income 2,433 2,930 2,760 Interest expense (76) (182) (243) Other income (expense), net (187) 49 153 - ------------------------------------------------------------------------------- Income from continuing operations before income taxes 2,170 2,797 2,670 Income taxes (878) (1,061) (995) - ------------------------------------------------------------------------------- Income from Continuing Operations 1,292 1,736 1,675 Discontinued operation, net 675 (130) (135) Extraordinary items, net (1) (39) (5) Cumulative effect of change in accounting principle (2) -- -- - ------------------------------------------------------------------------------- Net Income 1,964 1,567 $ 1,535 Preferred stock dividends received, net 7 7 -- - ------------------------------------------------------------------------------- Earnings applicable to common stock $ 1,971 $ 1,574 $ 1,535 ------------------------- Diluted Earnings per Common Share(/1/) Continuing operations $ 1.45 $ 1.97 $ 1.93 Discontinued operation 0.76 (0.15) (0.16) Extraordinary items -- (0.04) -- - ------------------------------------------------------------------------------- Total $ 2.21 $ 1.78 $ 1.77 ------------------------- Diluted weighted average common shares 892.4 887.2 868.9 ------------------------- Basic Earnings per Common Share(/1/) Continuing operations $ 1.47 $ 2.01 $ 1.96 Discontinued operation 0.77 (0.15) (0.16) Extraordinary items -- (0.05) -- - ------------------------------------------------------------------------------- Total $ 2.24 $ 1.81 $ 1.80 ------------------------- Basic weighted average common shares 880.9 868.0 854.0 ------------------------- Dividends per Common Share(/1/) $ 0.50 $ 0.50 $ 0.50 -------------------------
(/1/) Basic and diluted earnings per common share, weighted average common shares, and dividends per common share for 1998 are pro forma, unaudited and assume the Recapitalization occurred prior to 1998. In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON common stock. As a result, 1998 basic and diluted earnings per common share, weighted average common shares and dividends per common share have been restated. See accompanying Notes to Combined Financial Statements. II-11 COMBINED STATEMENTS OF COMPREHENSIVE INCOME Sprint FON Group (millions) - ------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------ Net Income $1,964 $1,567 $1,535 - ------------------------------------------------------------------------------ Other Comprehensive Income Unrealized holding gains (losses) on securities (69) 33 28 Income tax (expense) benefit 25 (12) (10) - ------------------------------------------------------------------------------ Net unrealized holding gains (losses) on securities during the period (44) 21 18 Reclassification adjustment for net gains included in net income (2) (57) -- - ------------------------------------------------------------------------------ Total net unrealized holding gains (losses) on securities (46) (36) 18 Foreign currency translation adjustments (12) -- (2) - ------------------------------------------------------------------------------ Total other comprehensive income (loss) (58) (36) 16 - ------------------------------------------------------------------------------ Comprehensive Income $1,906 $1,531 $1,551 ----------------------
See accompanying Notes to Combined Financial Statements. II-12 COMBINED BALANCE SHEETS Sprint FON Group (millions) - -----------------------------------------------------------------------
December 31, 2000 1999 - ----------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 122 $ 104 Accounts receivable, net of allowance for doubtful accounts of $293 and $228 3,126 2,836 Inventories 434 441 Prepaid expenses 276 251 Receivables from the PCS Group 361 136 Investments in equity securities -- 316 Other 193 198 - ----------------------------------------------------------------------- Total current assets 4,512 4,282 Investments in securities 66 139 Property, plant and equipment Global markets division 12,512 10,602 Local division 16,835 15,828 Other 1,651 1,257 - ----------------------------------------------------------------------- Total property, plant and equipment 30,998 27,687 Accumulated depreciation (15,165) (13,685) - ----------------------------------------------------------------------- Net property, plant and equipment 15,833 14,002 Investments in and loans to the PCS Group 383 431 Investments in and advances to other affiliates 459 452 Intangible assets Goodwill 877 1,223 Other 384 296 - ----------------------------------------------------------------------- Total intangible assets 1,261 1,519 Accumulated amortization (57) (140) - ----------------------------------------------------------------------- Net intangible assets 1,204 1,379 Net assets of discontinued operation -- 394 Other assets 1,192 724 - ----------------------------------------------------------------------- Total $23,649 $21,803 ---------------- Liabilities and Group Equity Current liabilities Current maturities of long-term debt $ 1,026 $ 902 Accounts payable 1,598 1,012 Accrued interconnection costs 547 683 Accrued taxes 264 162 Advance billings 462 323 Payroll and employee benefits 377 557 Other 730 662 - ----------------------------------------------------------------------- Total current liabilities 5,004 4,301 Long-term debt 3,482 4,531 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,276 935 Postretirement and other benefit obligations 1,077 1,064 Other 467 458 - ----------------------------------------------------------------------- Total deferred credits and other liabilities 2,820 2,457 Group equity 12,343 10,514 - ----------------------------------------------------------------------- Total $23,649 $21,803 ----------------
See accompanying Notes to Combined Financial Statements. II-13 COMBINED STATEMENTS OF CASH FLOWS Sprint FON Group (millions) - -----------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------- Operating Activities Net income $ 1,964 $ 1,567 $ 1,535 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operation, net (675) 130 135 Extraordinary items, net 1 39 1 Equity in net losses of affiliates 201 70 52 Depreciation and amortization 2,267 2,129 1,921 Deferred income taxes and investment tax credits 386 220 60 Net gains on sales of assets (83) (158) (104) Net losses on write-down of assets 365 102 -- Changes in assets and liabilities: Accounts receivable, net (316) (459) 102 Inventories and other current assets 39 (130) (19) Accounts payable and other current liabilities 711 152 347 Affiliate receivables and payables, net (422) 88 (84) Noncurrent assets and liabilities, net (103) (76) (24) Other, net (12) 39 (7) - ----------------------------------------------------------------------------- Net cash provided by operating activities 4,323 3,713 3,915 - ----------------------------------------------------------------------------- Investing Activities Capital expenditures (4,105) (3,534) (3,159) Repayments from (investments in and loans to) Sprint PCS -- 314 (154) Investments in and loans to other affiliates, net (686) (135) (236) Net proceeds from sales of assets 51 90 230 Purchase of broadband fixed wireless companies, net of cash acquired -- (618) -- Advances from (to) the PCS Group 17 -- (64) Equity transfers from the PCS Group -- -- 340 Other, net (16) (82) (55) - ----------------------------------------------------------------------------- Net cash used by continuing operations (4,739) (3,965) (3,098) Proceeds from the sale of Global One 1,403 -- -- Net investing activities of discontinued operation -- (384) (268) - ----------------------------------------------------------------------------- Net cash used by investing activities (3,336) (4,349) (3,366) - ----------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt 344 1,020 785 Payments on long-term debt (949) (529) (388) Proceeds from common stock issued 148 52 -- Proceeds from treasury stock issued 12 134 60 Dividends paid (433) (426) (430) Treasury stock purchased (61) (48) (321) Other, net (30) 105 75 - ----------------------------------------------------------------------------- Net cash provided (used) by financing activities (969) 308 (219) - ----------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents 18 (328) 330 Cash and Equivalents at Beginning of Year 104 432 102 - ----------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 122 $ 104 $ 432 --------------------------
See accompanying Notes to Combined Financial Statements. II-14 NOTES TO COMBINED FINANCIAL STATEMENTS Sprint FON Group - ------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies - ------------------------------------------------------------------------------- Tracking Stock Formation In November 1998, Sprint's shareholders approved the formation of the FON Group and the PCS Group and the creation of the FON stock and the PCS stock. In addition, Sprint purchased the remaining ownership interests in Sprint Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired these ownership interests from Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued the Cable Partners special low-vote PCS shares and warrants to acquire additional PCS shares. Sprint also issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. The purchase of the Cable Partners' interests is referred to as the PCS Restructuring. In the 1999 second quarter, Sprint acquired the remaining minority interest in Cox PCS. Also in November 1998, Sprint reclassified each of its publicly traded common shares into one share of FON stock and 1/2 share of PCS stock. This recapitalization was tax-free to shareholders. Each Class A common share owned by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to represent an equity interest in the FON Group and the PCS Group that entitles FT and DT to one share of FON stock and 1/2 share of PCS stock. These transactions are referred to as the Recapitalization. In connection with the PCS Restructuring, FT and DT purchased 5.1 million additional PCS shares (pre-split basis) to maintain their voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. Basis of Combination and Presentation 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 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 after the PCS Restructuring date. 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 stock tracking the other Group. 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 FON stock and PCS 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. Investments in entities in which the FON Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 3). 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. Classification of Operations Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational II-15 corporations and other communications companies. These services include domestic and international voice; data communications such as Internet and frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(SM). 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 advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. During 2000, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed data services. Global markets division's operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. This division 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; Intelig, a long distance provider in Brazil, and certain other telecommunications investments and ventures. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. 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. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each Group. Sprint believes that the costs allocated are comparable to the costs that would be incurred if the Groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two Groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The FON Group accrued income taxes payable to the PCS Group in accordance with the tax sharing agreement totaling $605 million in 2000, $887 million in 1999 and $190 million in 1998. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's board of directors will adopt a tax sharing agreement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Allocation of Group Financing Financing activities for the Groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the Groups is specifically allocated to and reflected in the financial statements of the applicable Group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. II-16 Under Sprint's centralized cash management program, one Group may advance funds to the other Group. These advances are accounted for as short-term borrowings between the Groups and bear interest at a market rate that is substantially equal to the rate that Group would be able to obtain from third parties on a short-term basis. The allocation of Group financing activities may change at the discretion of Sprint and does not require shareholder approval. Income Taxes The FON Group records deferred income taxes based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Revenue Recognition The FON Group recognizes operating revenues as services are rendered or as products are delivered to customers. Service activation and certain installation fees are deferred and amortized over the average life of the service. Sprint's directory publishing business recognizes revenues for directory services over the life of the related directory (amortization method). Cash and Equivalents Cash and equivalents generally include highly liquid investments with original maturities of three months or less. They are stated at cost, which approximates market value. Sprint uses controlled disbursement banking arrangements as part of its cash management program. Outstanding checks in excess of cash balances for the FON Group were included in accounts payable. These amounts totaled $614 million at year-end 2000 and $174 million at year-end 1999. The FON Group had sufficient funds available to fund these outstanding checks when they were presented for payment. Investments in Debt and Equity Securities Investments in debt and equity securities are classified as available for sale and reported at fair value (estimated based on quoted market prices). Gross unrealized holding gains and losses are reflected as adjustments to "Group equity," net of related income taxes. Inventories Inventories are stated at the lower of cost (principally first-in, first-out method) or market value. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Generally, ordinary asset retirements and disposals are charged against accumulated depreciation with no gain or loss recognized. The cost of property, plant and equipment is generally depreciated on a straight-line basis over estimated economic useful lives. Repair and maintenance costs are expensed as incurred. Capitalized Interest The FON Group capitalized interest costs related to constructing capital assets of $22 million in 2000, $43 million in 1999 and $42 million in 1998. In addition, Sprint capitalized interest costs related to the PCS Group's network buildout. Capitalized interest totaled $61 million for 1998 and was contributed to, and is being amortized by, the PCS Group. Intangible Assets The FON Group evaluates the recoverability of intangible assets when events or circumstances indicate that such assets might be impaired. The FON Group determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying value. In the event impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for as purchases. Goodwill is being amortized over five to 40 years using the straight-line method. Accumulated amortization totaled $28 million at year-end 2000 and $94 million at year-end 1999. Earnings per Share As a result of the Recapitalization, earnings per share for the FON Group for 1998 has been calculated based on the Group's income from November 1998 through year-end 1998. It was not calculated on a Group basis for periods prior to November 1998 because the FON stock was not part of Sprint's capital structure at that time. In the 1999 second quarter, Sprint effected a two-for-one split on its FON common stock. As a result, basic and diluted earnings per common share, weighted average common shares and dividends for FON common stock have been restated for periods prior to the stock split. The FON Group's convertible preferred dividends totaled $1 million in 2000 and 1999 and dilutive securities (mainly options) totaled 11.5 million shares in 2000 and 19.2 million shares in 1999. From the Recapitalization date to year- end 1998, the FON Group's convertible preferred dividends totaled $0.1 million, and dilutive securities (mainly options) totaled 13.8 million shares. II-17 The FON Group's earnings per common share in 1998 after the Recapitalization date was as follows: - ---------------------------------------------------
1998 - --------------------------------------------------- (millions, except per share data) Earnings applicable to common stock $ 118 ------ Diluted earnings per common share Continuing operations $ 0.18 Discontinued operation (0.04) - --------------------------------------------------- Total $ 0.14 ------ Diluted weighted average common shares 869.0 ------ Basic earnings per common share Continuing operations $ 0.18 Discontinued operation (0.04) - --------------------------------------------------- Total $ 0.14 ------ Basic weighted average common shares 855.2 ------
Stock-based Compensation The FON Group participates in the incentive-based stock option plans and employee stock purchase plan administered by Sprint for executives and other employees. Sprint adopted the pro forma disclosure requirements under Statement of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation," and continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to its stock option and employee stock purchase plans. Had the FON Group applied SFAS 123, pro forma net income would have been $1,668 million for 2000, $1,434 million for 1999 and $103 million from the Recapitalization date through year-end 1998. See Note 12 of Sprint's Notes to Consolidated Financial Statements for more information about Sprint's stock-based compensation and the FON Group's pro forma net income and earnings per share. In 1997, Sprint granted performance-based stock options to certain key executives. The FON Group expensed $5 million in 2000, $9 million in 1999 and $14 million in 1998 related to these performance-based stock options. The 2000 amount reflects expense through the date of the shareholder approval of the proposed WorldCom merger. At that time, all of these options became vested. An additional $19 million of expense related to these options was included in "Asset write-down and merger related costs" in the Combined Statements of Operations. - -------------------------------------------------------------------------------- 2. Business Combinations - -------------------------------------------------------------------------------- Broadband Fixed Wireless Companies In the second half of 1999, Sprint acquired People's Choice TV Corp. (PCTV), American Telecasting, Inc. (ATI), Videotron USA and the operating subsidiaries of WBS America, LLC. These companies own broadband fixed wireless licenses in the Midwest, Southwest, North Central, Western and Southeastern United States. Sprint paid $618 million for the companies' outstanding stock and assumed $575 million of the companies' debt. These notes were redeemed, prior to scheduled maturities, in the 1999 fourth quarter (see Note 10). These acquisitions were accounted for as purchases. As a result, the financial statements of these companies have been reflected in the FON Group's combined financial statements after the acquisition dates. The excess of the purchase price over the net liabilities acquired totaled $835 million and was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. - -------------------------------------------------------------------------------- 3. Investments - -------------------------------------------------------------------------------- Investments in Securities The cost of investments in securities was $13 million at year-end 2000 and $153 million at year-end 1999. Gross unrealized holding gains were $53 million at year-end 2000 and $302 million at year-end 1999. In the 2000 fourth quarter, the FON Group recorded a write-down of securities with a cost basis of $48 million due to a decline in market value that was considered other than temporary. The $48 million charge was included in "Other income (expense), net" in the Combined Statements of Operations. During 2000, Sprint used equity securities with a cost basis of $94 million to retire debt instruments (see Note 10). The FON Group recorded a $45 million gain associated with the transaction which was included in "Other income (expense), net" in the Combined Statements of Operations. At year-end 1999, these equity securities were classified as current assets at their fair value. During 1999, the FON Group sold available-for-sale securities with a cost basis of $14 million for $104 million. The $90 million gain was included in "Other income (expense), net" in the Combined Statements of Operations. Investments in and Advances to Other Affiliates At year-end 2000, investments accounted for using the equity method consisted of the FON Group's investments in Intelig, EarthLink and certain other strategic investments. In February 2001, Sprint modified its relationship with EarthLink which resulted in the FON Group's investment being accounted for as a cost method investment (see Note 17). II-18 In the 2000 fourth quarter, Sprint completed an analysis of the valuation of its equity method investments in response to changes in the overall telecommunications industry. The analysis resulted in an $87 million charge for the write-down of an equity method investment which was included in "Other income (expense), net" in the FON Group's Combined Statements of Operations. Combined, unaudited, summarized financial information (100% basis) of these entities and others accounted for using the equity method was as follows: - -------------------------------------------------
2000 1999 1998 - ------------------------------------------------- (millions) Results of operations Net operating revenues $2,091 $1,571 $1,242 ---------------------------- Operating income (loss) $ (649) $ (192) $ 67 ---------------------------- Net loss $ (870) $ (329) $ (145) ---------------------------- Financial position Current assets $1,393 $1,524 $1,038 Noncurrent assets 2,184 2,749 2,401 - ------------------------------------------------- Total $3,577 $4,273 $3,439 ---------------------------- Current liabilities $ 735 $ 599 $ 538 Noncurrent liabilities 206 1,644 1,004 Owners' equity 2,636 2,030 1,897 - ------------------------------------------------- Total $3,577 $4,273 $3,439 ----------------------------
- -------------------------------------------------------------------------------- 4. Asset Write-down - -------------------------------------------------------------------------------- In the 2000 fourth quarter, Sprint completed its analysis of the valuation of various FON Group assets resulting from its reassessment of the FON Group's business strategies in response to recent changes within the overall telecommunications industry. This analysis resulted in a $238 million pre-tax charge, primarily related to the impairment of goodwill associated with the global markets division's Paranet operations. - -------------------------------------------------------------------------------- 5. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, the FON Group recognized a one-time, pre-tax charge of $163 million for costs associated with the terminated merger. - -------------------------------------------------------------------------------- 6. Discontinued Operation - -------------------------------------------------------------------------------- In the 2000 first quarter, Sprint sold its interest in Global One to FT and DT. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, Sprint's gain on the sale and equity share of the results of Global One have been reported as a discontinued operation for all periods presented. In 2000, the FON Group recorded an after-tax gain related to the sale of its interest in Global One of $675 million. The FON Group recorded after-tax losses related to Global One totaling $130 million in 1999 and $135 million in 1998. - -------------------------------------------------------------------------------- 7. Cumulative Effect of Change in Accounting Principle - -------------------------------------------------------------------------------- The FON Group implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," during the fourth quarter of 2000, effective the beginning of the year. This bulletin requires activation and installation fee revenues that do not represent a separate earnings process to be deferred and recognized over the estimated service period. Associated incremental direct costs may also be deferred, but only to the extent of revenues subject to deferral. The FON Group recorded a $2 million charge for the cumulative effect of change in accounting principle in 2000. The change had no material impact on the nine months ended September 30, 2000. - -------------------------------------------------------------------------------- 8. Employee Benefit Plans - -------------------------------------------------------------------------------- Defined Benefit Pension Plan Most FON Group employees are covered by a noncontributory defined benefit pension plan sponsored by Sprint. Benefits for plan participants belonging to unions are based on negotiated schedules. For non-union participants, pension benefits are based on years of service and the participants' compensation. Sprint's policy is to make plan contributions equal to an actuarially determined amount consistent with federal tax regulations. The funding objective is to accumulate funds at a relatively stable rate over the participants' working lives so benefits are fully funded at retirement. Amounts included in the Combined Balance Sheets for the plan were prepaid pension costs of $407 million at year-end 2000 and $285 million at year-end 1999. Net pension costs or credits are determined for the FON Group based on a direct calculation of service costs and interest on projected benefit obligations and an appropriate allocation of unrecognized prior service costs, amortization of unrecognized transition asset, actuarial gains and losses, and expected return on plan assets. The FON Group recorded net II-19 pension credits of $122 million in 2000, $63 million in 1999 and $46 million in 1998. Defined Contribution Plans Sprint sponsors defined contribution employee savings plans covering most FON Group employees. Participants may contribute portions of their pay to the plans. For union employees, Sprint matches contributions based on negotiated amounts. Sprint also matches contributions of non-union employees in FON and PCS stock. The matching is equal to 50% of participants' contributions up to 6% of their pay. In addition, Sprint may, at the discretion of the Board of Directors, provide additional matching contributions based on the performance of FON and PCS stock compared to other telecommunications companies' stock. The FON Group recorded expenses of $95 million in 2000, $73 million in 1999 and $54 million in 1998 for Sprint's matching contributions to the Sprint defined contribution plans. At year-end 2000, Sprint's defined contribution plans held 34 million FON shares and 31 million PCS shares. Postretirement Benefits Sprint provides postretirement benefits (mainly medical and life insurance benefits) to most FON Group employees. Employees retiring before certain dates are eligible for benefits at no cost, or at a reduced cost. Employees retiring after certain dates are eligible for benefits on a shared-cost basis. Sprint funds the accrued costs as benefits are paid. Amounts included in the Combined Balance Sheets at year-end were accrued postretirement benefits costs of $1.1 billion in 2000 and $1.0 billion in 1999. Net postretirement benefits costs are determined for the FON Group based on a direct calculation of service costs and interest on accumulated postretirement benefit obligations and an appropriate allocation of unrecognized prior service costs and actuarial gains. The FON Group recorded net postretirement benefits costs of $62 million in 2000, $54 million in 1999 and $51 million in 1998. - -------------------------------------------------------------------------------- 9. Income Taxes - -------------------------------------------------------------------------------- Income tax expense allocated to continuing operations consisted of the following: - ---------------------------------------------
2000 1999 1998 - --------------------------------------------- (millions) Current income tax expense Federal $429 $ 776 $861 State 63 65 74 - --------------------------------------------- Total current 492 841 935 - --------------------------------------------- Deferred income tax expense Federal 338 170 38 State 48 50 22 - --------------------------------------------- Total deferred 386 220 60 - --------------------------------------------- Total $878 $1,061 $995 ----------------------
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: - --------------------------------------------------------------------------
2000 1999 1998 - -------------------------------------------------------------------------- (millions) Income tax expense at the federal statutory rate $759 $ 979 $935 Effect of: State income taxes, net of federal income tax effect 72 75 62 Equity in losses of foreign joint ventures 25 18 6 Write down of equity method investment 30 -- -- Other, net (8) (11) (8) - -------------------------------------------------------------------------- Income tax expense $878 $1,061 $995 --------------------------------------------------- Effective income tax rate 40.5% 37.9% 37.3% ---------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows: - ----------------------------------------------------------------------------
2000 1999 1998 - ---------------------------------------------------------------------------- (millions) Discontinued operation $ 370 $(111) $(62) Extraordinary items (1) (23) (3) Unrealized holding gains (losses) on investments(/1/) (26) (20) 10 Stock ownership, purchase and options arrangements(/1/) (276) (223) (49) - ----------------------------------------------------------------------------
(/1/) These amounts have been recorded directly to "Group equity." The FON Group recognizes deferred income taxes for the temporary differences between the carrying amounts of its assets and liabilities for financial statement purposes and their tax bases. The sources of the differences that give rise to the deferred income tax assets and liabilities at year-end 2000 and 1999, along with the income tax effect of each, were as follows: - -----------------------------------------------------------
2000 Deferred Income Tax ------------------ Assets Liabilities - ----------------------------------------------------------- (millions) Property, plant and equipment $-- $1,891 Postretirement and other benefits 428 -- Reserves and allowances 175 -- Unrealized holding gains on investments -- 26 Operating loss carryforwards 217 -- Other, net 144 -- - ----------------------------------------------------------- 964 1,917 Less valuation allowance 273 -- - ----------------------------------------------------------- Total $691 $1,917 ---------------------------------
II-20 - -----------------------------------------------------------
1999 Deferred Income Tax ------------------ Assets Liabilities - ----------------------------------------------------------- (millions) Property, plant and equipment $-- $1,555 Postretirement and other benefits 422 -- Reserves and allowances 143 -- Unrealized holding gains on investments -- 52 Operating loss carryforwards 197 -- Tax credit carryforwards 22 -- Other, net 161 - ----------------------------------------------------------- 945 1,607 Less valuation allowance 197 -- - ----------------------------------------------------------- Total $748 $1,607 ---------------------------------
Management believes it is more likely than not that these deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities or ordinary operations. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions, and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets. The valuation allowance related to deferred income tax assets increased $76 million in 2000 and $193 million in 1999. In 1999, the FON Group acquired approximately $193 million of potential tax benefits related to net operating loss carryforwards in the acquisitions of the broadband fixed wireless companies. These benefits are subject to certain realization restrictions under various tax laws. A valuation allowance was provided for the total of these benefits. If these benefits are subsequently recognized, they will reduce goodwill or other noncurrent intangible assets resulting from the application of the purchase method of accounting for these transactions. At year-end 2000, the FON Group had federal operating loss carryforwards of $514 million and state operating loss carryforwards of $923 million. Related to these loss carryforwards are federal tax benefits of $180 million and state tax benefits of $56 million which expire in varying amounts through 2020. - -------------------------------------------------------------------------------- 10. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint's consolidated long-term debt and capital lease obligations at year-end was as follows: - ------------------------------------------------------------------------------------------
2000 1999 --------------------------- --------------------------- Sprint Sprint Sprint Sprint FON PCS FON PCS Maturing Group Group Consolidated Group Group Consolidated - ------------------------------------------------------------------------------------------ (millions) Senior notes 5.7% to 7.6%(/1/) 2001 to 2028 $1,105 $ 9,395 $10,500 $1,105 $ 8,145 $ 9,250 8.1% to 9.8% 2000 to 2003 382 -- 382 632 -- 632 11.0% to 12.5%(/2/) 2001 to 2006 -- 776 607 -- 734 584 Debentures and notes 5.8% to 9.6% 2000 to 2022 500 -- 500 565 -- 565 Notes payable and commercial paper -- 157 3,797 3,954 294 1,971 2,265 First mortgage bonds 5.9% to 9.9% 2000 to 2025 1,085 -- 1,085 1,295 -- 1,295 Capital lease obligations 5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555 Revolving credit facilities Variable rates 2002 900 -- 900 900 -- 900 Other 2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726 - ------------------------------------------------------------------------------------------ 4,508 14,380 18,719 5,433 11,489 16,772 Less: current maturities(/2/) 1,026 244 1,205 902 185 1,087 - ------------------------------------------------------------------------------------------ Long-term debt and capital lease obligations(/2/) $3,482 $14,136 $17,514 $4,531 $11,304 $15,685 ------------------------------------------------------
(/1/) These borrowings were incurred by Sprint and allocated to the applicable Group. Sprint's weighted average interest rate related to these borrowings was 6.7% at year-end 2000 and 6.6% at year-end 1999. The weighted average interest rate related to the borrowings allocated to the PCS Group was approximately 8.8% at year-end 2000 and 8.7% at year-end 1999. See Note 1 for a more detailed description of how Sprint allocates financing to each of the Groups. (/2/) Consolidated debt does not equal the total of PCS Group and FON Group debt due to intergroup debt eliminated in consolidation. The FON Group had an investment in the PCS Group's Senior Discount notes totaling $169 million at year-end 2000, including $65 million classified as current, and $150 million at year-end 1999. II-21 Scheduled principal payments, excluding reclassified short-term borrowings, during each of the next five years are as follows: - -------------------------------
Sprint Sprint FON PCS Group Group Sprint - ------------------------------- (millions) 2001(/1/) $1,026 $ 258 $1,214 2002 1,339 1,309 2,648 2003 372 1,060 1,432 2004 144 1,062 1,206 2005 122 61 183 - -------------------------------
(/1/) The 2001 scheduled principal payments do not equal current maturities as these amounts reflect the maturity value of the scheduled payment on the PCS Group's Senior Discount notes. Included in the above schedule are payments on PCS Group debt that are to be made in Japanese yen. The yen needed to satisfy the obligations is currently held on deposit by the PCS Group and included in "Other assets" on the PCS Group's Combined Balance Sheets. The scheduled yen payments included in the above schedule are $1 million in 2003, $20 million in 2004 and $43 million in 2005. Sprint Short-term Borrowings Sprint had bank notes payable totaling $676 million at year-end 2000 and $670 million at year-end 1999. In addition, Sprint had commercial paper borrowings totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999. Though these borrowings are renewable at various dates throughout the year, they were classified as long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis through unused credit facilities and unissued debt under Sprint's shelf registration. Sprint currently has revolving credit facilities with syndicates of domestic and international banks totaling $5 billion; $3 billion of which is a 364 day facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year facility expiring in 2003. Commercial paper and certain bank notes are supported by Sprint's revolving credit facilities. Certain other notes payable relate to a separate revolving credit facility which expires in 2002. At year- end 2000, Sprint had total unused lines of credit of $1.8 billion. Bank notes outstanding had weighted average interest rates of 7.1% at year-end 2000 and 6.3% at year-end 1999. The weighted average interest rate of commercial paper was 7.5% at year-end 2000 and 6.4% at year-end 1999. Long-term Debt In June 2000, Sprint issued $1.25 billion of debt securities under its $4 billion shelf registration statement with the SEC. These borrowings mature in 2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000, Sprint had issued a total of $2 billion of debt securities under the shelf. In January 2001, Sprint issued securities using the remaining amount of the shelf (see Note 18 of Notes to Sprint's Consolidated Financial Statements). In June 1999, Sprint entered into a $1 billion financing agreement to sell, on a continuous basis with recourse, undivided percentage ownership interests in a designated pool of its accounts receivable. Subsequent collections of receivables sold to investors are typically reinvested in new receivables. At year-end 2000, Sprint had borrowed $900 million with a weighted average interest rate of 6.9% under this agreement. These borrowings mature in 2002. Sprint FON Group In 2000, the FON Group received an allocation of $344 million of debt from Sprint. This debt was mainly used to repay existing debt and to fund new capital investments. See Note 1 for a more detailed description of how Sprint allocates debt to the Groups. In the 2000 fourth quarter, Sprint redeemed, prior to scheduled maturities, $25 million of FON Group debt with a weighted average interest rate of 9.6%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. 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 the 1999 fourth quarter, Sprint redeemed, prior to scheduled maturities, $575 million of the assumed broadband fixed wireless companies' debt with interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million after-tax extraordinary loss for the FON Group. In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5 million after-tax extraordinary loss for the FON Group. FON Group gross property, plant and equipment totaling $16.1 billion was either pledged as security for first mortgage bonds and certain notes or is restricted for use as mortgaged property. II-22 Other Sprint, including the FON Group, had complied with all restrictive or financial covenants relating to its debt arrangements at year-end 2000. - -------------------------------------------------------------------------------- 11. Group Equity - -------------------------------------------------------------------------------- - -------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------- (millions) Beginning balance $10,514 $ 9,024 $7,639 Net income 1,964 1,567 1,535 Dividends (435) (427) (431) Common stock issued 202 209 164 Treasury stock purchased (61) (48) (321) Tax benefit of stock compensation 276 223 49 Contributions to the PCS Group -- -- (146) Equity transfer from the PCS Group -- -- 460 Other comprehensive income (loss) (58) (36) 16 Other, net (59) 2 59 - ------------------------------------------------------------- Ending balance $12,343 $10,514 $9,024 ------------------------------------------
- -------------------------------------------------------------------------------- 12. Commitments and Contingencies - -------------------------------------------------------------------------------- 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. In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the FON Group's combined financial statements. Operating Leases The FON Group's minimum rental commitments at year-end 2000 for all noncancelable operating leases, consisting mainly of leases for data processing equipment and real estate, are as follows: - ----------------------
(millions) 2001 $372 2002 252 2003 175 2004 124 2005 93 Thereafter 301 - ----------------------
The FON Group's gross rental expense totaled $643 million in 2000, $575 million in 1999 and $474 million in 1998. Rental commitments for subleases, contingent rentals and executory costs were not significant. - -------------------------------------------------------------------------------- 13. Financial Instruments - -------------------------------------------------------------------------------- Fair Value of Financial Instruments Sprint estimates the fair value of the FON Group's financial instruments using available market information and appropriate valuation methodologies. As a result, the following estimates do not necessarily represent the values the FON Group could realize in a current market exchange. Although management is not aware of any factors that would affect the year-end 2000 estimated fair values, those amounts have not been comprehensively revalued for purposes of these financial statements since that date. Therefore, estimates of fair value after year-end 2000 may differ significantly from the amounts presented below. The carrying amounts and estimated fair values of the FON Group's financial instruments at year-end were as follows: - -----------------------------------------------------------------
2000 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 122 $ 122 Investment in affiliate debt securities 188 188 Investments in securities 66 66 Long-term debt and capital lease obligations 4,508 4,539 - ----------------------------------------------------------------- - ----------------------------------------------------------------- 1999 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 104 $ 104 Investment in affiliate debt securities 169 169 Investments in securities 455 455 Long-term debt and capital lease obligations 5,433 5,497 - -----------------------------------------------------------------
II-23 The carrying amounts of the FON Group's cash and equivalents approximate fair value at year-end 2000 and 1999. The estimated fair value of investments in debt and equity securities was based on quoted market prices. The estimated fair value of the FON Group's long-term debt was based on quoted market prices for publicly traded issues. The estimated fair value of all other issues was based on the present value of estimated future cash flows using a discount rate based on the risks involved. Concentrations of Credit Risk The FON Group's accounts receivable are not subject to any concentration of credit risk. - -------------------------------------------------------------------------------- 14. Additional Financial Information - -------------------------------------------------------------------------------- Segment Information The FON Group operates in three business segments, based on how Sprint manages the FON Group's operations and assesses its performance: the global markets division, the local division, and the product distribution and directory publishing businesses. Beginning in 2000, the FON Group combined its long distance operation, Sprint ION and broadband fixed wireless services and certain other ventures into one division, global markets. Along with creating the global markets division, the FON Group shifted the recognition of consumer long distance revenues and expenses associated with customers in its local franchise territories from the global markets division to the local division. Prior periods have been restated to reflect these changes. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value. Segment financial information was as follows: - ------------------------------------------------------------------------------
Product Global Distribution Corporate Sprint Markets Local & Directory and FON Division Division Publishing Eliminations(/1/) Group - ------------------------------------------------------------------------------ (millions) 2000 Net operating revenues $10,528 $6,155 $1,936 $ (931) $17,688 Intercompany revenue 105 137 689 (931) -- Depreciation and amortization 1,121 1,139 16 (9) 2,267 Operating expenses 9,943 4,392 1,652 (732) 15,255 Operating income (loss) 585 1,763 284 (199) 2,433 Operating margin 5.6% 28.6% 14.7% -- 13.8% Capital expenditures 2,294 1,371 8 432 4,105 Total assets 12,042 9,219 845 1,543 23,649 1999 Net operating revenues $10,308 $5,958 $1,758 $ (864) $17,160 Intercompany revenue 93 133 638 (864) -- Depreciation and amortization 1,045 1,069 17 (2) 2,129 Operating expenses 9,133 4,405 1,516 (824) 14,230 Operating income (loss) 1,175 1,553 242 (40) 2,930 Operating margin 11.4% 26.1% 13.8% -- 17.1% Capital expenditures 1,774 1,354 36 370 3,534 Total assets 10,661 8,641 651 1,850 21,803 1998 Net operating revenues $ 9,541 $5,599 $1,709 $ (891) $15,958 Intercompany revenue 53 130 708 (891) -- Depreciation and amortization 928 984 13 (4) 1,921 Operating expenses 8,351 4,198 1,478 (829) 13,198 Operating income (loss) 1,190 1,401 231 (62) 2,760 Operating margin 12.5% 25.0% 13.5% -- 17.3% Capital expenditures 1,518 1,374 9 258 3,159 Total assets 8,008 8,176 612 2,205 19,001
(/1/) Significant intercompany eliminations consist of equipment purchases from the product distribution business, local access charged to the global markets division and interexchange services provided to the local division. In 2000, corporate operating loss includes a $163 million charge for costs associated with the terminated merger between Sprint and WorldCom, Inc. More than 95% of the FON Group's revenues are from domestic customers located within the United States. II-24 Net operating revenues by product and services were as follows: - -------------------------------------------------------------------------
Product Global Distribution Sprint Markets Local & Directory FON Division Division Publishing Eliminations Group - ------------------------------------------------------------------------- (millions) 2000 Voice $ 7,094 $ -- $ -- $(105) $ 6,989 Data 1,937 -- -- -- 1,937 Internet 920 -- -- -- 920 Local service -- 2,846 -- -- 2,846 Network access -- 1,987 -- (133) 1,854 Toll service -- 717 -- -- 717 Product distribution -- -- 1,468 (689) 779 Directory publishing -- -- 468 -- 468 Other 577 605 -- (4) 1,178 --------------------------------------------------- Total net operating revenues $10,528 $6,155 $1,936 $(931) $17,688 --------------------------------------------------- 1999 Voice $ 7,445 $ -- $ -- $ (93) $ 7,352 Data 1,696 -- -- -- 1,696 Internet 615 -- -- -- 615 Local service -- 2,677 -- -- 2,677 Network access -- 1,918 -- (130) 1,788 Toll service -- 611 -- -- 611 Product distribution -- -- 1,350 (638) 712 Directory publishing -- -- 408 -- 408 Other 552 752 -- (3) 1,301 --------------------------------------------------- Total net operating revenues $10,308 $5,958 $1,758 $(864) $17,160 --------------------------------------------------- 1998 Voice $ 7,079 $ -- $ -- $ (53) $ 7,026 Data 1,396 -- -- -- 1,396 Internet 434 -- -- -- 434 Local service -- 2,469 -- -- 2,469 Network access -- 1,894 -- (127) 1,767 Toll service -- 503 -- -- 503 Product distribution -- -- 1,315 (708) 607 Directory publishing -- -- 394 -- 394 Other 632 733 -- (3) 1,362 --------------------------------------------------- Total net operating revenues $ 9,541 $5,599 $1,709 $(891) $15,958 ---------------------------------------------------
Supplemental Cash Flows Information The FON Group's cash paid for interest and income taxes was as follows: - ------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------ (millions) Interest (net of capitalized interest) $113 $ 82 $217 -------------- Income taxes $486 $633 $327 --------------
Noncash activities for the FON Group included the following: - -------------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------------- (millions) Tax benefit from stock options exercised $276 $223 $ 49 -------------- Stock received for stock options exercised $ 29 $ 78 $ 18 -------------- Noncash extinguishment of debt $275 $ 78 $-- -------------- Common stock issued under employee benefit stock plans $106 $ 95 $ 99 -------------- Capital lease obligations $-- $ 41 $-- -------------- Debt assumed in the broadband fixed wireless acquisitions $-- $575 $-- --------------
II-25 Intergroup Investments and Transactions Sprint FON Group Investments in the Sprint PCS Group The following table reflects the FON Group's investments in the PCS Group, which have been eliminated in Sprint's consolidated financial statements: - -----------------------------------------------------
2000 1999 - ----------------------------------------------------- (millions) Common and preferred intergroup interest $ 260 $ 262 Investment in debt securities(/1/) 188 169 - ----------------------------------------------------- Total $ 448 $ 431 -----------
(/1/) $65 million is classified as current at year-end 2000 and is included in "Receivables from the PCS Group" in the FON Group's Combined Balance Sheets. Common Intergroup Interest The FON Group received a 1% intergroup interest in the PCS Group at the time of the PCS Restructuring and Recapitalization. Subsequently, PCS shares representing the intergroup interest were issued to FON Group employees, exhausting the FON Group's interest in the PCS Group in January 2000. The FON Group's share of the PCS Group's net loss totaled $13 million in 1999 and $6 million from the date of the PCS Restructuring to year-end 1998 and was included in "Other income, net" in the Sprint FON Group Combined Statements of Operations. As the intergroup interest was exhausted in 2000, no additional PCS Group losses were recognized by the FON Group in 2000. Preferred Intergroup Interest The FON Group provided Sprint PCS and the PCS Group with interim financing from the date the PCS Restructuring agreement was signed in May 1998 until it was completed in November 1998. As part of the PCS Restructuring, Sprint converted this financing, totaling $279 million, into an intergroup interest representing 0.3 million shares of 10-year PCS preferred stock convertible into a PCS common intergroup interest. The PCS Group paid the FON Group dividends on the preferred intergroup interest of $8 million in 2000 and 1999 and $1 million in 1998. Long-term Loans Sprint provided Sprint PCS with additional interim financing of $180 million from May 1998 through November 1998. This loan was repaid in 1999. Intergroup Interest Income The difference between Sprint's actual interest costs and the interest costs charged to the PCS Group on allocated debt totaled $235 million in 2000, $167 million in 1999 and $11 million in 1998. These amounts are reflected as a reduction to "Interest expense" in the Sprint FON Group Combined Statements of Operations. See Note 1 for a more detailed description of how Sprint allocates interest expense to each of the Groups. The FON Group earned intergroup interest income of $19 million in 2000, $16 million in 1999 and $15 million in 1998 related to the FON Group's investment in PCS Group debt securities. These amounts are included in "Other income, net" in the Sprint FON Group Combined Statements of Operations. Intergroup Transactions The PCS Group uses the long distance operation as its interexchange carrier and purchases wholesale long distance for resale to its customers. Additionally, the FON Group provides the PCS Group with Caller ID services and various other goods and services. Charges to the PCS Group for these items totaled $396 million in 2000, $280 million in 1999 and $21 million from the PCS Restructuring date to year-end 1998. The PCS Group provides the FON Group with access to its network and telemarketing and various other services. Charges to the FON Group for these items totaled $35 million in 2000 and $4 million in 1999. The FON Group provides management, printing, mailing and warehousing services to the PCS Group. Charges to the PCS Group for these services totaled $150 million in 2000, $65 million in 1999 and $5 million from the PCS Restructuring date to year-end 1998. Related Party Transactions Sprint PCS The following discussion reflects related party transactions between Sprint and Sprint PCS prior to the PCS Restructuring: Sprint provided Sprint PCS with billing and operator services, and switching equipment. Sprint PCS also used the long distance operation as its interexchange carrier. Charges to Sprint PCS for these services totaled $104 million in 1998. Sprint provided management, printing, mailing and warehousing services to Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in 1998. Sprint had a vendor financing loan to Sprint PCS for $300 million at year-end 1997 which was repaid in 1998. Sprint also loaned Sprint PCS $114 million in 1998, which was repaid in the 1999 first quarter. II-26 - -------------------------------------------------------------------------------- 15. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires all derivatives to be recorded on the balance sheet as either assets or liabilities and be measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative is used and whether it qualifies for hedge accounting. When this statement was adopted in January 2001, it had no material impact on the FON Group's combined financial statements. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and provides consistent standards for distinguishing transfers from sales and secured borrowings. This statement is effective for transactions occurring after March 31, 2001 and is not expected to have a material impact on the FON Group's combined financial statements. - -------------------------------------------------------------------------------- 16. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Quarter ----------------------------- 2000 1st 2nd 3rd 4th(/1/) - ------------------------------------------------------------------------ (millions, except per share data) Net operating revenues(/2/)(/3/) $4,404 $4,446 $4,444 $4,394 Operating income 758 591 724 360 Income from continuing operations 445 365 384 98 Net income(/3/) 1,118 365 384 97 Earnings per common share from continuing operations Diluted 0.50 0.41 0.43 0.11 Basic 0.51 0.42 0.44 0.11 - ------------------------------------------------------------------------ Quarter ----------------------------- 1999 1st 2nd 3rd 4th - ------------------------------------------------------------------------ (millions, except per share data) Net operating revenues(/2/) $4,157 $4,254 $4,331 $4,418 Operating income 737 736 726 731 Income from continuing operations 434 452 419 431 Net income 406 386 359 416 Earnings per common share from continuing operations(/4/) Diluted 0.49 0.51 0.48 0.49 Basic 0.50 0.52 0.49 0.50 - ------------------------------------------------------------------------
(/1/) See Notes 3 and 4 of Notes to Combined Financial Statements for information about nonrecurring charges recorded in the 2000 fourth quarter. (/2/) Certain reclassifications were made between net operating revenues and operating expenses from amounts reported in the 2000 quarterly reports on Form 10-Q to conform to industry events or practices. These reclassifications had no impact on operating income as previously reported. (/3/) In the 2000 fourth quarter, the FON Group adopted SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB 101). As required by SAB 101, 2000 net operating revenues have been restated from amounts reported in the 2000 quarterly reports on Form 10- Q. Net operating revenues were reduced by $4 million in the 2000 first quarter, and increased by $1 million in the 2000 second quarter and $3 million in the 2000 third quarter. The FON Group also restated the 2000 first quarter net income by recording a $2 million loss for the cumulative effect of change in accounting principle at the effective adoption date of SAB 101. (/4/) In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON stock. FON Group earnings per share for prior periods have been restated to reflect this stock split. - -------------------------------------------------------------------------------- 17. Subsequent Events (Unaudited) - -------------------------------------------------------------------------------- In February 2001, Sprint agreed to end its exclusive alliance with EarthLink and relinquished its seats on EarthLink's Board of Directors. As a result of these changes, Sprint will now treat its investment in EarthLink as a cost method investment. In February 2001, Sprint filed a registration statement with the SEC for a secondary offering of 174.8 million shares of FON stock (including 22.8 million shares to cover over-allotments) owned by FT and DT, including the FON stock underlying the Class A common stock. Sprint will not receive any of the proceeds from the sale of this stock. In February 2001, 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 March 30, 2001. II-27 SPRINT FON GROUP SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2000, 1999 and 1998 - -----------------------------------------------------------------------------
Additions ---------------- Balance Charged Charged Balance Beginning to to Other Other End of of Year Income Accounts Deductions Year - ----------------------------------------------------------------------------- (millions) 2000 Allowance for doubtful accounts $228 $414 $ (1) $(348)(/1/) $293 ---------------------------------------------------- Valuation allowance-- deferred income tax assets $197 $ 76 $-- $ -- $273 ---------------------------------------------------- 1999 Allowance for doubtful accounts $175 $383 $ 3 $(333)(/1/) $228 ---------------------------------------------------- Valuation allowance-- deferred income tax assets $ 4 $-- $193(/2/) $ -- $197 ---------------------------------------------------- 1998 Allowance for doubtful accounts $147 $365 $ 3 $(340)(/1/) $175 ---------------------------------------------------- Valuation allowance-- deferred income tax assets $ 12 $-- $-- $ (8) $ 4 ----------------------------------------------------
(/1/) Accounts written off, net of recoveries. (/2/) Represents a valuation allowance for deferred income tax assets relating to the net operating loss carryforwards acquired in the purchase of the broadband fixed wireless companies. II-28 [SPRINT LOGO] Annex III Sprint PCS Group Combined Financial Information SELECTED FINANCIAL DATA Sprint PCS Group - -------------------------------------------------------------------------------
2000 1999 1998(/1/) 1997(/1/) 1996(/1/) - ------------------------------------------------------------------------------- (millions, except per share data) Results of Operations - ------------------------------------------------------------------------------- Net operating revenues $ 6,341 $ 3,373 $ 1,294 $ -- $ -- Operating loss(/2/) (1,928) (3,237) (2,570) (19) (1) Other partners' loss in Sprint PCS -- -- 1,251 -- -- Equity in loss of Sprint PCS -- -- -- (660) (192) Loss before extraordinary items(/2/),(/3/) (1,868) (2,481) (1,090) (419) (120) Net loss(/2/),(/3/) (1,871) (2,502) (1,121) (419) (120) Loss per Share(/4/),(/5/) - ------------------------------------------------------------------------------- Diluted and basic loss per common share before extraordinary items $ (1.95) $ (2.71) $ (2.21) $(1.98) NA Financial Position - ------------------------------------------------------------------------------- Total assets $19,763 $17,924 $15,165 $1,703 $1,260 Property, plant and equipment, net 9,522 7,996 6,535 187 -- Investment in Sprint PCS -- -- -- 784 1,176 Total debt 14,380 11,489 8,195 -- -- Group equity 1,892 3,320 3,755 1,386 1,188 Cash Flow Data - ------------------------------------------------------------------------------- Net cash provided (used) by operating activities $ (8) $(1,692) $ (159) $ 38 $ (1) Capital expenditures 3,047 2,580 1,072 154 -- PCS license purchases -- -- -- 460 84 Investments in Sprint PCS -- -- 33 406 298
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. (/1/) Results of operations for 1998 include Sprint PCS' operating results on a consolidated basis for the entire year. The cable partners' share of losses through the PCS restructuring date has been reflected as "Other partners' loss in Sprint PCS" in the Combined Statements of Operations. Before 1998, the PCS Group's investment in Sprint PCS was accounted for using the equity method. Sprint PCS' financial position at year-end 1998 has also been reflected on a consolidated basis. Cash flow data reflects Sprint PCS' cash flows only after the PCS restructuring date. See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" for more information. (/2/) In 2000, the PCS Group recorded costs associated with the terminated WorldCom merger of $24 million. This charge increased the loss before extraordinary items and net loss by $16 million. In 1998, the PCS Group recorded a nonrecurring charge to write off $179 million of acquired in- process research and development costs related to the PCS restructuring. This charge increased operating loss, loss before extraordinary items and net loss by $179 million. (/3/) In 2000, the PCS group recorded a net nonrecurring gain of $28 million from the sale of customers and network infrastructure to a PCS affiliate. This gain reduced the loss before extraordinary items and net loss by $18 million. (/4/) In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS common stock. As a result, diluted and basic loss per common share have been restated for periods before this stock split. (/5/) Loss per share for the PCS Group for periods prior to 1999 is on a pro forma basis and assumes the PCS restructuring, the recapitalization, the purchase of 5.1 million PCS shares by France Telecom and Deutsche Telekom that occurred in connection with the restructuring and the PCS Group's write-off of $179 million of acquired in-process research and development costs occurred at the beginning of 1997. These pro forma amounts are for comparative purposes only and do not necessarily represent what actual results of operations would have been had the transactions occurred at the beginning of 1997, nor do they indicate the results of future operations. NA = not applicable III-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint PCS Group FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- General - ------------------------------------------------------------------------------- See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" for more information. - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- Sprint PCS Group - ------------------------------------------------------------------------------- The PCS Group includes Sprint's wireless personal communication services (PCS) operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At year-end 2000, the PCS Group, together with affiliates, operated PCS systems in over 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 280 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches more than 220 million people. The PCS Group provides nationwide service through: . operating its own digital network in major U.S. metropolitan areas, . affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, . roaming on other providers' analog cellular networks using dual- band/dual-mode handsets, and . roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS Group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of acquisition and customer service. The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted for using the equity method. The wireless industry, including the PCS Group, typically generates a significantly higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions. - ------------------------------------------------------------------------------- Results of Operations - ------------------------------------------------------------------------------- - -----------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------- (millions) Net operating revenues $ 6,341 $ 3,373 $ 1,294 Operating expenses 8,269 6,610 3,864 - ----------------------------------------------------------- Operating loss $(1,928) $(3,237) $(2,570) --------------------------------------- Loss from continuing operations $(1,868) $(2,481) $(1,090) --------------------------------------- Capital expenditures $ 3,047 $ 2,580 $ 1,072 ---------------------------------------
The PCS Group's 1999 results of operations reflect the first full year of combined results after the PCS Restructuring. The PCS Group's 1998 results of operations included SprintCom's operating results as well as Sprint PCS' operating results on a consolidated basis for the entire year. (See "Pro Forma Sprint PCS Group" section below for a discussion of pro forma results of operations.) In 2000, operating expenses include a nonrecurring charge of $24 million for costs associated with the terminated WorldCom merger. This charge increased the loss from continuing operations by $16 million. Also included in the 2000 loss from continuing operations is a nonrecurring gain of $18 million from the sale of customers and network infrastructure to a PCS affiliate. In 1998, operating expenses and loss from continuing operations include a write-off of $179 million associated with the cost of nine in-process research and development projects acquired in connection with the PCS Restructuring. The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 25% of net operating revenues in 2000, 28% in 1999 and 25% in 1998. Pro Forma Sprint PCS Group To provide a more meaningful analysis of the PCS Group's underlying operating results, the following supplemental discussion presents 1998 on a pro forma basis and assumes the PCS Restructuring and the write-off of acquired in- process research and development costs occurred prior to 1998. III-2 - ---------------------------------------------------------------------------
2000 1999 1998 - --------------------------------------------------------------------------- (millions) Net operating revenues $ 6,341 $ 3,373 $ 1,294 Operating expenses Costs of services and products 3,942 3,150 1,758 Selling, general and administrative 2,426 1,937 1,138 Depreciation and amortization 1,877 1,523 1,038 Merger related costs 24 -- -- - --------------------------------------------------------------------------- Total operating expenses 8,269 6,610 3,934 - --------------------------------------------------------------------------- Operating loss $(1,928) $(3,237) $(2,640) ------------------------------------------------------- Capital expenditures (including capital lease obligations) $ 3,047 $ 2,616 $ 2,904 ------------------------------------------------------- Net Operating Revenues - --------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------- Customers at year-end (millions) 9.5 5.7 2.6 ------------------------------------------------------- Average monthly service revenue per user (ARPU) $ 59 $ 58 $ 60 -------------------------------------------------------
Net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges, usage charges and activation fees. Subscriber revenues increased 94% in 2000 mainly reflecting an increase in the average number of customers. The PCS Group added 3.8 million customers in 2000 to end the year with over 9.5 million customers in more than 300 metropolitan markets nationwide. The increase in ARPU in 2000 was partly due to the implementation of activation charges in the second quarter. Subscriber revenues were also aided by the increase in resale customers. The companies that the PCS Group serves on a wholesale basis added 238,000 customers in 2000, ending the year with approximately 310,000 customers. In 2000, the customer churn rate improved to 2.8% from 3.4% in 1999 and 3.3% in 1998. The improvement reflects expanded network coverage and the success of several customer retention initiatives. Revenues from sales of handsets and accessories were approximately 14% of net operating revenues in 2000, 17% in 1999 and 18% in 1998. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses Costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 25% in 2000 and 79% in 1999 reflecting the significant growth in customers and expanded market coverage, partly offset by a reduction in handset unit costs. Selling, general and administrative (SG&A) expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 25% in 2000 and 70% in 1999 reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Acquisition costs per gross customer addition, including equipment subsidies and marketing costs, have improved approximately 19% in 2000 and 26% in 1999. Lower handset unit costs and scale benefits from greater customer additions have contributed to the improvement. Cash costs per user (CCPU) consists of costs of service revenues, service delivery and other general and administrative costs. CCPU was $35 in 2000, $48 in 1999 and $73 in 1998. The improvements reflect successful expense management and scale benefits resulting from the increased customer base. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce. Depreciation and amortization expense increased 23% in 2000 and 47% in 1999 mainly reflecting depreciation of the network assets placed in service during 2000 and 1999. The increases also reflects amortization of intangible assets acquired in the Cox PCS purchase in the 1999 second quarter. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense The effective interest rates in the following table reflect interest expense on long-term debt only. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings and deferred compensation plans have been excluded so as not to distort the PCS Group's effective interest rates on long- term debt. - -----------------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------------- Effective interest rate on long-term debt (/1/) 8.7% 8.7% 9.4% ----------------------------------------
(/1/) The effective interest rate on long-term debt for 1998 is on a pro forma basis as if Sprint PCS' long-term debt had been included in the PCS Group's outstanding long-term debt balance all year. III-3 The decrease in the PCS Group's effective interest rate from 1998 mainly reflects increased borrowings with lower interest rates. Effective with the PCS Restructuring, interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The PCS Group's interest expense includes $235 million in 2000, $167 million in 1999 and $11 million in 1998 resulting from the difference between Sprint's actual interest rates and the rates charged to the PCS Group. These costs are derived from both long-term and short-term allocated borrowings. Only the long-term portion of these costs are included in the effective interest rates above. Other Partners' Loss in Sprint PCS Sprint PCS' results of operations for 1998 have been consolidated for the entire year. The Cable Partners' share of losses through the PCS Restructuring date has been reflected as "Other partners' loss in Sprint PCS" in the Combined Statements of Operations. Other Income (Expense), Net Other income (expense) consisted of the following: - ------------------------------------------------
2000 1999 1998 - ------------------------------------------------ (millions) Equity in net loss of affiliate $(55) $-- $-- Gains on sales of assets 47 25 -- Other, net (3) 21 34 - ------------------------------------------------ Total $(11) $ 46 $ 34 ---------------
Other expense for 2000 mainly includes the PCS Group's share of losses of Pegaso and gains on sales of assets including certain customers and associated network infrastructure and certain other investments. Other income for 1999 mainly includes a gain on the sale of network infrastructure totaling $25 million and $13 million from the FON Group's interest in the PCS Group's loss. Other income for 1998 consisted mainly of interest income totaling $34 million, reflecting interest earned on partner contributions from the Sprint PCS partners prior to the PCS Restructuring. Income Taxes The PCS Group's effective tax rates were 35.0% in 2000, 35.9% in 1999 and 33.2% in 1998. See Note 6 of Notes to Combined Financial Statements for information about the differences that caused the effective income tax rates to vary from the statutory federal rate for income taxes related to loss before extraordinary items. Extraordinary Items, Net In 2000, Sprint redeemed, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. In 1999, Sprint redeemed, prior to scheduled maturities, $2.2 billion of the PCS Groups revolving credit facilities and other borrowings. These borrowings had interest rates ranging from 5.6% to 8.3%. This resulted in a $21 million after-tax extraordinary loss. These short-term borrowings were repaid with proceeds from long-term financing. In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS Group debt with a weighted average interest rate of 8.3%. This resulted in a $31 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- - --------------------------------
2000 1999 - -------------------------------- (millions) Combined assets $19,763 $17,924 ---------------
Net property, plant and equipment increased $1.5 billion in 2000 reflecting capital expenditures to support the PCS network buildout, partly offset by depreciation and network asset sales. Net intangibles decreased $454 million mainly reflecting amortization of the customer base and goodwill. See "Liquidity and Capital Resources" for more information about changes in the Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- The PCS Group's cash flows for 1998 include Sprint PCS' cash flows only after the PCS Restructuring date. Operating Activities - --------------------------------------------------------------
2000 1999 1998 - -------------------------------------------------------------- (millions) Cash flows used by operating activities $(8) $(1,692) $(159) --------------------
Cash flows used by operating activities decreased $1.7 billion in 2000 and increased $1.5 billion in 1999. The 2000 decrease mainly reflects decreased operating losses for the PCS Group and a decrease in working capital. The 1999 increase mainly reflects increased operating losses and an increase in working capital. III-4 Investing Activities - -----------------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------------- (millions) Cash flows used by investing activities $(3,054) $(2,509) $(861) --------------------------------------------
The PCS Group's main use of cash in 2000, 1999 and 1998 was to fund capital expenditures for the PCS network buildout. Capital expenditures for the PCS Group totaled $3.0 billion in 2000, $2.6 billion in 1999 and $1.1 billion in 1998. Investing activities also include sales of assets of $207 million in 2000 and $153 million in 1999. "Investments in affiliates" mainly reflects the PCS Group's investment in Pegaso. Financing Activities - -----------------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------------- (millions) Cash flows provided by financing activities $3,163 $4,044 $1,193 --------------------------------------------
Financing activities reflect net proceeds from long-term debt allocated from Sprint of $2.9 billion in 2000, $3.2 billion in 1999 and $1 billion in 1998. In addition, the PCS Group received $121 million in 2000 and $905 million in 1999 from stock issuances, including stock option exercises. These proceeds were primarily used to fund the PCS Group's capital expenditures and operating losses. Also included in the 2000 financing activities is $80 million received from the FON Group to compensate for the net amount of PCS stock-based compensation granted to FON Group employees and FON stock-based compensation granted to PCS Group employees. In addition, the PCS Group received $132 million of proceeds from Sprint's employee stock purchase plan in 2000. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement that provides for the allocation of income taxes between the FON Group and PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses in the near future and from using the PCS Group's net operating loss carryforwards. These payments will reflect the PCS Group's incremental cumulative effect on Sprint's consolidated federal and state tax liability and tax credit position. The PCS Group received payments from the FON Group totaling $872 million in 2000, $764 million in 1999 and $20 million in 1998. See Note 1 of Notes to Combined Financial Statements, "Allocation of Federal and State Income Taxes," for more details. Capital Requirements The PCS Group's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be between $3.7 and $4.0 billion. Capital expenditures are expected to range between $3.3 and $3.5 billion, and investments in affiliates are expected to be between $350 and $450 million. PCS preferred stock dividend payments are expected to total $15 million, including payments to the FON Group for its preferred intergroup interest. See Note 11 of Notes to Combined Financial Statements for a more detailed discussion of the FON Group's preferred intergroup interest in the PCS Group. Liquidity See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" for a discussion of liquidity. - ------------------------------------------------------------------------------- Regulatory Developments - ------------------------------------------------------------------------------- The FCC sets rules, regulations and policies to, among other things: . grant licenses for PCS frequencies and license renewals, . rule on assignments and transfers of control of PCS licenses, . govern the interconnection of PCS networks with other wireless and wireline carriers, . establish access and universal service funding provisions, . impose fines and forfeitures for violations of any of the FCC's rules, and . regulate the technical standards of PCS networks. The FCC currently prohibits a single entity from having a combined attributable interest (20% or greater interest in any license) in broadband PCS, cellular and specialized mobile radio licenses totaling more than 45 megahertz (MHz) in any geographic area except that in rural service areas no licensee may have an attributable interest in more than 55 MHz of commercial mobile radio service (CMRS) spectrum. PCS License Transfers and Assignments The FCC must approve any substantial changes in ownership or control of a PCS license. Noncontrolling interests in an entity that holds a PCS license or operates PCS networks generally may be bought or sold without prior FCC approval. In addition, the FCC now requires only post-consummation notification of certain pro forma assignments or transfers of control. III-5 PCS License Conditions All PCS licenses are granted for 10-year terms if the FCC's buildout requirements are followed. Based on those requirements, all 30 MHz broadband major trading area (MTA) licensees must build networks offering coverage to 1/3 of the population within five years and 2/3 within 10 years. In June 2000, the PCS Group met its five-year buildout requirement in all its MTA markets. All 10 MHz broadband PCS licensees must build networks offering coverage to at least 1/4 of the population within five years or make a showing of "substantial service" within that five-year period. Sprint anticipates that it will meet the 10 MHz five-year buildout requirement by the April 2002 deadline. Licenses may be revoked if the rules are violated. PCS licenses may be renewed for additional 10-year terms. Renewal applications are not subject to auctions. However, third parties may oppose renewal applications. Other FCC Requirements Broadband PCS providers cannot unreasonably restrict or prohibit other companies from reselling their services. They also cannot unreasonably discriminate against resellers. CMRS resale obligations will expire in 2002. Local exchange carriers must program their networks to allow customers to retain, at the same location, existing telephone numbers when switching from one telecommunications carrier to another. This is referred to as service provider number portability. CMRS providers are currently required to deliver calls from their networks to ported numbers anywhere in the country. By November 24, 2002, all covered CMRS providers must provide a database solution for number portability. The solution must be able to support roaming. Covered CMRS providers must provide number portability in the 100 largest metropolitan statistical areas, in compliance with certain FCC performance criteria, but only at the request of another carrier (CMRS provider or local exchange carrier). Broadband PCS and other CMRS providers may provide wireless local loop and other fixed services that would directly compete with the wireline services of local phone companies. Broadband PCS and other CMRS providers must implement enhanced emergency 911 capabilities in a two-tiered manner. In the first phase, wireless carriers must identify the base station from which a call originated. In the second phase, wireless carriers must provide location within a radius as small as fifty meters. Implementation of the more complex Phase II location requirements must begin by October 1, 2001. Communications Assistance for Law Enforcement Act The Communications Assistance for Law Enforcement Act (CALEA) was enacted in 1994 to preserve electronic surveillance capabilities by law enforcement officials in the face of rapidly changing telecommunications technology. This act requires telecommunications carriers, including Sprint, to modify their equipment, facilities and services to allow for authorized electronic surveillance based on either industry or FCC standards. In 1997, industry- setting organizations developed interim standards for wireline, cellular and broadband PCS carriers to comply with CALEA. In August 1999, the FCC supplemented the interim industry standards with six additional capabilities. For interim industry standards, the deadline for compliance was June 30, 2000, and for the additional standards established by the FCC, the deadline is September 30, 2001. In August 2000, an appellate court vacated the FCC's decision relative to four of the capabilities and remanded the matter for further FCC consideration. Sprint PCS believes that it is in compliance with all existing CALEA requirements. However, Sprint PCS filed a petition for an extension of the June 30, 2000 deadline until June 30, 2001 in the event that the FCC determines that Sprint PCS must use a specific vendor solution to automatically provide mobile service assistance information under Section 103 (d) of CALEA. Specifically, this section requires a CMRS carrier to identify (a) whether a customer/interception subject is traveling "in network: but outside the customer's service area," and (b) the service provider if the subject is roaming on another CMRS network. While Sprint PCS is capable of providing this information upon a specific request by law enforcement, it cannot provide the information automatically. The FCC has not ruled on Sprint PCS' motion for an extension of the June 30, 2000 deadline; however, Sprint PCS is deemed to have an extension of the deadline until March 31, 2001 unless the FCC revokes the extension before that deadline or issues a final order with a different deadline. Other Federal Regulations Wireless systems must comply with certain FCC and Federal Aviation Administration regulations about the siting, lighting and construction of transmitter towers and antennas. In addition, FCC environmental regulations may cause certain cell site locations to come under National Environmental Policy Act (NEPA) and National Historic Preservation Act (NHPA) regulation. The FCC's NEPA and NHPA rules require carriers to meet certain land use and radio frequency standards. III-6 Universal Service Requirements The FCC and many states have established "universal service" programs to ensure affordable, quality telecommunications services for all Americans. The PCS Group's "contribution" to these programs is typically a percentage of end-user revenues. Currently, management cannot predict the extent of the PCS Group's future federal and state universal service assessments, or its ability to recover its contributions from the universal service fund. - -------------------------------------------------------------------------------- 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." - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- See Note 12 of Notes to Combined Financial Statements for a discussion of recently issued accounting pronouncements. III-7 MANAGEMENT REPORT Sprint Corporation's management is responsible for the integrity and objectivity of the information contained in this annex. Management is responsible for the consistency of reporting this information and for ensuring that accounting principles generally accepted in the United States are used. In discharging this responsibility, management maintains a comprehensive system of internal controls and supports an extensive program of internal audits, has made organizational arrangements providing appropriate divisions of responsibility and has established communication programs aimed at assuring that its policies, procedures and principles of business conduct are understood and practiced by its employees. The combined financial statements included in this annex have been audited by Ernst & Young LLP, independent auditors. Their audits were conducted using auditing standards generally accepted in the United States and their report is included herein. The Board of Director's responsibility for these combined financial statements is pursued mainly through its Audit Committee. The Audit Committee, composed entirely of directors who are not officers or employees of Sprint, meets periodically with the internal auditors and independent auditors, both with and without management present, to assure that their respective responsibilities are being fulfilled. The internal and independent auditors have full access to the Audit Committee to discuss auditing and financial reporting matters. /s/ W. T. Esrey - -------------------------------------------------------------------------------- William T. Esrey Chairman and Chief Executive Officer /s/ Arthur B. Krause - -------------------------------------------------------------------------------- Arthur B. Krause Executive Vice President and Chief Financial Officer III-8 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Sprint Corporation We have audited the accompanying combined balance sheets of the Sprint PCS Group (as described in Note 1) as of December 31, 2000 and 1999, and the related combined statements of operations, comprehensive loss and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index to Financial Statements and Financial Statement Schedules. These financial statements and the schedule are the responsibility of the management of Sprint Corporation (Sprint). Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We did not audit the 1998 consolidated financial statements of Sprint Spectrum Holding Company, L.P., a wholly owned subsidiary of Sprint as of December 31, 1998 and an investment in which Sprint had a 40% interest through November 23, 1998 (as discussed in Note 1). Such financial statements reflect revenues of $1.2 billion for the year ended December 31, 1998. The consolidated financial statements and financial statement schedule of Sprint Spectrum Holding Company, L.P. have been audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the 1998 revenues, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Sprint PCS Group at December 31, 2000 and 1999, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the combined financial statements, in 2000 the Sprint PCS Group changed its accounting for activation fee revenues. As more fully discussed in Note 1, the combined financial statements of the Sprint PCS Group should be read together with the audited consolidated financial statements of Sprint. Ernst & Young LLP Kansas City, Missouri February 1, 2001 III-9 REPORT OF INDEPENDENT AUDITORS The Board of Directors of Sprint Corporation and Partners of Sprint Spectrum Holding Company, L.P. We have audited the consolidated statements of operations and cash flows of Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended December 31, 1998. Our audit also included the 1998 financial statement schedule (Schedule II). These financial statements and Schedule II are the responsibility of Partnership management. Our responsibility is to express an opinion on these consolidated financial statements and Schedule II based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, Schedule II, when considered in relation to the basic 1998 consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. Deloitte & Touche LLP Kansas City, Missouri February 2, 1999 III-10 COMBINED STATEMENTS OF OPERATIONS Sprint PCS Group (millions, except per share data) - -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Net Operating Revenues $ 6,341 $ 3,373 $ 1,294 - ------------------------------------------------------------------------------- Operating Expenses Costs of services and products 3,942 3,150 1,758 Selling, general and administrative 2,426 1,937 1,138 Depreciation 1,339 1,060 670 Amortization 538 463 119 Merger related costs 24 -- -- Acquired in-process research and development costs -- -- 179 - ------------------------------------------------------------------------------- Total operating expenses 8,269 6,610 3,864 - ------------------------------------------------------------------------------- Operating Loss (1,928) (3,237) (2,570) Interest expense (933) (698) (491) Other partners' loss in Sprint PCS -- -- 1,251 Minority interest -- 20 145 Other income (expense), net (11) 46 34 - ------------------------------------------------------------------------------- Loss before income tax benefit and extraordinary items (2,872) (3,869) (1,631) Income tax benefit 1,004 1,388 541 - ------------------------------------------------------------------------------- Loss before Extraordinary Items (1,868) (2,481) (1,090) Extraordinary items, net (3) (21) (31) - ------------------------------------------------------------------------------- Net Loss (1,871) (2,502) (1,121) Preferred stock dividends paid (14) (15) (2) - ------------------------------------------------------------------------------- Loss applicable to common stock $(1,885) $(2,517) $(1,123) ------------------------- Basic and Diluted Loss per Common Share(/1/),(/2/) Continuing operations $ (1.95) $ (2.71) $ (2.21) Extraordinary items -- (0.02) (0.04) - ------------------------------------------------------------------------------- Total $ (1.95) $ (2.73) $ (2.25) ------------------------- Basic and diluted weighted average common shares 966.5 920.4 831.6 -------------------------
(/1/) Basic and diluted loss per common share and weighted average common shares for 1998 is pro forma, unaudited and assume the PCS Restructuring, Recapitalization, Top-up and the write-off of $179 million of acquired in-process research and development occurred prior to 1998. These pro forma amounts are for comparative purposes only and do not necessarily represent what actual results of operations would have been had the transactions occurred prior to 1998, nor do they indicate the results of future operations. (/2/) In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS common stock. As a result, basic and diluted loss per common share and weighted average common shares for periods before the stock split have been restated. See accompanying Notes to Combined Financial Statements. III-11 COMBINED STATEMENTS OF COMPREHENSIVE LOSS Sprint PCS Group (millions) - -----------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------- Net Loss $(1,871) $(2,502) $(1,121) - ----------------------------------------------------------------------------- Other Comprehensive Loss Unrealized holding gains on securities 5 8 -- Income tax expense (2) (3) -- - ----------------------------------------------------------------------------- Net unrealized holding gains on securities during the period 3 5 -- Reclassification adjustment for gains included in net loss (8) -- -- - ----------------------------------------------------------------------------- Total net unrealized holding gains (losses) on securities (5) 5 -- Foreign currency translation adjustments 3 -- -- - ----------------------------------------------------------------------------- Total other comprehensive income (loss) (2) 5 -- - ----------------------------------------------------------------------------- Comprehensive Loss $(1,873) $(2,497) $(1,121) -------------------------
See accompanying Notes to Combined Financial Statements. III-12 COMBINED BALANCE SHEETS Sprint PCS Group (millions) - -----------------------------------------------------------------------
December 31, 2000 1999 - ----------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 117 $ 16 Accounts receivable, net of allowance for doubtful accounts of $96 and $46 902 572 Inventories 515 336 Prepaid expenses 90 89 Current tax benefit receivable from the FON Group 26 293 Other 200 9 - ----------------------------------------------------------------------- Total current assets 1,850 1,315 Property, plant and equipment Network equipment 7,540 5,817 Construction work in progress 1,713 1,692 Buildings and leasehold improvements 2,108 1,235 Other 756 667 - ----------------------------------------------------------------------- Total property, plant and equipment 12,117 9,411 Accumulated depreciation (2,595) (1,415) - ----------------------------------------------------------------------- Net property, plant and equipment 9,522 7,996 Investments in affiliates 148 -- - ----------------------------------------------------------------------- Intangible assets Goodwill 4,548 4,522 PCS licenses 3,059 3,060 Customer base 747 726 Microwave relocation costs 411 377 Other 46 54 - ----------------------------------------------------------------------- Total intangible assets 8,811 8,739 Accumulated amortization (1,077) (551) - ----------------------------------------------------------------------- Net intangible assets 7,734 8,188 Other assets 509 425 - ----------------------------------------------------------------------- Total $19,763 $17,924 ---------------- Liabilities and Group Equity Current liabilities Current maturities of long-term debt $ 244 $ 185 Accounts payable 687 450 Construction obligations 997 1,039 Accrued taxes 203 130 Payables to the FON Group 296 136 Other 965 638 - ----------------------------------------------------------------------- Total current liabilities 3,392 2,578 Long-term debt and capital lease obligations 14,136 11,304 Deferred credits and other liabilities Deferred income taxes 90 582 Other 253 140 - ----------------------------------------------------------------------- Total deferred credits and other liabilities 343 722 Group equity 1,892 3,320 - ----------------------------------------------------------------------- Total $19,763 $17,924 ----------------
See accompanying Notes to Combined Financial Statements. III-13 COMBINED STATEMENTS OF CASH FLOWS Sprint PCS Group (millions) - --------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Operating Activities Net loss $(1,871) $(2,502) $(1,121) Adjustments to reconcile net loss to net cash used by operating activities: Extraordinary items, net 3 21 31 Equity in net loss of affiliate 55 -- 840 Acquired in-process research and development costs -- -- 179 Depreciation and amortization 1,877 1,523 121 Deferred income taxes (591) (553) 68 Current tax benefit used by the FON Group -- -- (460) Net gains on sales of assets (47) (25) -- Changes in assets and liabilities, excluding the PCS Restructuring in 1998: Accounts receivable, net (324) (241) (1) Inventories and other current assets (304) (237) -- Accounts payable and other current liabilities 647 363 386 Current tax benefit receivable from the FON Group 267 (123) (170) Affiliate receivables and payables, net 155 35 101 Noncurrent assets and liabilities, net 77 13 (102) Other, net 48 34 (31) - -------------------------------------------------------------------------------- Net cash used by operating activities (8) (1,692) (159) - -------------------------------------------------------------------------------- Investing Activities Capital expenditures (3,047) (2,580) (1,072) Proceeds from sales of assets 207 153 -- Investments in affiliates (203) -- -- Cash acquired in the PCS Restructuring -- -- 244 Investments in Sprint PCS -- -- (33) Other, net (11) (82) -- - -------------------------------------------------------------------------------- Net cash used by investing activities (3,054) (2,509) (861) - -------------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt 3,269 5,901 4,428 Payments on long-term debt (407) (2,734) (3,434) Advances from (to) the FON Group (17) -- 64 Proceeds from common stock issued 121 905 85 Dividends paid (15) (15) -- Equity transfer to the FON Group -- -- (340) Current tax benefit used by the FON Group -- -- 460 Other, net 212 (13) (70) - -------------------------------------------------------------------------------- Net cash provided by financing activities 3,163 4,044 1,193 - -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents 101 (157) 173 Cash and Equivalents at Beginning of Year 16 173 -- - -------------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 117 $ 16 $ 173 --------------------------
See accompanying Notes to Combined Financial Statements. III-14 NOTES TO COMBINED FINANCIAL STATEMENTS Sprint PCS Group - ------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies - ------------------------------------------------------------------------------- Tracking Stock Formation In November 1998, Sprint's shareholders approved the formation of the FON Group and the PCS Group and the creation of the FON stock and the PCS stock. In addition, Sprint purchased the remaining ownership interests in Sprint Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired these ownership interests from Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued the Cable Partners special low-vote PCS shares and warrants to acquire additional PCS shares. Sprint also issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. The purchase of the Cable Partners' interests is referred to as the PCS Restructuring. In the 1999 second quarter, Cox Communications, Inc. exercised a put option requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint issued additional low vote PCS shares in exchange for this interest. Also in November 1998, Sprint reclassified each of its publicly traded common shares into one share of FON stock and 1/2 share of PCS stock. This recapitalization was tax-free to shareholders. Each Class A common share owned by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to represent an equity interest in the FON Group and the PCS Group that entitles FT and DT to one share of FON stock and 1/2 share of PCS stock. These transactions are referred to as the Recapitalization. In connection with the PCS Restructuring, FT and DT purchased 5.1 million additional PCS shares (pre-split basis) to maintain their voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. Basis of Combination and Presentation The combined PCS Group financial statements, together with the combined FON Group financial statements, include all the accounts included in Sprint's consolidated financial statements. The combined financial statements for each Group were prepared on a basis that management believes is reasonable and proper and include: . the combined 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 after the PCS Restructuring date. 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 stock tracking the other Group. 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 FON and PCS 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. Sprint PCS' results of operations for 1998 have been consolidated for the entire year. The Cable Partners' share of losses through the PCS Restructuring date has been reflected as "Other partners' loss in Sprint PCS" in the Combined Statements of Operations. Sprint PCS financial position has been reflected on a consolidated basis at year-end 1998. Before 1998, Sprint's investment in Sprint PCS was accounted for using the equity method. The PCS Group's cash flows include Sprint PCS' cash flows only after the PCS Restructuring date. Investments in entities in which the PCS Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 3). The PCS Group 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 III-15 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. Classification of Operations The PCS Group includes Sprint's wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide nationwide service using a single frequency and a single technology. At year- end 2000, the PCS Group, together with affiliates, operated PCS systems in over 300 metropolitan markets including the 50 largest U.S. metropolitan areas. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses indirect methods, including time studies, to estimate the assignment of costs to each Group. Sprint believes that the costs allocated are comparable to the costs that would be incurred if the Groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two Groups. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The PCS Group accrued current income tax benefits in accordance with the tax sharing agreement totaling $605 million in 2000, $887 million in 1999 and $190 million in 1998. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's board of directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Allocation of Group Financing Financing activities for the Groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the Groups is specifically allocated to and reflected in the financial statements of the applicable Group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. Under Sprint's centralized cash management program, one Group may advance funds to the other Group. These advances are accounted for as short-term borrowings between the Groups and bear interest at a market rate that is substantially equal to the rate that Group would be able to obtain from third parties on a short-term basis. The allocation of Group financing activities may change at the discretion of Sprint and does not require shareholder approval. Income Taxes The PCS Group records deferred income taxes based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Revenue Recognition The PCS Group recognizes operating revenues as services are rendered or as products are delivered to customers. Service activation fees are deferred and amortized over the average life of the service. The PCS Group implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," during the fourth quarter of 2000, effective the beginning of the year. This bulletin requires activation and installation fee revenues that do not represent a separate earnings process to be deferred and recognized over the estimated service period. Associated incremental direct costs may also be deferred, but only to the extent of revenues subject to deferral. The effect of the change on the nine months ended September 30, 2000 was to decrease revenues and expenses by $68 million. Cash and Equivalents Cash equivalents generally include highly liquid investments with original maturities of three months or less. They are stated at cost, which approximates III-16 market value. Sprint uses controlled disbursement banking arrangements as part of its cash management program. Outstanding checks in excess of cash balances for the PCS Group were included in accounts payable. These amounts totaled $22 million at year-end 2000 and $30 million at year-end 1999. The PCS Group had sufficient funds available to fund these outstanding checks when they were presented for payment. Inventories Inventories are stated at the lower of cost (principally first-in, first-out method) or replacement value. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Generally, ordinary asset retirements and disposals are charged against accumulated depreciation with no gain or loss recognized. Property, plant and equipment is depreciated on a straight-line basis over estimated economic useful lives. Repair and maintenance costs are expensed as incurred. Capitalized Interest The PCS Group capitalizes interest costs related to network buildout and PCS licenses, which totaled $153 million in 2000, $108 million in 1999 and $64 million in 1998. In addition, Sprint capitalized interest costs related to the PCS Group's network buildout. This capitalized interest totaled $61 million for 1998 and was contributed to, and is being amortized by, the PCS Group. Intangible Assets The PCS Group evaluates the recoverability of intangible assets when events or circumstances indicate that such assets might be impaired. The PCS Group determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying value. In the event impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for as purchases. Goodwill is being amortized over 40 years using the straight-line method. Accumulated amortization totaled $231 million at year-end 2000 and $116 million at year-end 1999. PCS Licenses The PCS Group acquired licenses from the Federal Communications Commission (FCC) to operate as a PCS service provider. These licenses are granted for up to 10-year terms with renewals for additional 10-year terms if license obligations are met. These licenses are recorded at cost and are amortized on a straight-line basis over 40 years when service begins in a specific geographic area. Accumulated amortization totaled $206 million at year-end 2000 and $130 million at year-end 1999. Customer Base The PCS Group capitalized the fair value of Sprint PCS' customer base acquired in the PCS Restructuring and the fair value of Cox PCS' customer base when the remaining minority interest in Cox PCS was acquired in the 1999 second quarter. The customer base is being amortized over 30 months using the straight-line method. Accumulated amortization totaled $596 million at year-end 2000 and $277 million at year-end 1999. Microwave Relocation Costs The PCS Group has incurred costs related to microwave relocation in constructing the PCS network. Microwave relocation costs are being amortized over the remaining lives of the PCS licenses. Accumulated amortization totaled $24 million at year-end 2000 and $15 million at year-end 1999. Loss per Share As a result of the PCS Restructuring and the Recapitalization, loss per share for the PCS Group for 1998 has been calculated based on the Group's net loss from November 1998 through year-end 1998. It was not calculated on a Group basis for periods prior to November 1998 because the PCS stock was not part of Sprint's capital structure at that time. In the 2000 first quarter, Sprint effected a two-for-one split of its PCS common stock. As a result, basic and diluted loss per common share and weighted average common shares for PCS common stock have been restated for periods prior to the stock split. Dilutive securities for the PCS Group mainly include options, warrants and convertible preferred stock. These securities did not have a dilutive effect on loss per share because the PCS Group incurred net losses for 2000, 1999 and 1998. As a result, diluted loss per share equaled basic loss per share. III-17 The PCS Group's basic and diluted loss per common share in 1998 after the PCS Restructuring and Recapitalization date was as follows: - ------------------------------------------------------------
1998 - ------------------------------------------------------------ (millions, except per share data) Loss applicable to common stock $ (559) ------ Basic and diluted loss per common share: Loss before extraordinary item $(0.63) Extraordinary item (0.04) - ------------------------------------------------------------ Total $(0.67) ------ Basic and diluted weighted average shares 831.6 ------
Stock-based Compensation The PCS Group participates in the incentive-based stock option plans and employee stock purchase plan administered by Sprint for executives and other employees. Sprint adopted the pro forma disclosure requirements under Statement of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation," and continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to its stock option and employee stock purchase plans. Had the PCS Group applied SFAS 123, pro forma net loss would have been $2,135 million in 2000, $2,578 million in 1999 and would not have changed materially from the Recapitalization date through year-end 1998. See Note 12 of Sprint's Notes to Consolidated Financial Statements for more information about Sprint's stock-based compensation and the PCS Group's pro forma net loss and loss per share. In 1997, Sprint granted performance-based stock options to certain key executives. The PCS Group expensed $3 million in 2000, $5 million in 1999 and $1 million in 1998 related to these performance-based stock options. The 2000 amount reflects expense through the date of the shareholder approval of the proposed WorldCom merger. At that time, all of these options became vested. An additional $10 million of expense related to these options was included in "Merger related costs" in the Combined Statements of Operations. - -------------------------------------------------------------------------------- 2. Business Combinations - -------------------------------------------------------------------------------- Cox PCS In the 1999 second quarter, Cox Communications, Inc. exercised a put option requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's existing 59.2% interest in Cox PCS was reflected in the PCS Group combined financial statements on a combined basis. Sprint issued 24.3 million shares of low-vote PCS stock (pre-split basis) in exchange for the remaining interest. The shares were valued at $1.1 billion. Sprint accounted for the transaction as a purchase. The excess of the purchase price over the fair value of the net liabilities acquired was allocated as follows: - -------------------------------------------------------------------------
1999 - ------------------------------------------------------------------------- (millions) Purchase price $1,146 Net liabilities acquired 99 Fair value assigned to customer base acquired (45) Fair value assigned to PCS licenses (99) Deferred taxes established on acquired assets and liabilities 88 - ------------------------------------------------------------------------- Goodwill $1,189 ------
Goodwill is being amortized on a straight-line basis over 40 years. PCS Restructuring In November 1998, Sprint acquired the remaining interest in Sprint PCS (except for the minority interest in Cox PCS) from the Cable Partners. In exchange, Sprint issued the Cable Partners 195.1 million low-vote shares of PCS stock and 12.5 million warrants to purchase additional shares of PCS stock (on a pre- split basis). The purchase price was $3.2 billion. In addition, Sprint issued the Cable Partners shares of a new class of preferred stock convertible into PCS shares. Sprint accounted for the transaction as a purchase. The excess of the purchase price over the fair value of the net liabilities acquired was allocated as follows: - -------------------------------------------------------------------------
1998 - ------------------------------------------------------------------------- (millions) Purchase price including transaction costs $3,226 Net liabilities acquired 281 Fair value assigned to customer base acquired (681) Fair value assigned to assembled workforce acquired (45) Increase in property, plant and equipment to fair value (204) Mark-to-market of long-term debt 85 Deferred taxes established on acquired assets and liabilities 678 In-process research and development costs (179) - ------------------------------------------------------------------------- Goodwill $3,161 ------
Goodwill is being amortized on a straight-line basis over 40 years. III-18 With respect to the purchase price attributed to in-process research and development (IPR&D), the acquired IPR&D was limited to significant new products under development that were intended to address new and emerging market needs and requirements, such as the rapid adoption of the Internet and the rapid convergence of voice, data, and video. No routine research and development projects, minor refinements, normal enhancements, or production activities were included in the acquired IPR&D. The income approach was the primary technique utilized in valuing the acquired IPR&D. This approach included, but was not limited to, an analysis of (1) the markets for each product; (2) the completion costs for projects; (3) the expected cash flows attributable to the IPR&D projects; (4) the risks related to achieving these cash flows; and (5) the stage of development of each project. The issue of alternative future use was extensively evaluated and these technologies, once completed, could only be economically used for their intended purposes. Sprint PCS Group Pro Forma Results The following unaudited pro forma combined results of operations for the PCS Group assume the PCS Restructuring, Recapitalization, Top-up and the write-off of acquired IPR&D costs occurred prior to 1998. These pro forma amounts are for comparative purposes only and do not necessarily represent what actual results of operations would have been had the transactions occurred prior to 1998, nor do they indicate the results of future operations. Pro forma results were as follows: - -----------------------------------------------------------
1998 - ----------------------------------------------------------- (millions, except per share data) Net operating revenues $ 1,294 ------- Loss before extraordinary items $(1,847) ------- Net loss $(1,878) ------- Basic and diluted loss per common share: Loss before extraordinary items $ (2.21) Extraordinary items (0.04) - ----------------------------------------------------------- Total $ (2.25) -------
- -------------------------------------------------------------------------------- 3. Investment - -------------------------------------------------------------------------------- During the 2000 second quarter, the PCS Group made an investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. The PCS Group accounts for this investment using the equity method. Unaudited, summarized financial information (100% basis) of this entity was as follows: - -----------------------------------
2000 - ----------------------------------- (millions) Results of operations Net operating revenues $ 104 ----- Operating loss $(177) ----- Net loss $(192) ----- Financial position Current assets $ 77 Noncurrent assets 716 - ----------------------------------- Total $ 793 ----- Current liabilities $ 367 Noncurrent liabilities 327 Owners' equity 99 - ----------------------------------- Total $ 793 -----
- -------------------------------------------------------------------------------- 4. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, the PCS Group recognized a one-time, pre-tax charge of $24 million for costs associated with the terminated merger. - -------------------------------------------------------------------------------- 5. Employee Benefit Plans - -------------------------------------------------------------------------------- Defined Benefit Pension Plan Effective January 1999, most PCS Group employees became eligible to participate in Sprint's pension plans. Pension benefits are based on years of service and the participants' compensation. Sprint's policy is to make plan contributions equal to an actuarially determined amount consistent with federal tax regulations. The funding objective is to accumulate funds at a relatively stable rate over the participants' working lives so benefits are fully funded at retirement. Amounts included in the Combined Balance Sheets for the plan were accrued pension costs of $12 million at year-end 2000 and $5 million at year-end 1999. Net pension costs are determined for the PCS Group based on a direct calculation of service costs. The PCS Group recorded net pension costs of $7 million in 2000 and $5 million in 1999. III-19 Defined Contribution Plan Prior to January 1999, Sprint PCS sponsored a savings and retirement program for certain employees. Sprint PCS matched contributions equal to 50% of the contribution of each participant, up to the first 6% that the employee elected to contribute. Expense under the savings plan was $7 million in 1998. Effective January 1999, the PCS Group employees began making contributions to Sprint's defined contribution plan. The existing assets of the Sprint PCS savings plan were rolled over to Sprint's defined contribution plan in early 1999. The PCS Group recorded expense of $17 million in 2000 and $10 million in 1999 for Sprint's matching contributions to the Sprint defined contribution plans. At year-end 2000, Sprint's defined contribution plans held 34 million FON shares and 31 million PCS shares. Postretirement Benefits Effective January 1999, most PCS Group employees also became eligible for postretirement benefits (principally medical and life insurance benefits). Retiring employees are eligible for benefits on a shared-cost basis. Sprint funds the accrued costs as benefits are paid. Amounts included in the Combined Balance Sheets at year-end were accrued postretirement benefits costs of $1 million in 2000 and 1999. Net postretirement benefits costs are determined for the PCS Group based on a direct calculation of service costs. The PCS Group recorded net postretirement benefits costs of $0.2 million in 2000 and $1 million in 1999. - -------------------------------------------------------------------------------- 6. Income Taxes - -------------------------------------------------------------------------------- Income tax benefits allocated to continuing operations consisted of the following: - ---------------------------------------------------------------
2000 1999 1998 - --------------------------------------------------------------- (millions) Current income tax benefit Federal $ (405) $ (810) $(579) State (8) (25) (30) - --------------------------------------------------------------- Total current (413) (835) (609) - --------------------------------------------------------------- Deferred income tax expense (benefit) Federal (511) (479) 83 State (80) (74) (15) - --------------------------------------------------------------- Total deferred (591) (553) 68 - --------------------------------------------------------------- Total $(1,004) $(1,388) $(541) -------------------------------------------
The differences that caused the PCS Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: - -------------------------------------------------------------------------------
2000 1999 1998 - ------------------------------------------------------------------------------- (millions) Income tax benefit at the statutory rate $(1,005) $(1,354) $(571) Effect of: State income taxes, net of federal income tax effect (57) (64) (29) Goodwill amortization 38 34 3 Equity in losses of foreign joint venture 23 -- -- Write-off of in-process research and development costs -- -- 63 Other, net (3) (4) (7) - ------------------------------------------------------------------------------- Income tax benefit $(1,004) $(1,388) $(541) ----------------------------------------------------------- Effective income tax rate 35.0% 35.9% 33.2% -----------------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows: - --------------------------------------------------------------------------
2000 1999 1998 - -------------------------------------------------------------------------- (millions) Extraordinary items $ (2) $(11) $(20) Unrealized holding gains (losses) on investments(/1/) (3) 3 -- Stock ownership, purchase and options arrangements(/1/) (148) (31) -- - --------------------------------------------------------------------------
(/1/) These amounts have been recorded directly to "Group equity." III-20 The PCS Group recognizes deferred income taxes for the temporary differences between the carrying amounts of its assets and liabilities for financial statement purposes and their tax bases. The sources of the differences that give rise to the deferred income tax assets and liabilities at year-end 2000 and 1999, along with the income tax effect of each, were as follows: - -------------------------------------------------
2000 Deferred Income Tax ------------------ Assets Liabilities - ------------------------------------------------- (millions) Property, plant and equipment $ -- $1,156 Intangibles -- 386 Capitalized interest -- 114 Reserves and allowances 39 -- Operating loss carryforwards 1,794 -- Tax credit carryforwards 127 -- Other, net 18 -- - ------------------------------------------------- 1,978 1,656 Less valuation allowance 325 -- - ------------------------------------------------- Total $1,653 $1,656 ----------------------- - ------------------------------------------------- 1999 Deferred Income Tax ------------------ Assets Liabilities - ------------------------------------------------- (millions) Property, plant and equipment $ -- $ 811 Intangibles -- 453 Capitalized interest -- 108 Operating loss carryforwards 1,006 -- Tax credit carryforwards 53 -- Other, net 21 -- - ------------------------------------------------- 1,080 1,372 Less valuation allowance 283 -- - ------------------------------------------------- Total $ 797 $1,372 -----------------------
Management believes it is more likely than not that these deferred income tax assets, net of the valuation allowance, will be realized based on current income tax laws and expectations of future taxable income stemming from the reversal of existing deferred tax liabilities or ordinary operations. Uncertainties surrounding income tax law changes, shifts in operations between state taxing jurisdictions, and future operating income levels may, however, affect the ultimate realization of all or some of these deferred income tax assets. The valuation allowance related to deferred income tax assets increased $42 million in 2000 and $38 million in 1999. In 1998, the PCS Group acquired approximately $229 million of potential tax benefits related to net operating loss carryforwards in the PCS Restructuring which are subject to certain realization restrictions under various tax laws. A valuation allowance was provided for the total of these benefits. If these benefits are subsequently recognized, they will reduce the goodwill or other noncurrent intangible assets resulting from the PCS Restructuring. In connection with the PCS Restructuring, the PCS Group is required to reimburse the FON Group and the Cable Partners for net operating loss and tax credit carryforward benefits generated prior to the PCS Restructuring if realization by the PCS Group produces a cash benefit that would not otherwise have been realized. The reimbursement will equal 60% of the net cash benefit received by the PCS Group and will be made to the FON Group in cash and to the Cable Partners in shares of Series 2 PCS stock. The carryforward benefits subject to this requirement totaled $259 million, which includes the $229 million acquired in the PCS Restructuring. At year-end 2000, the PCS Group had federal operating loss carryforwards of approximately $4.2 billion and state operating loss carryforwards of approximately $7.2 billion. Related to these loss carryforwards are federal tax benefits of $1.5 billion and state tax benefits of $519 million. In addition, the PCS Group had available for income tax purposes federal alternative minimum tax credit carryforwards of $33 million, state alternative minimum tax credit carryforwards of $5 million, federal alternative minimum tax net operating loss carryforwards of $2.2 billion, and state alternative minimum tax net operating loss carryforwards of $682 million. The loss carryforwards expire in varying amounts through 2020. III-21 - -------------------------------------------------------------------------------- 7. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint's consolidated long-term debt and capital lease obligations at year-end was as follows: - ------------------------------------------------------------------------------------------
2000 1999 --------------------------- --------------------------- Sprint Sprint Sprint Sprint FON PCS FON PCS Maturing Group Group Consolidated Group Group Consolidated - ------------------------------------------------------------------------------------------ (millions) Senior notes 5.7% to 7.6%(/1/) 2001 to 2028 $1,105 $ 9,395 $10,500 $1,105 $ 8,145 $ 9,250 8.1% to 9.8% 2000 to 2003 382 -- 382 632 -- 632 11.0% to 12.5%(/2/) 2001 to 2006 -- 776 607 -- 734 584 Debentures and notes 5.8% to 9.6% 2000 to 2022 500 -- 500 565 -- 565 Notes payable and commercial paper -- 157 3,797 3,954 294 1,971 2,265 First mortgage bonds 5.9% to 9.9% 2000 to 2025 1,085 -- 1,085 1,295 -- 1,295 Capital lease obligations 5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555 Revolving credit facilities Variable rates 2002 900 -- 900 900 -- 900 Other 2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726 - ------------------------------------------------------------------------------------------ 4,508 14,380 18,719 5,433 11,489 16,772 Less: current maturities(/2/) 1,026 244 1,205 902 185 1,087 - ------------------------------------------------------------------------------------------ Long-term debt and capital lease obligations(/2/) $3,482 $14,136 $17,514 $4,531 $11,304 $15,685 ------------------------------------------------------
(/1/) These borrowings were incurred by Sprint and allocated to the applicable Group. Sprint's weighted average interest rate related to these borrowings was 6.7% at year-end 2000 and 6.6% at year-end 1999. The weighted average interest rate related to the borrowings allocated to the PCS Group was approximately 8.8% at year-end 2000 and 8.7% at year-end 1999. See Note 1 for a more detailed description of how Sprint allocates financing to each of the Groups. (/2/) Consolidated debt does not equal the total of PCS Group and FON Group debt due to intergroup debt eliminated in consolidation. The FON Group had an investment in the PCS Group's Senior Discount notes totaling $169 million at year-end 2000, including $65 million classified as current, and $150 million at year-end 1999. III-22 Scheduled principal payments, excluding reclassified short-term borrowings, during each of the next five years are as follows: - -------------------------------
Sprint Sprint FON PCS Group Group Sprint - ------------------------------- (millions) 2001(/1/) $1,026 $ 258 $1,214 2002 1,339 1,309 2,648 2003 372 1,060 1,432 2004 144 1,062 1,206 2005 122 61 183 - -------------------------------
(/1/) The 2001 scheduled principal payments do not equal current maturities as these amounts reflect the maturity value of the scheduled payment on the PCS Group's Senior Discount notes. Included in the above schedule are payments on PCS Group debt that are to be made in Japanese yen. The yen needed to satisfy the obligations is currently held on deposit by the PCS Group and included in "Other assets" on the PCS Group's Combined Balance Sheets. The scheduled yen payments included in the above schedule are $1 million in 2003, $20 million in 2004 and $43 million in 2005. Sprint Short-term Borrowings Sprint had bank notes payable totaling $676 million at year-end 2000 and $670 million at year-end 1999. In addition, Sprint had commercial paper borrowings totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999. Though these borrowings are renewable at various dates throughout the year, they were classified as long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis through unused credit facilities and unissued debt under Sprint's shelf registration. Sprint currently has revolving credit facilities with syndicates of domestic and international banks totaling $5 billion; $3 billion of which is a 364 day facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year facility expiring in 2003. Commercial paper and certain bank notes are supported by Sprint's revolving credit facilities. Certain other notes payable relate to a separate revolving credit facility which expires in 2002. At year- end 2000, Sprint had total unused lines of credit of $1.8 billion. Bank notes outstanding had weighted average interest rates of 7.1% at year-end 2000 and 6.3% at year-end 1999. The weighted average interest rate of commercial paper was 7.5% at year-end 2000 and 6.4% at year-end 1999. Long-term Debt In June 2000, Sprint issued $1.25 billion of debt securities under its $4 billion shelf registration statement with the SEC. These borrowings mature in 2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000, Sprint had issued a total of $2 billion of debt securities under the shelf. In January 2001, Sprint issued securities using the remaining amount of the shelf (see Note 14). In June 1999, Sprint entered into a $1 billion financing agreement to sell, on a continuous basis with recourse, undivided percentage ownership interests in a designated pool of its accounts receivable. Subsequent collections of receivables sold to investors are typically reinvested in new receivables. At year-end 2000, Sprint had borrowed $900 million with a weighted average interest rate of 6.9% under this agreement. These borrowings mature in 2002. Sprint PCS Group In 2000, Sprint allocated $3.3 billion of debt to the PCS Group. This debt was mainly used to fund new capital investments and repay existing debt. In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. In 1999, the PCS Group repaid $2.2 billion of its revolving credit facilities and other borrowings prior to scheduled maturities. This resulted in a $21 million after-tax extraordinary loss. In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS Group debt with a weighted average interest rate of 8.3%. This resulted in a $31 million after-tax extraordinary loss for the PCS Group. Other Sprint, including the PCS Group, had complied with all restrictive or financial covenants relating to its debt arrangements at year-end 2000. III-23 - -------------------------------------------------------------------------------- 8. Group Equity - -------------------------------------------------------------------------------- - ----------------------------------------------------------
2000 1999 1998 - ---------------------------------------------------------- (millions) Beginning balance $3,320 $3,755 $1,386 Net loss (1,871) (2,502) (1,121) Dividends (14) (15) (2) Common stock issued 230 2,064 3,285 Tax benefit of stock compensation 148 31 -- Preferred stock issued -- -- 247 Preferred intergroup interest -- -- 279 Contributions from the FON Group -- -- 146 Equity transfers to the FON Group -- -- (460) Other comprehensive income (loss) (2) 5 -- Other, net 81 (18) (5) - ---------------------------------------------------------- Ending balance $1,892 $3,320 $3,755 -------------------------------------
- -------------------------------------------------------------------------------- 9. Commitments and Contingencies - -------------------------------------------------------------------------------- Litigation, Claims and Assessments PCS shareholders are subject to all of the risks related to an investment in Sprint and the PCS Group, including the effects of any legal proceedings and claims against the FON Group. In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the PCS Group combined financial statements. Commitments The PCS Group has purchase commitments with various vendors to purchase handsets and other equipment through 2001. Outstanding commitments at year-end 2000 were approximately $830 million. Purchases under these commitments during 2000 totaled approximately $2 million. Operating Leases The PCS Group's minimum rental commitments at year-end 2000 for all noncancelable operating leases, consisting mainly of leases for cell and switch sites and office space, are as follows: - ----------------------
(millions) 2001 $205 2002 157 2003 108 2004 70 2005 26 Thereafter 63 - ----------------------
The PCS Group's gross rental expense totaled $400 million in 2000, $315 million in 1999 and $256 million in 1998. The table excludes renewal options related to certain cell and switch site leases. These renewal options generally have five- year terms and may be exercised from time to time. - -------------------------------------------------------------------------------- 10. Financial Instruments - -------------------------------------------------------------------------------- Fair Value of Financial Instruments Sprint estimates the fair value of the PCS Group's financial instruments using available market information and appropriate valuation methodologies. As a result, the following estimates do not necessarily represent the values the PCS Group could realize in a current market exchange. Although management is not aware of any factors that would affect the year-end 2000 estimated fair values, those amounts have not been comprehensively revalued for purposes of these financial statements since that date. Therefore, estimates of fair value after year-end 2000 may differ significantly from the amounts presented below. The carrying amounts and estimated fair values of the PCS Group's financial instruments at year-end were as follows: - -----------------------------------------------------------------
2000 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 117 $ 117 Long-term debt and capital lease obligations 14,380 13,741 - -----------------------------------------------------------------
III-24 - -----------------------------------------------------------------
1999 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 16 $ 16 Investment in equity securities 9 9 Long-term debt and capital lease obligations 11,489 11,054 - -----------------------------------------------------------------
The carrying amounts of the PCS Group's cash and equivalents approximate fair value at year-end 2000 and 1999. The estimated fair value of investments in equity securities was based on quoted market prices. The estimated fair value of the PCS Group's long-term debt was based on quoted market prices for publicly traded issues. The estimated fair value of all other issues was based on the present value of estimated future cash flows using a discount rate based on the risks involved. Concentrations of Credit Risk The PCS Group's accounts receivable are not subject to any concentration of credit risk. Interest Rate Swap Agreements In 1998, Sprint deferred losses from the termination of interest rate swap agreements used to hedge a portion of a $5.0 billion debt offering. These losses, totaling $75 million, were allocated to the PCS Group and are being amortized to interest expense using the effective interest method over the term of the debt. At year-end 2000, the remaining unamortized deferred loss totaled $61 million. - -------------------------------------------------------------------------------- 11. Additional Financial Information - -------------------------------------------------------------------------------- Supplemental Cash Flows Information The PCS Group's cash paid (received) for interest and income taxes was as follows: - -----------------------------------------------------------
2000 1999 1998 - ----------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 909 $ 632 $-- ----------------------------------- Income taxes $(872) $(764) $(20) -----------------------------------
Noncash activities for the PCS Group included the following: - ----------------------------------------------------------------------------
2000 1999 1998 - ---------------------------------------------------------------------------- (millions) Tax benefit from stock options exercised $148 $ 31 $ -- ------------------------------------------------------ Stock received for stock options exercised $ 40 $ 40 $ -- ------------------------------------------------------ Common stock issued under employee benefit stock plans $149 $ 49 $ -- ------------------------------------------------------ Capital lease obligations $-- $ 36 $ 460 ------------------------------------------------------ Common stock issued for Cox PCS acquisition $-- $1,146 $ -- ------------------------------------------------------ Common stock issued to the Cable Partners to purchase Sprint PCS $-- $ -- $3,200 ------------------------------------------------------ Preferred stock issued to the Cable Partners in exchange for interim financing $-- $ -- $ 247 ------------------------------------------------------ Conversion of interim financing to preferred intergroup interest $-- $ -- $ 279 ------------------------------------------------------
See Note 2 for more details about the assets and liabilities acquired in the Cox PCS purchase and the PCS Restructuring. Intergroup Investments and Transactions Sprint FON Group Investments in the Sprint PCS Group The following table reflects the FON Group's investments in the PCS Group, which have been eliminated in Sprint's consolidated financial statements: - -----------------------------------------------------
2000 1999 - ----------------------------------------------------- (millions) Common and preferred intergroup interest $ 260 $ 262 Investment in debt securities 188 169 - ----------------------------------------------------- Total $ 448 $ 431 ------------------------
Common Intergroup Interest The FON Group received a 1% intergroup interest in the PCS Group at the time of the PCS Restructuring and Recapitalization. Subsequently, PCS shares representing the intergroup interest were issued to FON Group employees, exhausting the FON Group's interest in the PCS Group in January 2000. The FON Group's share of the PCS Group's net loss totaled $13 million in 1999 and $6 million from the date of the PCS Restructuring to year-end 1998 and was included in "Other income, net" in the Sprint FON Group Combined Statements of Operations. As the intergroup interest was exhausted in 2000, no additional PCS Group losses were recognized by the FON Group in 2000. III-25 Preferred Intergroup Interest The FON Group provided Sprint PCS and the PCS Group with interim financing from the date the PCS Restructuring agreement was signed in May 1998 until it was completed in November 1998. As part of the PCS Restructuring, Sprint converted this financing, totaling $279 million, into an intergroup interest representing 0.3 million shares of 10-year PCS preferred stock convertible into a PCS common intergroup interest. The PCS Group paid the FON Group dividends on the preferred intergroup interest of $8 million in 2000 and 1999 and $1 million in 1998. Long-term Loans Sprint provided Sprint PCS with additional interim financing of $180 million from May 1998 through November 1998. This loan was repaid in 1999. Intergroup Interest Expense The difference between Sprint's actual interest costs and the interest costs charged to the PCS Group on allocated debt totaled $235 million in 2000, $167 million in 1999 and $11 million in 1998. Additionally, the PCS Group incurred intergroup interest expense of $19 million in 2000, $16 million in 1999 and $15 million in 1998 related to the FON Group's investment in PCS Group debt securities. These amounts are included in "Interest expense" in the Sprint PCS Group Combined Statements of Operations. See Note 1 for a more detailed description of how Sprint allocates interest expense to each of the Groups. Intergroup Transactions The PCS Group uses the long distance operation as its interexchange carrier and purchases wholesale long distance for resale to its customers. Additionally, the FON Group provides the PCS Group with Caller ID services and various other goods and services. Charges to the PCS Group for these items totaled $396 million in 2000, $280 million in 1999 and $21 million from the PCS Restructuring date to year-end 1998. The PCS Group provides the FON Group with access to its network and telemarketing and various other services. Charges to the FON Group for these items totaled $35 million in 2000 and $4 million in 1999. The FON Group provides management, printing, mailing and warehousing services to the PCS Group. Charges to the PCS Group for these services totaled $150 million in 2000, $65 million in 1999 and $5 million from the PCS Restructuring date to year-end 1998. Related Party Transactions Sprint PCS Group The Cable Partners advanced PhillieCo $26 million in 1998. These advances were repaid in the 1999 first quarter. Sprint PCS The following discussion reflects related party transactions between Sprint and Sprint PCS prior to the PCS Restructuring: Sprint provided Sprint PCS with billing and operator services, and switching equipment. Sprint PCS also used the long distance operation as its interexchange carrier. Charges to Sprint PCS for these services totaled $104 million in 1998. Sprint provided management, printing, mailing and warehousing services to Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in 1998. Sprint had a vendor financing loan to Sprint PCS for $300 million at year-end 1997 which was repaid in 1998. Sprint also loaned Sprint PCS $114 million in 1998, which was repaid in the 1999 first quarter. Major Customer The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 25% of net operating revenues in 2000, 28% in 1999 and 25% in 1998. - -------------------------------------------------------------------------------- 12. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires all derivatives to be recorded on the balance sheet as either assets or liabilities and be measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative is used and whether it qualifies for hedge accounting. When this statement was adopted in January 2001, it had no material impact on the PCS Group's combined financial statements. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and provides consistent standards for distinguishing transfers from sales and secured borrowings. This statement is effective for transactions occurring after March 31, 2001 and is not expected to have a material impact on the PCS Group's combined financial statements. III-26 - -------------------------------------------------------------------------------- 13. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Quarter ------------------------------ 2000 1st 2nd 3rd 4th - ------------------------------------------------------------------------------- (millions, except per share data) Net operating revenues(/1/) $1,220 $1,476 $1,707 $1,938 Operating loss (602) (469) (367) (490) Loss before extraordinary items (510) (456) (390) (512) Net loss (513) (456) (390) (512) Diluted and basic loss per common share before extraordinary items (0.54) (0.48) (0.41) (0.53) Quarter ------------------------------ 1999 1st 2nd 3rd 4th - ------------------------------------------------------------------------------- (millions, except per share data) Net operating revenues(/1/) $ 637 $ 780 $ 901 $1,055 Operating loss (827) (708) (790) (912) Loss before extraordinary items (605) (555) (615) (706) Net loss (626) (555) (615) (706) Diluted and basic loss per common share before extraordinary items(/2/) (0.71) (0.61) (0.65) (0.75)
(/1/) Certain reclassifications were made between net operating revenues and operating expenses from amounts reported in the 2000 quarterly reports on Form 10-Q to conform to industry events or practices. These reclassifications had no impact on operating loss as previously reported. Additionally, in the 2000 fourth quarter, the PCS Group adopted SEC Staff Accounting Bulletin No. 101, "Revenue recognition in Financial Statements," (SAB 101). As required by SAB 101, 2000 net operating revenues have been restated from amounts reported in the 2000 quarterly reports on Form 10-Q. Net operating revenues were unchanged in the 2000 first quarter and reduced by $32 million in the 2000 second quarter and $36 million in the 2000 third quarter. (/2/) In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS stock. PCS Group loss per share for prior periods have been restated to reflect this stock split. - -------------------------------------------------------------------------------- 14. Subsequent Event (Unaudited) - -------------------------------------------------------------------------------- In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2 billion of unissued securities under its existing shelf registration statement with the SEC, and registered an additional $400 million prior to the issuance. These borrowings have interest rates ranging from 7.1% to 7.6% and have scheduled maturities in 2006 and 2011. The proceeds were allocated to the PCS Group and used mainly to repay existing debt. III-27 SPRINT PCS GROUP SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2000, 1999 and 1998
Additions ------------------------------- Balance Charged Charged Balance Beginning PCS to to Other Other End of of Year Restructuring Income Accounts Deductions Year - ----------------------------------------------------------------------------------------- (millions) 2000 Allowance for doubtful accounts $ 46 $-- $252 $ 9 $(211)(/3/) $ 96 ---------------------------------------------------------------- Valuation allowance-- deferred income tax assets $283 $-- $ 39 $ 3 $ -- $325 ---------------------------------------------------------------- 1999 Allowance for doubtful accounts $ 7 $-- $201 $ 4 $(166)(/3/) $ 46 ---------------------------------------------------------------- Valuation allowance-- deferred income tax assets $245 $-- $ 47 $-- $ (9) $283 ---------------------------------------------------------------- 1998 Allowance for doubtful accounts $-- $ 8(/1/) $ 2 $-- $ (3)(/3/) $ 7 ---------------------------------------------------------------- Valuation allowance-- deferred income tax assets $-- $229(/2/) $-- $ 16 $ -- $245 ----------------------------------------------------------------
(/1/) As discussed in Note 1 of the Notes to Combined Financial Statements, the PCS Group's assets and liabilities were recorded at their fair values on the PCS Restructuring date. Therefore, the data presented in this schedule reflects activity since the PCS Restructuring. (/2/) Represents a valuation allowance for deferred income tax assets recorded in connection with the PCS Restructuring. (/3/) Accounts written off, net of recoveries. III-28 EX-10.(B) 2 0002.txt AMENDED REGISTRATION RIGHTS AGREEMENT Exhibit 10(b) EXECUTION COPY OFFERING PROCESS AGREEMENT AMONG FRANCE TELECOM, DEUTSCHE TELEKOM AG, NAB NORDAMERIKA BETEILIGUNGS HOLDING GmbH AND SPRINT CORPORATION Dated as of February 20, 2001 OFFERING PROCESS AGREEMENT THIS OFFERING PROCESS AGREEMENT, dated as of February 20, 2001 (this "Agreement"), is entered into by and among France Telecom, a societe anonyme organized under the laws of France ("FT"); Deutsche Telekom AG, an Aktiengesellschaft organized under the laws of Germany ("DT"); NAB Nordamerika Beteiligungs Holding GmbH, a limited liability company duly organized under the laws of Germany and a wholly owned subsidiary of DT ("NAB"); and Sprint Corporation, a corporation organized under the laws of the State of Kansas ("Sprint"). FT, DT, NAB and Sprint are collectively referred to herein as the "Parties." Terms used and not defined herein have the meanings assigned to such terms in the Sprint Articles of Incorporation. WHEREAS, each of FT, DT, NAB and Sprint is a party to the Amended and Restated Registration Rights Agreement, dated as of November 23, 1998 (as amended by the Master Transfer Agreement (the "Master Transfer Agreement"), dated as of January 21, 2000, between and among FT, DT, NAB, Atlas Telecommunications S.A., a societe anonyme duly organized under the laws of Belgium, the JV Entities and Sprint, the "Registration Rights Agreement"); WHEREAS, each of FT, DT and NAB proposes to dispose of shares of FON Stock in an underwritten public offering; WHEREAS, Sprint proposes to sell newly issued shares of PCS Stock in a separate underwritten public offering; and WHEREAS, in connection with such offerings, Sprint, on the one hand, and FT, DT and NAB, on the other hand, wish to set forth an agreed upon method of complying with the provisions of, and to amend certain provisions of, the Registration Rights Agreement; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of Sprint, FT, DT and NAB, intending to be legally bound, hereby agrees as follows: Section 1. FON Stock Offering (a) Request. FT, DT and NAB (each a "Selling Stockholder," and collectively the "Selling Stockholders") hereby request Sprint, pursuant to Section 1.1 of the Registration Rights Agreement, to effect the registration of shares of Series 3 FON Stock and shares of Series 3 FON Stock issuable with respect to the Class A Common Stock (together, "FT/DT FON Stock") owned by them in connection with an underwritten public offering of such shares (the "FON Offering") to be conducted in accordance with the terms of this Agreement. (b) Number and Designation of Shares. The Selling Stockholders hereby request that Sprint register for sale in the FON Offering all shares of Series 3 FON Stock, and all shares of Series 3 FON Stock issuable with respect to shares of Class A Common Stock, held by the Selling Stockholders and their Affiliates. The parties acknowledge that the registration statement and prospectus for the FON Offering shall indicate the registration and offering of such shares by designating the registration of shares of Series 1 FON Stock. (c) Exercise of Request Registration Rights. Subject to the terms of the Registration Rights Agreement, the request set forth in Section 1(a) hereof shall count as one registration request under the Registration Rights Agreement. Notwithstanding the foregoing, for purposes of clause (i) of the first proviso to Section 1.1(a) of the Registration Rights Agreement, the registration for the FON Offering shall be deemed to have been effected as of the date that the registration statement for the FON Offering is declared effective, unless the FON Offering is not completed, in which case the FON Offering shall be deemed to have been effected on the date of the first printed preliminary prospectus for the FON Offering (unless such registration does not become effective under the Securities Act due to material adverse developments involving Sprint or actions taken by Sprint) or at such time, if any, after filing and prior to such printing that the FON Offering is terminated pursuant to Section 3(b)(A) or (B) hereof (unless such termination shall have resulted from material adverse developments involving Sprint or actions taken by Sprint). (d) Sprint Participation. Sprint shall not seek to sell any securities in the FON Offering. Section 2. PCS Stock Offering (a) Proposed Offering. Sprint proposes to complete, during 2001, in accordance with the terms of this Agreement, an underwritten public offering of newly issued shares of PCS Stock (the first such offering completed by Sprint in 2001 is referred to as the "PCS Offering"). (b) Selling Stockholder Participation. None of the Selling Stockholders shall seek to sell any securities in the PCS Offering, and accordingly, with respect to the PCS Offering, each of the Selling Stockholders hereby waives the right to receive notice of, and the right to exercise, any incidental registration rights granted to the Selling Stockholders pursuant to Section 1.2 of the Registration Rights Agreement. Section 3. Timing of Offerings (a) Filing of Registration Statements. Sprint shall, promptly after the execution of this Agreement, file with the Securities and Exchange Commission (the "Commission") a registration statement for the FON Offering. 2 (b) Completion or Suspension of FON Offering. Sprint shall, subject to the terms of the Registration Rights Agreement, use reasonable efforts to cause the registration statement filed with respect to the FON Offering to become effective under the Securities Act. Each of Sprint and the Selling Stockholders shall use reasonable efforts to pursue the completion of the FON Offering. Prior to the date of the first printed preliminary prospectus for the FON Offering, the Selling Stockholders may change the number of their respective shares of FT/DT FON Stock to be offered in the FON Offering and one (but not both) Selling Stockholders may withdraw from the FON Offering. If (A) Selling Stockholders holding a majority of the securities to be registered for sale in the FON Offering notify Sprint that they have determined in good faith, at any point during the FON Offering, that market conditions are not suitable for completion of the FON Offering, or (B) the FON Offering is not completed within twenty-five (25) business days following the Trigger Date, then Sprint shall, in the case of clause (A) and may, if it so elects in its sole discretion, in the case of clause (B), promptly terminate its efforts to complete the FON Offering and shall be permitted, until December 31, 2001, to pursue the PCS Offering, as set forth below, in lieu of pursuing the FON Offering. If the FON Offering is so terminated, any future offering of FON Stock by any of the Selling Stockholders shall not be considered the "FON Offering" for purposes of this Agreement. The "Trigger Date" means the earlier of (1) the date on which the staff of the Commission advises Sprint, and Sprint advises the other Parties, that the Commission has no comments or no further comments on the registration statement as then filed ("SEC Clearance") and (2) the date of the first printed preliminary prospectus for the FON Offering; provided, however, that after April 30, 2001, the 25 business day period set forth in clause (B) above shall be tolled for any period following the date of SEC Clearance date during which Sprint has suspended its efforts to complete the FON Offering, as described below. If preliminary prospectuses for the FON Offering have not been printed on or before April 30, 2001 (May 3, 2001 if SEC Clearance is received between April 26, 2001 and April 30, 2001) (or, in either case, such later date as Sprint may determine in its sole discretion), then at any one time after such date, if Sprint intends within the following 14 days, or such longer period as Sprint determines is reasonably necessary, but in no event longer than within the following 30 days, to print preliminary prospectuses in order to commence marketing for the PCS Offering, and so informs the requesting Selling Stockholders in writing, Sprint may, if it so elects in its sole discretion, and if the preliminary prospectuses have not yet been printed for the FON Offering, suspend its efforts to complete the FON Offering for so long as Sprint continues to use reasonable efforts to pursue the PCS Offering. If Sprint so elects, then the Selling Stockholders may, beginning on the date that is thirty (30) days after completion of the PCS Offering (or immediately if Sprint abandons the PCS Offering), request that Sprint resume reasonable efforts to cause the registration statement filed with respect to the FON Offering to become effective and to perform its other obligations with respect to the FON Offering under this Agreement, and, if so requested, Sprint shall, subject to the provisions of the Registration Rights Agreement (including Section 1.4 thereof), do so. Sprint shall provide prompt written notice to each Selling Stockholder if it elects to abandon or otherwise terminate the PCS Offering. Any such request by the Selling Stockholders that Sprint resume the FON Offering shall not be deemed to be an additional registration request by the Selling Stockholders under the Registration Rights Agreement. 3 (c) Commencement of PCS Offering Road Show. No "road show" or other series of presentations to prospective investors for the PCS Offering shall commence until at least two (2) weeks following the execution of the underwriting agreement for the FON Offering. Section 4. Announcements. The Selling Stockholders agree to use commercially reasonable efforts to coordinate their public announcements regarding the PCS Offering, if any, with Sprint. The Selling Stockholders and Sprint agree to use commercially reasonable efforts to coordinate their public announcements regarding the FON Offering. Section 5. Lockups Agreements; Amendment to Registration Rights Agreement. (a) Lockup Restrictions. (i) Sprint FON Restriction. Sprint acknowledges and confirms, pursuant to Section 1.5(c)(ii) of the Registration Rights Agreement, as amended by Section 5(b) hereof, that Sprint shall not effect any public sale or distribution of shares of FON Stock or securities convertible into or exchangeable or exercisable for shares of FON Stock during the ten days before and the ninety days after the registration of the FON Offering has become effective. (ii) Selling Stockholders' PCS Stock Restriction. In addition to Section 3(b), each of the Selling Stockholders acknowledges and agrees that, until the earliest to occur of (x) November 15, 2001, if Sprint has not publicly announced its intention to commence the PCS Offering by such date, (y) 180 days following the closing of the PCS Offering (if the PCS Offering is closed by December 31, 2001) and (z) January 1, 2002 (if the PCS Offering is not closed by December 31, 2001) (such earliest date being referred to as the "Lockup Termination Date"), none of the Selling Stockholders or their subsidiaries shall transfer, sell, monetize, hedge or otherwise dispose of, or request registration pursuant to Section 1.1 of the Registration Rights Agreement of, any PCS Stock (including shares of PCS Stock issuable in respect of the shares of Class A Common Stock held by the Selling Stockholders) or securities convertible into or exchangeable or exercisable for such shares. Notwithstanding any of the foregoing or any provision of the Amended and Restated Stockholders' Agreement among FT, DT and Sprint, dated as of November 23, 1998, as amended by the Master Transfer Agreement dated January 21, 2000 (as amended, the "Stockholders' Agreement"), during the period from the date hereof through the Lockup Termination Date: (A) The Selling Stockholders may, alone or in conjunction with Third Parties, as defined below, sell such shares pursuant to Rule 144 under the Securities Act and/or enter into hedging transactions with respect to such shares, in either case, with the prior written consent of Sprint, which consent shall not be unreasonably withheld. 4 (B) The Selling Stockholders may at any time until December 31, 2001, acting alone or together, transfer Sprint securities to one or a limited number of special purpose vehicles or other financial intermediaries or financial institutions for the benefit of FT or DT (collectively "Third Parties"), which would agree to be bound by the provisions of Sections 8, this Section 5(a)(ii) hereof (in the case of Third Parties that hold PCS Stock) and Section 5(b)(i) hereof (in the case of Third Parties that hold FON Stock), except that Third Parties may borrow against those Sprint securities or use such Sprint securities as collateral, or engage in swap or hedging transactions with any of the Selling Stockholders, but not involving other third parties, to transfer the risk of ownership of such securities to such Selling Stockholder (by way of clarification, a Third Party, as a result of being so bound, would not be permitted to sell short or engage in any transaction that is the equivalent of a sale with any party other than the Selling Stockholders, without Sprint's consent). Third Parties, to the extent permitted by Section 5(a)(ii) and Section 5(b)(i) hereof, would be permitted to transfer, sell, monetize, hedge or otherwise dispose of (A) FON Stock, immediately following the FON Offering or any abandonment thereof (subject to Section 5(b)(i) hereof) if any FON Stock remains unsold after the FON Offering, (B) PCS Stock, beginning on the Lockup Termination Date, and (C) FON Stock and PCS Stock at any time upon obtaining Sprint's prior written consent; such consent not to be unreasonably withheld. If Selling Stockholders elect to cause the Third Parties to make a public sale of Sprint securities, then the Selling Stockholders will be permitted to exercise their rights under the Registration Rights Agreement for the benefit of the Third Parties, and, if all or substantially all of the PCS Stock or FON Stock, as applicable, held by the Selling Stockholders and their subsidiaries are offered in such public sale, including for this purpose shares that are offered to cover underwriter over-allotments, then such rights under Section 1.3(j) of the Registration Rights Agreement shall be deemed to include the rights set forth in Section 7 hereof as to such sale. Any (x) Third Party that is a special purpose subsidiary of a Selling Stockholder and (y) Third Party that acquires Sprint securities from the Selling Stockholders with more than five percent of the Voting Power of Sprint would agree to be bound by the Standstill Agreement and Section 2.4 of the Stockholders' Agreement, to the same extent as the relevant Selling Stockholder. (C) In a manner not prohibited by the Standstill Agreement, the Selling Stockholders may at any time, acting alone or together, transfer Sprint securities by tendering their shares into a bona fide tender offer or exchange offer made to all holders of Sprint securities which does not involve a violation of the Standstill Agreement. (b) Amendments to Registration Rights Agreement. (i) Amendment to Section 1.5(c)(i). Effective as of the date hereof, Section 1.5(c)(i) of the Registration Rights Agreement is hereby amended by substituting the following in replacement thereof: 5 "During the ten days before and the 90 days after any underwritten registration pursuant to Section 1.1 or 1.2 with respect to which a holder of Eligible Securities has a right to participate has become effective, such holder of Eligible Securities agrees by becoming a holder of such Eligible Securities not to effect any public sale or distribution of shares of the same class of equity securities of the Company offered in such underwritten registration, or any securities convertible into or exchangeable or exercisable for shares of such class of equity securities, including a sale pursuant to Rule 144 under the Securities Act (or any similar provision then in force), except as part of such underwritten registration." (ii) Amendment to Section 1.5(c)(ii). Effective as of the date hereof, Section 1.5(c)(ii) of the Registration Rights Agreement is hereby amended by deleting the following clause: "The Company agrees not to effect any public sale or distribution of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the ten days before and the 90 days after any underwritten registration pursuant to Section 1.1 or 1.2 has become effective" and by replacing such clause with the following: "During the ten days before and the 90 days after any underwritten registration pursuant to Section 1.1 or 1.2 has become effective, the Company agrees not to effect any public sale or distribution of shares of the same class of equity securities offered in such underwritten registration, or securities convertible into or exchangeable or exercisable for shares of such class of equity securities" (iii) Amendment to Section 1.3(a). Effective as of the date hereof, Section 1.3(a) of the Registration Rights Agreement shall be amended such that after the words " ...before filing such registration statement or any amendments thereto," the following parenthetical shall be inserted: "(for purposes of this subsection, amendments shall not be deemed to include any filing that the Company is required to make pursuant to the Exchange Act)". Section 6. Managing Underwriters. (a) Selection of Managing Underwriters. Goldman Sachs, Morgan Stanley Dean Witter and UBS Warburg LLC shall act as the book running managing underwriters for the FON Offering (each an "Underwriter," and collectively, the "Managing Underwriters"). (b) Compensation of Managing Underwriters. Any selling commissions, discounts or other compensation to be received by the Managing Underwriters shall be divided equally among the three Managing Underwriters. 6 Section 7. Road Shows. In connection with the FON Offering, as appropriate in light of the size of the FON Offering indicated in the first preliminary prospectus that is printed, Sprint shall provide special assistance to the Underwriters in their selling efforts, including, but not limited to (i) the preparation of "road show" materials and (ii) the participation of certain members of Sprint's management in such "road show." Section 8. Voting Agreement. With respect to each Selling Stockholder, until the earlier of (a) July 15, 2001 and (b) the time at which such Selling Stockholder and its subsidiaries have disposed of all of their shares of capital stock of Sprint, FT, DT and NAB and their subsidiaries hereby irrevocably agree, at any special meeting or any other meeting of stockholders of Sprint, however called, and in any action by written consent of stockholders of Sprint, to vote (or cause to be voted) or execute a written consent as to all shares of capital stock of Sprint held by such party and its subsidiaries (A) as to FT and its subsidiaries, in favor of the adoption or approval or against any proposal relating to the matters set forth on Exhibit A, as indicated on Exhibit A, and in a manner at least as favorable to Sprint ("favorable" meaning in accordance with the recommendation of the Sprint Board of Directors) as for and/or against any other proposal that is voted upon, in proportion to the number of votes cast for and against such proposal by the holders of voting capital stock of Sprint who are not Selling Stockholders or their subsidiaries, and (B) as to DT and NAB and their subsidiaries, in a manner at least as favorable to Sprint ("favorable" meaning as specified in Exhibit A as to proposals relating to the matters on Exhibit A, and in accordance with the recommendation of the Sprint Board of Directors as to other proposals) as for and/or against any proposal that is voted upon, in proportion to the number of votes cast for and against such proposal by the holders of voting capital stock of Sprint other than the Selling Stockholders; provided that this Section 8 shall not affect the right of the Selling Stockholders and their subsidiaries to vote any shares of capital stock of Sprint in their sole discretion as to extraordinary corporate transactions such as a merger, or consolidation, disposition of all or substantially all assets, dissolution or liquidation involving Sprint or an acquisition of all or substantially all of the assets of Sprint. For purposes of this Section 8, the Selling Stockholders and their subsidiaries shall be deemed to have retained any shares of capital stock of Sprint that are owned at the time of a record date for any meeting of Sprint stockholders through the date of the related meeting of Sprint stockholders. Section 9. Miscellaneous. (a) Effect of Registration Rights Agreement. The Registration Rights Agreement shall remain in full force and effect and shall govern as to the FON Offering; provided, however, that this Agreement shall control as to any matter inconsistent with the Registration Rights Agreement; provided, further, that nothing in this Agreement (other than Section 5(b)) shall be deemed to modify the parties' respective rights and duties under the Registration Rights Agreement as to offerings and activities of the Parties other than the FON Offering and the PCS Offering. (b) Additional Parties. Upon the Transfer of any shares of Class A Stock to a Qualified Subsidiary or Qualified Stock Purchaser in accordance with the terms of the 7 Stockholders' Agreement, such Qualified Subsidiary or Qualified Stock Purchaser shall become a party to this Agreement by agreeing in writing to be bound by the terms and conditions of this Agreement. Any transfer to a Third Party permitted by Section 5 shall require a written assumption of the terms of this Agreement by such transferee. (c) Binding Agreement; No Third Party Beneficiaries. This Agreement will be binding upon and inure to the benefit of the Parties and their successors and permitted assigns. Except as set forth herein and by operation of law, no Party may assign or delegate all or any portion of its rights, obligations or liabilities under this Agreement without the prior written consent of each of the other Parties to this Agreement. Nothing expressed or implied herein is intended or shall be construed to confer upon or give to any third party any rights or remedies by virtue hereof. (d) Governing Law; Dispute Resolution; Equitable Relief. (i) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW). (ii) EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS AND AGREES THAT ANY LEGAL ACTION, SUIT OR PROCEEDING AGAINST IT WITH RESPECT TO ITS OBLIGATIONS OR LIABILITIES UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT BY SUCH PARTY ONLY IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OR, IN THE EVENT (BUT ONLY IN THE EVENT) SUCH COURT DOES NOT HAVE SUBJECT MATTER JURISDICTION OVER SUCH ACTION, SUIT OR PROCEEDING, IN THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK CITY, AND EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY ACCEPTS AND SUBMITS TO THE JURISDICTION OF EACH OF THE AFORESAID COURTS IN PERSONAM, WITH RESPECT TO ANY SUCH ACTION, SUIT OR PROCEEDING. EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A JURY TRIAL IN ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. EACH OF SELLING STOCKHOLDERS HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM (IN SUCH CAPACITY, THE "PROCESS AGENT"), WITH AN OFFICE AT 1633 BROADWAY, NEW YORK, NEW YORK 10019, AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, FOR AND ON ITS BEHALF SERVICE OF PROCESS IN SUCH JURISDICTION IN ANY LEGAL ACTION OR PROCEEDINGS WITH RESPECT TO THIS AGREEMENT, AND SUCH SERVICE SHALL BE DEEMED COMPLETE UPON DELIVERY THEREOF TO THE PROCESS AGENT, PROVIDED THAT IN THE CASE OF ANY SUCH SERVICE UPON THE PROCESS AGENT, THE PARTY EFFECTING SUCH SERVICE SHALL ALSO DELIVER A COPY THEREOF TO EACH OF THE SELLING 8 STOCKHOLDERS IN THE MANNER PROVIDED HEREIN. EACH OF THE SELLING STOCKHOLDERS SHALL TAKE ALL SUCH ACTION AS MAY BE NECESSARY TO CONTINUE SAID APPOINTMENT IN FULL FORCE AND EFFECT OR TO APPOINT ANOTHER AGENT SO THAT EACH OF THE SELLING STOCKHOLDERS WILL AT ALL TIMES HAVE AN AGENT FOR SERVICE OF PROCESS FOR THE ABOVE PURPOSES IN NEW YORK, NEW YORK. IN THE EVENT OF THE TRANSFER OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS AND BUSINESS OF THE PROCESS AGENT TO ANY OTHER CORPORATION BY CONSOLIDATION, MERGER, SALE OF ASSETS OR OTHERWISE, SUCH OTHER CORPORATION SHALL BE SUBSTITUTED HEREUNDER FOR THE PROCESS AGENT WITH THE SAME EFFECT AS IF NAMED HEREIN IN PLACE OF CT CORPORATION SYSTEM. EACH OF THE SELLING STOCKHOLDERS FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED AIRMAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS SET FORTH IN THIS AGREEMENT, SUCH SERVICE OF PROCESS TO BE EFFECTIVE UPON ACKNOWLEDGMENT OF RECEIPT OF SUCH REGISTERED MAIL. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. EACH OF THE SELLING STOCKHOLDERS EXPRESSLY ACKNOWLEDGES THAT THE FOREGOING WAIVER IS INTENDED TO BE IRREVOCABLE UNDER THE LAWS OF THE STATE OF NEW YORK AND OF THE UNITED STATES OF AMERICA. (iii) EACH PARTY HERETO AGREES THAT MONEY DAMAGES WOULD NOT BE A SUFFICIENT REMEDY FOR THE OTHER PARTIES HERETO FOR ANY BREACH OF THIS AGREEMENT BY IT, AND THAT IN ADDITION TO ALL OTHER REMEDIES THE OTHER PARTIES HERETO MAY HAVE, THEY SHALL BE ENTITLED TO SPECIFIC PERFORMANCE AND TO INJUNCTIVE OR OTHER EQUITABLE RELIEF AS A REMEDY FOR ANY SUCH BREACH TO THE EXTENT PERMITTED BY APPLICABLE LAW. EACH PARTY HERETO AGREES, TO THE EXTENT PERMITTED BY LAW, NOT TO OPPOSE THE GRANTING OF SUCH RELIEF IN THE EVENT A COURT DETERMINES SUCH A BREACH HAS OCCURRED, AND TO WAIVE ANY REQUIREMENT FOR THE SECURING OR POSTING OF ANY BOND IN CONNECTION WITH SUCH REMEDY. (e) Severability. The invalidity or unenforceability of any provision hereof in any jurisdiction will not affect the validity or enforceability of the remainder hereof in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. To the extent permitted by applicable law, each party hereto waives any provision of law that renders any provision hereof prohibited or unenforceable in any respect. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such 9 determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. (f) Headings; Counterparts. The headings in this Agreement are for convenience of reference only and will not affect the construction of any provisions hereof. This Agreement may be executed in one or more counterparts, each of which when so executed and delivered will be deemed an original but all of which will constitute one and the same Agreement. (g) Waiver of Immunity. Each of the Selling Stockholders agrees that, to the extent that it or any of its property is or becomes entitled at any time to any immunity on the grounds of sovereignty or otherwise based upon its status as an agency or instrumentality of government from any legal action, suit or proceeding or from set off or counterclaim relating to this Agreement from the jurisdiction of any competent court, from service of process, from attachment prior to judgment, from attachment in aid of execution of a judgment, from execution pursuant to a judgment or an arbitral award or from any other legal process in any jurisdiction, it, for itself and its property expressly, irrevocably and unconditionally waives, and agrees not to plead or claim, any such immunity with respect to such matters arising with respect to this Agreement or the subject matter hereof or thereof (including any obligation for the payment of money). Each of the Selling Stockholders agrees that the waiver in this provision is irrevocable and is not subject to withdrawal in any jurisdiction or under any statute, including the Foreign Sovereign Immunities Act, 28 U.S.C. P. 1602 et seq. The foregoing waiver shall constitute a present waiver of immunity at any time any action is initiated against the Selling Stockholders with respect to this Agreement. (h) Waivers and Consents. Any Party to this Agreement may (i) extend the time for the performance of any of the obligations or other acts of the other Parties, or (ii) waive compliance with any of the agreements or conditions of the other Parties contained herein. Any such extension or waiver shall be valid only if set forth in writing signed by the Party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition, of this Agreement. The failure of any Party to assert any of its rights hereunder shall not constitute a waiver of any of such rights. Waivers or consents by the Selling Stockholders pursuant to this Agreement shall be effective if granted by Selling Stockholders holding at least a majority of the shares to be registered for sale in the FON Offering. (i) Expenses. Except as may otherwise be specified in this Agreement or the Registration Rights Agreement, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such costs and expenses. (j) Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing, in English, and shall be given or made by delivery in person, by courier service, by telecopy, by e-mail or by registered or certified mail (postage prepaid, return 10 receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section): (i) If to FT: 6 place d'Alleray 75505 Paris Cedex 15 France Telephone: 33-1-44-44-01-59 Telecopy: 33-1-44-44-01-75 Attention: Senior Executive Vice President and Chief Financial Officer (e-mail: jeanlouis.vinciguerra@francetelecom.com) with copies (which shall not constitute notice to FT) to: 6 place d'Alleray 75505 Paris Cedex 15 France Telephone: 33-1-44-44-84-76 Telecopy: 33-1-44-44-02-13 Attention: Chief Legal and Tax Officer (e-mail: emmanuel.guillaume@francetelecom.com) and Shearman & Sterling 599 Lexington Avenue New York, New York 10022 U.S.A. Telephone: 1 (212) 848-7058 Telecopy: 1 (212) 848-4051 Attention: Alfred J. Ross, Esq. (e-mail: aross@shearman.com) (ii) If to DT and NAB: Friedrich-Ebert-Allee 140 D-53113 Bonn Germany Telephone: 49-228-181-4000 Telecopy: 49-228-181-8602 Attention: Jeffrey Hedberg (e-mail: hedberg@telekom.de) 11 with a copy (which shall not constitute notice to DT and NAB) to: Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York 10006 U.S.A. Telephone: 1 (212) 225-2670 Telecopy: 1 (212) 225-3999 Attention: Robert P. Davis, Esq. (e-mail: rdavis@cgsh.com) (iii) If to Sprint: 2330 Shawnee Mission Parkway, East Wing Westwood, Kansas 66205 U.S.A. Telephone: 1 (913) 624-8440 Telecopy: 1 (913) 624-8426 Attention: General Counsel (e-mail: Richard.Devlin@mail.sprint.com) and King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 U.S.A. Telephone: 1 (404) 572-4600 Telecopy: 1 (404) 572-5100 Attention: Bruce N. Hawthorne, Esq. (e-mail: bhawthorne@kslaw.com) All such notices shall be deemed to have been duly given or made upon receipt; provided, however, that a notice sent via telecopy or e-mail shall only be deemed to have been duly given or made on the date that the sender thereof confirms it via courier service or by registered or certified mail (return receipt requested). (l) Entire Agreement. This Agreement, together with, subject to Section 9(a) hereof, the Registration Rights Agreement, constitute the entire agreement of the Parties with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, among the Parties with respect to the subject matter hereof and thereof. (m) Amendment. This Agreement may not be amended or modified except by an instrument in writing signed by the Parties. 12 (n) No Partnership. Nothing in this Agreement shall authorize any Party to act as an agent or representative of any of the others (or any of them) or to authorize any such Party to assume or create an obligation on behalf of the other (or others), except as expressly provided in this Agreement. (o) Terms Generally. Whenever the context may require, any pronoun includes the corresponding masculine, feminine and neuter forms. Any term defined by reference to any agreement, instrument or document has the meaning assigned to it whether or not such agreement, instrument or document is in effect. The words "include", "includes" and "including" are deemed to be followed by the phrase "without limitation". Unless the context otherwise requires, any agreement, instrument or other document defined or referred to herein refers to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified from time to time. Unless the context otherwise requires, references herein to any Party include its successors and assigns. 13 IN WITNESS WHEREOF, the parties have caused this Offering Process Agreement to be executed and delivered as of the date first above written. SPRINT CORPORATION By: /s/ Dennis C. Piper Name: Dennis C. Piper Title: Vice President FRANCE TELECOM By: /s/ Jean Louis Vinciguerra Name: Jean Louis Vinciguerra Title: Senior Executive Vice President and Chief Financial Officer DEUTSCHE TELEKOM AG By: /s/ Karl-Gerhard Eick Name: Karl-Gerhard Eick Title: Chief Financial Officer NAB NORDAMERIKA BETEILIGUNGS HOLDING GmbH By: /s/ Joachim Peckert Name: Dr. Joachim Peckert Title: Managing Director By: /s/ Heinz Klesing Name: Mr. Heinz Klesing Title: Managing Director 14 EX-10.(G) 3 0003.txt 1990 STOCK OPTION PLAN, AS AMENDED Exhibit (10)(g) Sprint Corporation 1990 Stock Option Plan Adopted as a Stock Option Plan under the 1997 Sprint Corporation Long-Term Stock Incentive Program As Amended and Restated by the Board Effective February 13, 2001 Table of Contents 1 Establishment.......................................... 1 2 Defined Terms.......................................... 1 3 Purpose................................................ 1 4 Administration......................................... 1 4.01 Interpretation of the Plan.......................... 1 4.02 Abstention in Certain Cases by Committee Members.... 2 5 Number of Shares Authorized to be Issued............... 2 6 Grant of Options....................................... 3 6.01 Eligibility for Grants.............................. 3 6.02 Committee Grants.................................... 3 6.03 Interim Grants...................................... 3 6.04 Limitation on Discretion of Committee and Authorized Officers................................. 4 7 Terms of Options....................................... 4 7.01 Standard Terms of Options........................... 4 7.02 Mandatory Terms of Incentive Stock Options.......... 7 7.03 Standard Terms of Incentive Stock Options........... 8 7.04 Stock Option Agreement.............................. 8 8 Exercise of Options.................................... 8 8.01 Notice of Exercise.................................. 8 8.02 Form of Payment of Exercise Price................... 9 9 Withholding of Payroll Taxes on Exercise............... 10 9.01 Obligation to Pay Payroll Taxes..................... 10 9.02 Amount to Be Withheld............................... 10 9.03 Eligibility to Elect Stock Withholding.............. 10 9.04 Manner of Withholding............................... 10 10 Issuance of Shares on Exercise........................ 11 10.01 Generally.......................................... 11 10.02 Elective Issuance of Restricted Shares............. 11 10.03 Issuance of Restricted Shares Not Available to Transferred Options................................ 12 10.04 Terms of Restricted Shares Issued on Exercise...... 12 i 11 Reload Rights......................................... 14 11.01 Grant of Reload Rights on Outstanding Non-Qualified Options.............................. 14 11.02 Terms of Reload Options............................ 14 11.03 Variant Reload Rights.............................. 15 12 Change in Stock, Adjustments, Etc. ................... 15 13 Amendment and Termination............................. 16 14 Effective Date and Duration of the Plan............... 16 15 Definitions........................................... 16 15.01 1989 Program....................................... 16 15.02 1997 Program....................................... 16 15.03 Affiliate.......................................... 16 15.04 Authorized Officer................................. 16 15.05 Board.............................................. 16 15.06 Change in Control.................................. 16 15.07 Code............................................... 17 15.08 Code Section....................................... 17 15.09 Committee.......................................... 17 15.10 Common Stock....................................... 17 15.11 Company............................................ 17 15.12 Corporate Secretary................................ 17 15.13 Director........................................... 17 15.14 Employee........................................... 18 15.15 Equity Security.................................... 18 15.16 Exchange Act....................................... 18 15.17 Exchange Act Section 16............................ 18 15.18 Executive Officer.................................. 18 15.19 Exercise Date...................................... 18 15.20 Exercise Price..................................... 18 15.21 Expiration Date.................................... 18 15.22 Fair Market Value.................................. 18 15.23 FON Stock.......................................... 18 15.24 Foreign Reload Option.............................. 18 15.25 Grant Date......................................... 18 15.26 Grantee............................................ 19 15.27 Incentive Stock Option............................. 19 15.28 Minimum Withholding Amount......................... 19 15.29 Non-Qualified Option............................... 19 15.30 Normal Retirement.................................. 19 ii 15.31 Notice of Exercise................................. 19 15.32 Option............................................. 19 15.33 Option Class....................................... 19 15.34 Optionee........................................... 19 15.35 Payroll Tax........................................ 19 15.36 Payroll Taxpayer................................... 20 15.37 PCS Stock.......................................... 20 15.38 Permitted Disposition.............................. 20 15.39 Person............................................. 20 15.40 Program Adoption Date.............................. 20 15.41 Plan............................................... 20 15.42 Qualified Transferee............................... 20 15.43 Qualified Trust.................................... 20 15.44 Reload Option...................................... 20 15.45 Restricted Shares.................................. 20 15.46 Retirement......................................... 20 15.47 Seasoned Shares.................................... 21 15.48 Securities Act..................................... 21 15.49 Strike Price....................................... 21 15.50 Subsidiary......................................... 21 15.51 Tax Date........................................... 21 15.52 Termination Date................................... 21 15.53 Termination for Cause.............................. 21 15.54 Total Disability................................... 22 15.55 Underlying Option.................................. 22 15.56 Vesting Period..................................... 22 15.57 Withholding Amount................................. 22 iii Article 1 Establishment Pursuant to the 1989 Program the Company established a stock option plan named the 1990 Stock Option Plan (the "Plan") for officers and key employees of the Company and its subsidiaries. The 1989 Program has been replaced by the 1997 Program, and this Plan is now established pursuant to the 1997 Program. Article 2 Defined Terms Capitalized words used throughout this Plan have the meanings assigned to them parenthetically throughout the Plan or in Article 15. Article 3 Purpose The purposes of the Plan are to induce officers and key employees of the Company or its Subsidiaries who are in a position to contribute materially to the Company's prosperity to remain with the Company or its Subsidiaries, to offer them incentives and rewards in recognition of their share in the Company's progress, to encourage them to continue to promote the best interests of the Company and its stockholders, and to allow the Company and its Subsidiaries to successfully compete with other enterprises in the recruitment of new officers and key employees. Article 4 Administration The Committee shall administer the Plan as set forth in this Section. 4.01. Interpretation of the Plan. The Committee may from time to time adopt, and thereafter amend or rescind, such rules and regulations for carrying out the Plan and take such action in the administration of the Plan, not inconsistent with the provisions of the Plan and the 1997 Program, as it considers proper. The interpretation and construction of any provisions of the Plan by the Committee shall be final. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. The Corporate Secretary shall have the discretion and authority to establish any and all procedures, forms, and rules of a ministerial nature that the Corporate Secretary considers necessary or desirable for the orderly administration of the Plan and shall have other administrative responsibilities as set forth elsewhere in this Plan. The Committee may designate one or more Employees to hear and resolve disputes arising under the Plan. 1 4.02. Abstention in Certain Cases by Committee Members. If any Committee member's participation in an action to approve the acquisition or disposition of an Equity Security by an Executive Officer would prevent the Executive Officer's acquisition or disposition of the Equity Security from being exempt from the liability provisions of Exchange Act Section 16, the member shall abstain from voting on the transaction if doing so would cause the acquisition or disposition to be exempt. Article 5 Number of Shares Authorized to be Issued The number of shares of Common Stock that may be issued upon exercise of Options granted under the Plan may not exceed 95,500,000 shares of FON Stock or 78,000,000 shares of PCS Stock, subject to adjustment as provided in Article 12 hereof. The shares issued under the Plan may be either treasury shares or authorized but unissued shares. The number of shares of Common Stock that may be issued upon exercise of Options granted pursuant to this Plan after April 15, 1997, together with shares of Common Stock subject to other awards under the 1997 Program, may not exceed the limits set forth in Section 4(a) of the 1997 Program. The number of shares of Common Stock that may be issued upon exercise of Incentive Stock Options granted pursuant to this Plan after April 15, 1997, may not exceed 8,000,000 shares of FON Stock or 4,000,000 shares of PCS Stock. The shares of Common Stock allocable to the unexercised portion of any Option that for any reason is forfeited, canceled, expired or is otherwise terminated may again be subject to an Option under the Plan. 2 Article 6 Grant of Options 6.01. Eligibility for Grants. The Committee or an Authorized Officer may grant Options under this Plan to any Grantee who is a Director or Employee of the Company or a Subsidiary of the Company on the Grant Date of the Option and to whom the granting of Options and the exercise thereof would not be in violation of the laws of the jurisdiction, foreign or domestic, having legal authority over the issuance of Options to, or the exercise thereof by, Directors or Employees working or residing in such jurisdiction. No Incentive Stock Option may be granted to any Grantee who owns directly or indirectly shares of Common Stock or options to purchase shares of Common Stock, together possessing more than 10% of the total combined voting power or value of all classes of stock of the Company or any of its Subsidiaries. 6.02. Committee Grants. The Committee shall determine which Directors or Employees among those eligible shall be granted Options and, with respect to each Option, shall specify the Option Class and number of shares of Common Stock subject to the Option. The Committee may designate Grantees, the Option Class, and the number of shares subject to each Option by any objectively determinable description. The Committee may also specify the Grant Date of the Option, the Strike Price, the Expiration Date of the Option, the rate at which the Option may be exercised, and such other terms of the Option as the Committee may consider appropriate. In making its determinations, the Committee shall take into consideration the value of the services rendered by the Grantees, their present and potential contribution to the success of the Company and its Subsidiaries, and such other factors the Committee may consider relevant in accomplishing the purposes of the Plan. 6.03. Interim Grants. Between meetings of the Committee, any of the Authorized Officers may grant an Option to any eligible Employee other than a Director or an Executive Officer. The number of shares subject to Options granted pursuant to this Section 6.03 may not exceed a total of 20,000 shares of all Classes of Common Stock for any single Grantee between any two meetings of the Committee. An Authorized Officer may make interim grants of Options in excess of 20,000 shares with the written concurrence of the chairman of the Committee on or before the Grant Date. In making such grants, the Authorized Officer shall specify in a writing, executed by the Authorized Officer (and the chairman of the Committee, if the number of shares subject to the Option are in excess of 20,000) and setting forth the actual date of execution, which Employees among those eligible shall be granted Options and, with respect to each Option, shall specify the Option Class and number of shares of Common Stock subject to the Option. The Authorized Officer may designate Grantees, the Option Class, and the number of shares subject to each Option by any objectively determinable description. The Authorized Officer may also specify the Grant Date of the Option, the Strike Price, the Expiration Date of the Option, the rate at which the Option 3 may be exercised, and such other terms of the Option as the Authorized Officer may consider appropriate. In making its determinations, the Authorized Officer shall take into consideration the value of the services rendered by the Grantees, their present and potential contribution to the success of the Company and its Subsidiaries, and such other factors the Authorized Officer may consider relevant in accomplishing the purposes of the Plan. The Authorized Officer shall report to the Committee the Grantees and terms of all Options granted pursuant to this Section 6.03 at the next meeting of the Committee following such grants. 6.04. Limitation on Discretion of Committee and Authorized Officers. Neither the Committee nor the Authorized Officer may (i) set the Grant Date of any Option to any date earlier than the date of the action granting the Option; (ii) establish the Strike Price of any Option at a price lower than the greater of (a) the Fair Market Value of one share of the Option Class of Common Stock on the Grant Date of the Option or (b) the par value on the Grant Date of the Option Class of the Common Stock; or (iii) subject more than 6,000,000 shares to Options in the FON Stock Option Class nor more than 3,000,000 shares to Options in the PCS Stock Option Class granted to any single Director or Employee in any calendar year. For purposes of clause (iii), shares subject to Options granted puruant to the last sentence of Section 4(a) of the 1997 Program shall be counted in the year the Option is granted, rather than the year in which shares become first available for issuance. Article 7 Terms of Options 7.01. Standard Terms of Options. Unless the Committee or Authorized Officer specifies otherwise, the terms set forth in this Section 7.01 shall apply to all Options granted under this Plan. Any Stock Option Agreement that incorporates the terms of the Plan by reference shall be deemed to have incorporated the terms set forth in this Section 7.01 to the extent that these terms are not in conflict with those explicitly set forth in the Stock Option Agreement. (a) Non-Qualified Options. Each Option shall be a Non-Qualified Option. (b) Grant Date. The Grant Date of each Option shall be the date of the Committee's or Authorized Officer's action granting the Option. (c) Strike Price. The Strike Price of each Option shall be the Fair Market Value of one share of the Option Class of Common Stock on the Grant Date. (d) Expiration Date. The Expiration Date of each Option shall be the close of business on the tenth anniversary of the Option's Grant Date. The Option shall not be exercisable after its Expiration Date. (e) Rate of Exercisability. Each Option shall become exercisable with respect to 25% of the number of shares of the Option Class of Common Stock subject to the Option on each of the first four anniversaries of the Grant Date 4 if, on such anniversary date, the Grantee shall have been continuously employed by or served as a Director of the Company, a Subsidiary of the Company, or an Affiliate from the Grant Date. (f) Reload Rights. Each Non-Qualified Option, other than Options granted pursuant to Reload Rights, shall be granted with Reload Rights. (g) Limitations on Transfer. No Option may, during the lifetime of the Grantee, be transferred, levied, garnished, executed upon, subjected to a security interest, or assigned to any person other than the Grantee, except that a Grantee may transfer an Option to a Qualified Transferee if the transfer is made without payment of consideration being paid to the Grantee. Documents evidencing the transfer of any Option and the identity of the Qualified Transferee shall be in such form as may be required by the Corporate Secretary. No such Qualified Transferee may dispose of shares issued upon exercise of an Option, other than to the Company, until such shares are validly registered or, in the opinion of the Corporate Secretary, exempt from registration under the Securities Act. (h) Post-Employment Exercise of Options. Each Option may be exercised after the Grantee's Termination Date only with respect to the number of shares of Common Stock that were exercisable on the Grantee's Termination Date. An Optionee may exercise an Option before its Expiration Date with respect to those shares during a limited period beginning on the Grantee's Termination Date and ending (i) on the fifth anniversary of the Grantee's Termination Date, if the Grantee's service as Director or employment terminated by reason of his Retirement or Total Disability; (ii) on the first anniversary of the Grantee's Termination Date if the Grantee's employment or service as Director terminated by reason of his death; (iii) on the day three months following the Grantee's Termination Date if the Grantee terminated his employment or service as Director voluntarily, for a reason other than Retirement, or involuntarily for a reason not constituting Termination for Cause. If a Grantee's employment has been Terminated for Cause, the Optionee shall forfeit all outstanding Options immediately on the Grantee's Termination Date. An Option granted pursuant to the last sentence of Section 4(a) of the 1997 Program that was not exercisable on the Grantee's Termination Date solely because the number of shares covered by the Option exceeded the number of shares available for issuance may be exercised during the period described above to the extent that shares become available for issuance during such period. (i) Acceleration on Termination of Employment for Certain Reasons. (1) Death or Total Disability. Each Option shall become exercisable immediately on the Grantee's Termination Date if the reason for termination was the Grantee's death or Total Disability. (2) Normal Retirement. Each Option shall become exercisable immediately on the Grantee's Termination Date if (i) the reason for termination was the Grantee's Normal Retirement and (ii) the Option's Grant 5 Date was, except in the case of Normal Retirement for non-Employee Directors, at least one year before the Grantee's Termination Date. (j) Acceleration on Change in Control. (1) Acceleration. Each Option shall become immediately exercisable in full upon a Change in Control if (i) the Change in Control occurs at least one year after the Option's Grant Date and (ii) the Grantee of the Option has been a Director, Employee, or an employee of an Affiliate continuously from the Option's Grant Date to the date of the Change in Control. (2) Limitation on Acceleration. If the acceleration of exercisability under Section 7.01(j)(1), together with all other payments or benefits contingent on the Change in Control with the meaning of Code Section 280G, results in any portion of such payments or benefits not being deductible by the Company as a result of the application of Code Section 280G, the benefits shall be reduced until the entire amount of the benefits is deductible. The reduction shall be effected by the exclusion of grants of options or portions thereof in reverse chronological order of their respective Grant Dates from the application of Section 7.01(j)(1) until no portion of such benefits is rendered non-deductible by application of Code Section 280G. (k) Exercise After Death of Optionee. Upon the death of an Optionee, all Options held by the Optionee on the Optionee's date of death, to the extent exercisable under their terms, may be exercised by (i) the executor or administrator of the Optionee's estate, (ii) the Person or Persons to whom the Optionee's rights under the Options pass by the Optionee's will or the laws of descent and distribution, or (iii) the beneficiary or beneficiaries designated by the Optionee in accordance with Section 7.01(l). (l) Designation of Beneficiaries. An Optionee may designate a beneficiary or beneficiaries to exercise unexpired Options and to own shares issued upon any such exercise after the Optionee's death without order of any probate court or otherwise. A beneficiary so designated may exercise an Option upon presentation to the Company of evidence satisfactory to the Corporate Secretary of the beneficiary's identity and the death of the Optionee. An Optionee may change any beneficiary designation at any time before his death but may not do so by testamentary designation in his will or otherwise. Beneficiary designations must be made in writing on a form provided by the Corporate Secretary. Beneficiary designations shall become effective on the date that the form, properly completed, signed, and notarized, is received by the Corporate Secretary. Any designation of a beneficiary by an Optionee with respect to any Option shall be canceled upon the transfer of such Option by the Optionee in accordance with the terms of the Plan. (m) Agreement to Remain Employed. Each Grantee other than Directors shall, 6 as consideration for the grant of each Option, agree in the Stock Option Agreement to remain in the employ of the Company, its Subsidiaries, or an Affiliate at the pleasure of the Company, such Subsidiary, or Affiliate for at least one year from the Option's Grant Date or the earlier termination of the Grantee's employment effected or approved by the Company, the Subsidiary, or Affiliate. If the Grantee violates the agreement, the Optionee shall forfeit the Option. Nothing contained in the Plan or in any Option granted pursuant to the Plan shall confer upon any Grantee any right to continue employment with the Company, its Subsidiaries, or Affiliates nor interfere in any way with the right of the Company, its Subsidiaries, or Affiliates to terminate the Grantee's employment or change the Grantee's compensation at any time. (n) Forfeiture Upon Conflict of Interest. If any Grantee, without the consent of the Committee, becomes associated with, employed by, renders services to, or owns any significant interest in any business that is in competition with the Company, its Subsidiaries, or Affiliates, any outstanding Option granted to such Grantee shall be forfeited. (o) Exercise Subject to Available Shares. No Option shall be exercisable unless, on the Exercise Date, there are sufficient shares available under the Plan and the 1997 Program to allow for the issuance of shares pursuant to the Exercise. At any time when sufficient shares are not available, all Exercises of Options granted under the authority of the last sentence of Section 4(a) of the 1997 Program shall be suspended, and the term of any Options that would otherwise expire during the term of any such suspension shall be extended by the amount of time during which the suspension was in effect. 7.02. Mandatory Terms of Incentive Stock Options. If the Committee or Authorized Officer specifies that an Option is an Incentive Stock Option, the terms set forth in this Section 7.02 shall be incorporated into the terms of the Option in preference to any conflicting terms set forth in Section 7.01. If the Stock Option Agreement setting forth the terms of any Option contradict the terms set forth in this Section 7.02, such Option shall be treated as a Non-Qualified Stock Option, notwithstanding its designation as an Incentive Stock Option. (a) Grant Date within 10 Years of Program Adoption. No Incentive Stock Option may be granted under the Plan after the tenth anniversary of the Program Adoption Date. (b) Limitation on Option Term. No Incentive Stock Option may be exercised after the tenth anniversary of its Grant Date. (c) Strike Price. No Incentive Stock Option may have a Strike Price less than the Fair Market Value of one share of the Option Class of Common Stock on the Grant Date of the Incentive Stock Option. (d) Non-Transferability. No Incentive Stock Option may be transferred by the Grantee except by the Grantee's will or the laws of descent and distribution. An Incentive Stock Option may be exercised during the Grantee's lifetime only by the Grantee, and after the Grantee's death only by a ben- 7 eficiary designated by the Grantee pursuant to the terms of the Plan, or otherwise by the executor or administrator of the Grantee's estate or the Person succeeding to the Grantee's interest in the Incentive Stock Option under the Grantee's will or the applicable laws of intestacy. 7.03. Standard Terms of Incentive Stock Options. Unless the Committee or Authorized Officer specifies otherwise in the action granting the Option, the following terms shall apply to all Incentive Stock Options granted under the Plan. To the extent the terms set forth in this Section 7.03 conflict with the standard terms applicable to Options generally set forth in Section 7.01, the terms of this section shall control the terms of any Options designated as Incentive Stock Options at the time of grant. (a) Maximum Rate of Exercisability. The Fair Market Value on the Grant Date of the shares of Common Stock subject to any Incentive Stock Option with respect to which the Incentive Stock Option becomes exercisable for the first time during any calendar year, together with the Fair Market Value of shares of Common Stock subject to other Incentive Stock Options on their respective Grant Dates owned by the Optionee under all plans of the Company and its Subsidiaries and first becoming exercisable in the same calendar year, shall not exceed $100,000 or, if different, the maximum limitation in effect under Code Section 422 for Incentive Stock Options on the Grant Date of such Incentive Stock Option. To the extent the terms of the Option permit the exercise of an Option for more shares than permitted by this Section 7.03(a), each Option or portion of an Option, in reverse chronological order of their Grant Dates, shall be treated as Non-Qualified Options until the remaining Options or portions of Options meet the limitations set forth in this Section 7.03(a). (b) Post-Termination Exercise. Any Incentive Stock Option exercised after the end of the 12-month period beginning on the Grantee's Termination Date shall, to that extent, be treated as a Non-Qualified Option. 7.04. Stock Option Agreement. The terms of each Option shall be set forth in a Stock Option Agreement executed by the Company and the Grantee. The Stock Option Agreement must set forth those terms that are not made standard terms of the Option pursuant to this Plan. Article 8 Exercise of Options 8.01. Notice of Exercise. An Optionee may exercise his Option to purchase shares of Common Stock by written notice to the Corporate Secretary (i) unambiguously identifying the Option that he is exercising; (ii) stating the number of shares with respect to which he is exercising the Option; (iii) accompanied by payment of the Exercise Price in cash or any other form permitted by Section 8.02; 8 (iv) if the Optionee wants to have the shares issued to be registered jointly with the Optionee's spouse, a statement to that effect; (v) if the Optionee is electing to have any Payroll Tax withholding obligation discharged by delivery of Seasoned Shares or withholding of shares from shares issuable upon the exercise pursuant to Section 9.04, a statement to that effect, and, if the Optionee elects to have more than the required minimum percentage of Payroll Taxes withheld, a statement of the percentage to be withheld, not exceeding, if the Grantee is an Executive Officer, the applicable marginal tax rate; (vi) if the Optionee is electing to receive Restricted Shares pursuant to Section 10.02, a statement of the Vesting Period the Optionee is electing. The Corporate Secretary may dispense with a written Notice of Exercise in the case of certain exercises in which he considers a written Notice of Exercise unnecessary. The Exercise Date shall be the date on which the Notice of Exercise, together with the payment of the Exercise Price, is received by the Corporate Secretary or his designee. The Optionee may not, after the Exercise Date, change the form of payment of the Exercise Price, the election regarding stock withholding, or other aspects of the exercise dependent on the Fair Market Value of the Common Stock. The Corporate Secretary may condition the exercise of an Option on the Optionee's filing with the Company a representation in writing that at the time of such exercise it is the Optionee's then present intent to hold the shares being purchased for investment and not for resale, or on the completion of any registration or other qualification of shares under any state or federal laws or rulings or regulations of any government regulatory body that the Corporate Secretary may determine to be necessary or advisable. 8.02. Form of Payment of Exercise Price. (a) Payment in Cash. Unless the Optionee elects in the Notice of Exercise to make payment in another form authorized by the Plan, payment of the Exercise Price shall be in United States dollars, payable in cash or by check. The Corporate Secretary may establish procedures to delay the processing of any Option exercise until any check delivered in payment of the Exercise Price has cleared, and, if a check fails to clear, cancel the exercise. (b) Payment in Shares of Common Stock. On exercise of any Option, the Optionee may elect in the Notice of Exercise to pay the Exercise Price by surrender of stock certificates in transferable form representing Seasoned Shares of the Option Class having an aggregate Fair Market Value, determined as of the Exercise Date, at least equal to the Exercise Price. (c) Payment by Attestation. In lieu of the delivery of physical certificates, an Optionee may deliver shares in payment of the Exercise Price by attesting, on a form established by the Corporate Secretary, to the ownership, either outright or through ownership of a broker account, of a sufficient number of Seasoned Shares of the Option Class to pay the Exercise Price. The attestation must be notarized and signed by the Optionee and any co-owners with the Optionee of the shares with respect to which the attestation is being made. The form of attestation must be accompanied by any other 9 documentation the Corporate Secretary considers necessary to evidence actual ownership of such shares or otherwise preserve the integrity of the Plan. Shares, the ownership of which is so attested to by the Optionee, shall be deemed to have been re-issued to the Optionee on the Exercise Date in partial satisfaction of the Company's obligation to issue shares of the Option Class of Common Stock pursuant to the Option exercise to which it relates. (d) Fractional Shares. If an Optionee pays the Exercise Price of an Option by delivery or attestation of Seasoned Shares, the Company shall apply to payment of the Exercise Price from the shares delivered or attested the highest number of whole shares having a Fair Market Value on the Exercise Date less than or equal to the Exercise Price, and the Optionee shall be required to pay in cash the Fair Market Value of the fractional share resulting from truncating the number of shares to a whole number of shares. Article 9 Withholding of Payroll Taxes on Exercise 9.01. Obligation to Pay Payroll Taxes. Any Optionee, Grantee, or other Person (the "Payroll Taxpayer") with respect to whom the Company or a Subsidiary of the Company has an obligation under any Payroll Tax law to withhold amounts with respect to income arising from the exercise of any Option must pay to the Company or Subsidiary of the Company the Minimum Withholding Amount. 9.02. Amount to Be Withheld. The Payroll Taxpayer may elect in the Notice of Exercise or on another form specified by the Corporate Secretary for such purpose an amount to be withheld (the "Withholding Amount") with respect to the exercise of any Option. The Withholding Amount must be greater than or equal to the Minimum Withholding Amount and, if the Payroll Taxpayer is an Executive Officer, less than or equal to the Payroll Taxpayer's combined marginal tax rate for all Payroll Taxes. In the absence of such an election, the Withholding Amount shall be the Minimum Withholding Amount. If all amounts withheld in payment of Payroll taxes are reported to the appropriate taxing jurisdiction as amounts withheld from the Payroll Taxpayer, the Company or Subsidiary may, in cases where the Corporate Secretary considers it necessary, set the Withholding Amount to an amount in excess of the Minimum Withholding Amount based on assumptions about the amount required by law to be withheld. 9.03. Eligibility to Elect Stock Withholding. A Payroll Taxpayer may elect to pay all or part of the Withholding Amount in shares of the Option Class of Common Stock if the Optionee pays the Exercise Price by delivering or attesting to ownership of shares of the Option Class of Common Stock pursuant to Sections 8.02(b) or 8.02(c). 9.04. Manner of Withholding. If the Payroll Taxpayer is eligible to satisfy his obligation to pay the Withholding Amount by payment of shares of the Option Class of the Common Stock 10 pursuant to Section 9.03, he may pay the Withholding Amount by one or more of the following methods: (i) delivering Seasoned Shares of the Option Class; or (ii) directing the Company to withhold from those shares that would otherwise be received upon exercise of the Option or upon the vesting of Restricted Shares, shares of the Option Class of the Common Stock having a Fair Market Value on the Tax Date of no more than the Minimum Withholding Amount; or (iii) paying cash to the Company. If the Payroll Taxpayer is not eligible to elect stock withholding, the Withholding Amount must be paid entirely in cash. Any portion of the Withholding Amount that would require withholding or delivery of a fractional share and any portion of the Withholding Amount not paid by the withholding or surrender of Common Stock must be paid in cash. (a) Limit on Use of Unvested Restricted Shares. If the Option exercise resulted in the issuance of Restricted Shares and the Vesting Period with respect to the Restricted Shares has not ended on or before the Tax Date, method (ii) described in Section 9.04 shall not be available as a means of stock withholding. (b) Limit with Respect to Transferred Options. If an Option was transferred by the Grantee or the tax liability resulting from the exercise of the Option is otherwise not imposed on the Optionee, method (ii) described in Section 9.04 shall not be available as a means of stock withholding. Article 10 Issuance of Shares on Exercise 10.01. Generally. No Optionee will be considered a holder of any shares of Common Stock subject to an Option until a stock certificate or certificates for such shares are issued to the Optionee after an exercise of the Option under the terms of the Plan. No Optionee shall be entitled to dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions, or other rights with respect to the shares subject to purchase under the Option unless the record date for any such dividend, distribution, or other right falls on or after the date the Optionee becomes a record holder of such shares. All shares of Common Stock issued pursuant to an exercise of an Option shall be issued in the name of the Optionee, or in the name of the Optionee and the Optionee's spouse, and shall, except as otherwise provided in Article 8, be freely transferable by the registered owners upon issuance. 10.02. Elective Issuance of Restricted Shares. Certain Optionees, as determined by the Committee, may elect to receive Restricted Shares upon the exercise of an Option if the Optionee so states in the Notice of Exercise and has paid the Exercise Price of the Option by attesting to or by delivering shares of unrestricted Common Stock pursuant to Sections 8.02(b) or 8.02(c). 11 If an Optionee elects on exercise of any Option to receive Restricted Shares, the Company shall issue to the Optionee (i) a number of unrestricted shares of the Option Class of Common Stock equal to the number of unrestricted shares the Optionee used to pay the Exercise Price plus (ii) all other shares issuable pursuant to the exercise of the Option as Restricted Shares, having the Vesting Period specified by the Optionee in the Notice of Exercise and otherwise subject to the restrictions on transfer and other terms set forth in Section 10.05. 10.03. Issuance of Restricted Shares Not Available to Transferred Options. Neither the Optionee nor the Grantee of an Option transferred by the Grantee pursuant to the provisions of this Plan may use Restricted Shares in payment of the Exercise Price nor elect to receive Restricted Shares on exercise of the Option. 10.04. Terms of Restricted Shares Issued on Exercise. Subject to the right of the Optionee to elect the length of the Vesting Period applicable to Restricted Shares issued pursuant to an Option exercise under the Plan, all Restricted Shares issued pursuant to the Plan shall be subject to the terms and conditions set forth in this Section 10.05. (a) Restriction on Transfer. An Optionee who receives Restricted Shares may not sell, transfer, assign, pledge or otherwise encumber or dispose of the Restricted Shares until the end of the Vesting Period for such shares, except: (i) the Company receives, before the transfer, a true copy of the trust agreement of the Qualified Trust and an opinion from Optionee's counsel that (1) the trust will be treated as a grantor trust owned by the Optionee under Subchapter J of the Code at all times until the restrictions on such stock lapse or the stock is forfeited under the terms of their grant, (2) the terms of the trust provide that upon the forfeiture of the Restricted Shares under the terms of its grant or the earlier termination of the trust for whatever reason, ownership of the Restricted Shares shall revert to the Optionee or to the Company, (3) the trustee of such trust may not, prior to the lapsing of restrictions on such stock, sell, transfer, assign, pledge, or otherwise encumber or dispose of the Restricted Shares except to the Company or to the Optionee, subject to the restrictions provided for in this Plan, and (4) until the restrictions lapse, the trustee is not authorized to incur liabilities on behalf of the trust, other than to the beneficiaries of the trust; and (ii) the Corporate Secretary, in his discretion, may require the Optionee and the trustee to execute other documents as a precondition to such transfer to insure enforcement of the terms of the Restricted Shares or otherwise. (b) Enforcement of Transfer Restrictions. Unless the Corporate Secretary establishes alternative procedures, certificates representing Restricted Shares shall be registered in the name of the Optionee (or the Qualified Transferee trust in the case of shares transferred to such a trust pursuant to Section 10.05(a)) and shall be held by the Company in escrow, together with 12 a stock power assigning the Restricted Shares back to the Company, to be used only in the event of the forfeiture of any of the Restricted Shares. (c) Vesting Period. When an Optionee elects a Vesting Period to apply to Restricted Shares issued under the Plan, the Optionee shall elect a Vesting Period ending at least six months and no more than ten years after the Exercise Date of the Option with respect to which the Restricted Shares were issued. The Corporate Secretary may establish restrictions on the dates during the year on which Vesting Periods electable pursuant to this Article 10 may end for the convenient administration of Restricted Shares issued under the Plan. At any time on or before the last day of the 13th calendar month that ends on or before the last day of the Vesting Period for any Restricted Shares, the Optionee may elect to extend the Vesting Period on all but not a portion of the Restricted Shares by any multiple of six months. (d) Forfeiture and Vesting of Restricted Shares. (1) Vesting at End of Vesting Period. Any Restricted Shares not forfeited by the end of the Vesting Period shall vest, and the Company shall issue a certificate evidencing the shares to the registered owner thereof promptly after the end of the Vesting Period. (2) Restricted Shares Issued Electively. Unless the Committee determines otherwise, restrictions on Restricted Shares issued at the election of the Optionee under Section 10.02 shall lapse if the Grantee terminates his service or employment at any time before the end of the Vesting Period for the Restricted Shares if (i) the Grantee terminated service or employment by reason of the Grantee's Death or Total Disability, (ii) the Grantee terminated service or employment by reason of the Grantee's Normal Retirement, or (iii) the Grantee's employment was terminated involuntarily other than as a Termination for Cause, in which cases, the Company shall issue a certificate representing the shares to the registered owner thereof; otherwise the Restricted Shares shall be forfeited. (e) Acceleration on Change in Control. Unless the Committee determines otherwise, Restricted Shares issued at the election of the Optionee under Section 10.02 shall vest on a Change in Control if the Change in Control occurs at least one year after the Exercise Date on which the Restricted Shares were issued. (f) Rights of Grantee in Restricted Stock. The registered owner of Restricted Shares shall have the right to vote the shares of stock and to receive dividends or other distributions with respect to the shares. 13 Article 11 Reload Rights 11.01. Grant of Reload Rights on Outstanding Non-Qualified Options. The Committee may grant Reload Rights with respect to any outstanding Non- Qualified Options issued under any stock option plan of the Company, whether originally granted with Reload Rights or not. 11.02. Terms of Reload Options. Any Underlying Option granted Reload Rights shall, unless the Committee specifies other terms at the time the Reload Rights are granted, entitle the Grantee to receive a new Option (a "Reload Option") to purchase shares of the same Option Class as the Underlying Option upon the Optionee's exercise of the Underlying Option by delivery or attestation of shares of Common Stock in payment of the Exercise Price on the terms set forth in this Article 11. (a) Conditions to the Grant of Reload Options. No Reload Option shall be granted on the exercise of the Underlying Option unless (i) a sufficient number of shares remain authorized and not issued or subject to purchase under outstanding Options granted under the Plan; (ii) the Grantee of the Option is a Director or Employee on the Exercise Date of the Underlying Option; (iii) the exercise of the Underlying Option is for the purchase of a number of shares of Common Stock at least equal to the lesser of (a) 25% of the total number of shares subject to purchase under the Underlying Option or (b) 100% of the shares with respect to which the Underlying Option is then exercisable; (iv) the Grant Date of the Reload Option would be at least one year before the Expiration Date of the Underlying Option; and (v) the Fair Market Value of one share of the Underlying Option's Option Class on the Exercise Date is greater than or equal to the Strike Price of the Underlying Option. (b) Number of Shares Subject to Purchase; Grant Date. Each Reload Option shall entitle the Optionee to purchase a number of shares equal to the sum of (i) the number of shares of the Option Class used to pay the Exercise Price of the Underlying Option pursuant to Sections 8.02(b) or 8.02(c) on the Exercise Date and (ii) the number of shares of the Option Class delivered or withheld in payment of the Withholding Amount pursuant to Section 9.04. If the Exercise Date and the Tax Date do not coincide, the Reload Option shall be issued as two separate Options to purchase the number of shares set forth in (i) and (ii) above and having Grant Dates on the Exercise Date and the Tax Date, respectively. (c) Strike Price. Each Reload Option shall have a Strike Price equal to the Fair Market Value of one share of the Option Class of the Common Stock on the Grant Date of the Reload Option. 14 (d) Expiration Date. Each Reload Option shall have the same Expiration Date as the Underlying Option. (e) No Reload Rights. No Reload Option shall have Reload Rights. (f) Rate of Exercisability. Each Reload Option shall become exercisable in full on the first anniversary of the Grant Date of the Reload Option. (g) Forfeiture on Disposition of Shares Acquired in Exercise of Underlying Option. Each Reload Option shall be forfeited if the Optionee disposes of any of the shares issued on exercise of the Underlying Option, except in a Permitted Disposition, before the date six months after the Exercise Date to any Person other than the Company in the payment of Payroll Taxes on exercise of the Underlying Option. (h) Other Terms and Conditions. Except to the extent in conflict with the terms set forth in this Article 11, the terms for Options granted under the Plan as set forth in Section 7.01 shall apply to each Reload Option. (i) Terms of Foreign Reload Options. A Foreign Reload Option shall be subject to the terms and conditions set forth in the plan in which the underlying reload right was granted. 11.03. Variant Reload Rights. Any terms of Reload Rights or Reload Options different from those set forth in this Article 11 must be set forth in the Stock Option Agreement for the Underlying Option. Article 12 Change in Stock, Adjustments, Etc If the outstanding Common Stock of the Company is increased or decreased or changed into or exchanged for a different number of shares or kind of shares or other securities of the Company or of another Person by reason of a reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or a dividend payable in capital stock (including a spinoff), or otherwise, the Committee shall make an appropriate adjustment to the number and kind of shares for the purchase of which Options may be granted under the Plan including the maximum number that may be granted to any one person. In addition, the Committee shall make appropriate adjustment to the number and kind of shares as to which outstanding Options, or portions thereof then unexercised, shall be exercisable and to the Strike Price of the Options. Each such adjustment to outstanding Incentive Stock Options shall be made in such a manner as not to constitute a modification as defined in Code Section 424. If any outstanding Options are subject to any conditions affected by the event, the Committee shall also make appropriate adjustments to such conditions. Any such adjustments made by the Committee shall be conclusive. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate, or to sell or transfer all or any part of its business or assets. 15 Article 13 Amendment and Termination The Board may at any time amend or terminate the Plan as it considers advisable and in the best interests of the Company, but no such termination or amendment may (i) without the consent of the Optionee, adversely affect or impair the rights of the Optionee under any outstanding Option; or (ii) be inconsistent with the provisions of the 1997 Program. Article 14 Effective Date and Duration of the Plan This Plan was initially effective as of February 17, 1990, and was continued as a plan under the 1997 Program on the Program Adoption Date. No Option shall be granted under the Plan after the last permissible date for the granting of Options under the 1997 Program, but Options granted before that date may have Expiration Dates that extend beyond such date. Article 15 Definitions 15.01. 1989 Program. "1989 Program" means the Company's Long-Term Stock Incentive Program, approved by the Company's shareholders on April 18, 1989. 15.02. 1997 Program. "1997 Program" means the Company's 1997 Long-Term Stock Incentive Program, approved by the Company's shareholders on April 15, 1997, as amended from time to time. 15.03. Affiliate. "Affiliate" means those Persons, other than Subsidiaries of the Company, designated from time to time by the Committee as such. 15.04. Authorized Officer. "Authorized Officer" means the Chief Executive Officer of the Company. 15.05. Board. "Board" means the board of directors of the Company. 15.06. Change in Control. "Change in Control" means the occurrence of any of the following events (i) the acquisition of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities by any "person" or "group" as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act, other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company; 16 (B) the Company or a Person (or one of its Subsidiaries) owned by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company; or (C) Deutsche Telekom AG or France Telecom, individually or collectively; (ii) at the end of any two-year period, less than a majority of the directors of the Company are directors (A) who were directors of the Company at the beginning of the two-year period or (B) whose election as director was approved by a vote of two-thirds of the then directors described in the preceding clause (A) or this clause (B) by prior election; (iii) a merger or consolidation in which the Company is not the surviving entity, or a liquidation or dissolution of the Company, or a sale of all or substantially all of the Company's assets; or (iv) the acquisition by Deutsche Telekom AG or France Telecom, individually or collectively, of additional securities of the Company that would result in their possessing in the aggregate 35% or more of the combined voting power of the Company's then outstanding securities. 15.07. Code. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. 15.08. Code Section. "Code Section" is a reference to a particular section of the Code, and includes any successor provision or the same or a successor provision as renumbered at any time. 15.09. Committee. "Committee" means the the Organization, Compensation, and Nominating Committee of the Board. 15.10. Common Stock. "Common Stock" means any class of the Company's publicly-traded common stock as the Committee may determine to issue under the Plan, including the FON Stock and the PCS Stock. 15.11. Company. "Company" means Sprint Corporation, a Kansas corporation, or its successor. 15.12. Corporate Secretary. "Corporate Secretary" means the secretary of the Company. 15.13. Director. "Director" means a member of the Board or a member of the board of directors of a Subsidiary of the Company. 17 15.14. Employee. "Employee" means an employee of the Company or a Subsidiary of the Company. 15.15. Equity Security. "Equity Security" means an equity security as defined by the Exchange Act for purposes of Exchange Act Section 16. 15.16. Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time and as interpreted and implemented by the rules and regulations issued thereunder. 15.17. Exchange Act Section 16. "Exchange Act Section 16" means section 16 of the Exchange Act. 15.18. Executive Officer. "Executive Officer" means an officer of the Company that is subject to the liability provisions of Exchange Act Section 16. 15.19. Exercise Date. "Exercise Date" has the meaning indicated in Section 8.01. 15.20. Exercise Price. "Exercise Price" means, with respect to the exercise of an Option, the Strike Price of the Option multiplied by the number of shares with respect to which the Option is being exercised. 15.21. Expiration Date. "Expiration Date" means, with respect to any Option, the last date on which the Option may be exercised in the absence of an earlier forfeiture of the Option. 15.22. Fair Market Value. "Fair Market Value" means, with respect to any class of the Common Stock on any date, the average of the high and low prices per share of that class of Common Stock for composite transactions on that date, unless there was no trading in that class of Common Stock on that date, in which case, on the most recent day before that date on which that class of Common Stock was traded. The Fair Market Value of shares of Restricted Stock shall be determined without taking into account any restrictions. "Fair Market Value" means, with respect to other property, the value of the property as determined by the Committee. 15.23. FON Stock. "FON Stock" means the Series 1 FON Stock as described in the Company's articles of incorporation. 15.24. Foreign Reload Option. "Foreign Reload Option" means a reload option issued with respect to an option issued under a plan of Sprint's other than this Plan. 15.25. Grant Date. 18 "Grant Date" means, with respect to any Option, the date on which the term of the Option begins, as determined in Article 7 and Article 11. 15.26. Grantee. "Grantee" means, with respect to any Option, the Director or Employee to whom the Option was originally granted, notwithstanding any subsequent transfer of the Option under the terms of the Plan. 15.27. Incentive Stock Option. "Incentive Stock Option" means an Option designated as such in the action granting the Option. This Plan's intent is that Incentive Stock Options meet the requirements of Code Section 422. 15.28. Minimum Withholding Amount. "Minimum Withholding Amount" means, with respect to any Option exercise, the amount the employer is required to withhold from the income of the Payroll Taxpayer under the Payroll Tax laws. 15.29. Non-Qualified Option. "Non-Qualified Option" means any Option that is not an Incentive Stock Option. 15.30. Normal Retirement. "Normal Retirement" means, with respect to any Employee, Retirement at or later than an age qualifying as "normal retirement" under the Company's defined benefit pension plan, whether or not the person is a participant in the plan and, with respect to any Director, termination of service as a Director at the mandatory retirement age for members of the Board under its policies, as amended from time to time, even if the Director serves on the board of a Subsidiary or Affiliate. 15.31. Notice of Exercise. "Notice of Exercise" means the notice by an Optionee of the exercise of an Option as set forth in Section 8.01. 15.32. Option. "Option" means the right, set forth in a written agreement between the Company and an Optionee, authorized by this Plan to acquire a determinable number of shares of the Option Class of Common Stock at a determinable price for a determinable period of time and having such other terms as may be determined by the Committee or Authorized Officer or as set forth in this Plan. 15.33. Option Class. "Option Class" means, with respect to any Option, the class of Common Stock subject to purchase pursuant to the terms of the Option. 15.34. Optionee. "Optionee" means, with respect to any Option at any particular time, the holder of the Option at that time. 15.35. Payroll Tax. 19 "Payroll Tax" means any tax required by an employer to be withheld from wages paid to its employees, including but not limited to federal income tax withholding, Social Security and Medicare withholding taxes, and state and local income tax withholding. 15.36. Payroll Taxpayer. "Payroll Taxpayer" has the meaning specified in Section 9.01. 15.37. PCS Stock. "PCS Stock" means the Series 1 PCS Stock as defined in the Company's articles of incorporation. 15.38. Permitted Disposition. "Permitted Disposition" means, with respect to any Optionee, (i) a disposition of shares by the Optionee in which the Optionee remains the sole beneficial owner or (ii) a disposition upon death of the Optionee. 15.39. Person. "Person" means any individual, corporation, partnership, limited liability company, business trust, or other entity. 15.40. Program Adoption Date. "Program Adoption Date" means April 15, 1997. 15.41. Plan. "Plan" means the 1990 Stock Option Plan, the terms of which are set forth in this document. 15.42. Qualified Transferee. "Qualified Transferee" means a Qualified Trust. 15.43. Qualified Trust. "Qualified Trust" means a trust. (i) that is a grantor trust treated as owned by the Grantee under Subchapter J of the Code; (ii) of which the Grantee, the Grantee's spouse, or the Grantee's descendants by blood, adoption, or marriage, are the sole beneficiaries; and (iii) that, by its terms, may not be amended to violate the foregoing restrictions so long as the trust is an Optionee under this Plan. 15.44. Reload Option. "Reload Option" means an Option granted upon exercise of an Option having Reload Rights under the terms and conditions set forth in Article 11. 15.45. Restricted Shares. "Restricted Shares" means shares of Common Stock that are substantially non- vested within the meaning of Treasury regulations under Code Section 83. 15.46. Retirement. "Retirement" means, in the case of an Employee, termination of employment by an employee who is entitled to receive payment of pension benefits in accor- 20 dance with the Sprint Retirement Pension Plan or his employer's defined benefit pension plan, if any, immediately after the employee's Termination Date and, in the case of a Director, termination of service as a Director after five years of service as a Director. 15.47. Seasoned Shares. "Seasoned Shares" means, with respect to any Person, shares of Common Stock that (i) are not Restricted Shares, were acquired by the Person from the Company, and have been owned by the Person on that date for a period of at least six months; or (ii) were acquired by such Person other than from the Company. 15.48. Securities Act. "Securities Act" means the Securities Act of 1933, as amended from time to time and as interpreted and implemented by the rules and regulations issued thereunder. 15.49. Strike Price. "Strike Price" means, with respect to any Option, the price per share at which the Optionee is entitled to purchase shares of Common Stock. 15.50. Subsidiary. "Subsidiary" means, with respect to any Person (the "Controlling Person"), (i) all Persons (the "Controlled Persons") in whom the Controlling Person, together with its Subsidiaries, directly owns more than 50% of the voting rights, and (ii) all Subsidiaries of the Controlled Persons. 15.51. Tax Date. "Tax Date" means, with respect to any Option exercise, the date on which the shares issued pursuant to the Option exercise become subject to federal income taxation. 15.52. Termination Date. "Termination Date" means, (i) with respect to any Employee, the date on which the Employee ceases to be employed by the Company, any of its Subsidiaries, or any Affiliate, and ceases to receive severance benefits under any applicable plans for the payment of severance benefits by the employing entity, or (ii) with respect to any Director, the date on which the Director's service as a director ends. 15.53. Termination for Cause. In the case of an Employee, "Termination for Cause" means an involuntary termination of employment because (i) the employee has materially breached the Company's Code of Ethics, or the code of ethics of the employer; 21 (ii) the employee has materially breached the Sprint Employee Agreement Regarding Property Rights and Business Practices; (iii) the employee has engaged in acts or omissions constituting dishonesty, intentional breach of a fiduciary obligation, or intentional acts of wrongdoing or misfeasance; or (iv) the employee has acted intentionally and in bad faith in a manner that results in a material detriment to the assets, business, or prospects of the employer. In determining whether any particular employee was Terminated for Cause, the characterization of the reason for termination used for purposes of other employee benefit plans of the Company or other employer shall apply to this Plan. In the case of a Director, "Termination for Cause" means removal for cause from service as a director. 15.54. Total Disability. "Total Disability" means, in the case of employees, termination of employment under circumstances that would make the employee eligible to receive benefits under the employer's long-term disability plan and, in the case of Directors, termination of service as a Director under circumstances that would make the Director eligible to receive Social Security disability benefits. 15.55. Underlying Option. "Underlying Option" means, with respect to any Reload Option, the Option to which the Reload Rights were attached and the exercise of which resulted in the grant of the Reload Option. 15.56. Vesting Period. "Vesting Period" means, with respect to any Restricted Shares, the period during which the shares continue to meet the definition of Restricted Shares. 15.57. Withholding Amount. "Withholding Amount" has the meaning specified in Section 9.02. 22 EX-10.(I) 4 0004.txt EXECUTIVE DEFERRED COMPENSATION PLAN, AS AMENDED Exhibit 10(i) Summary of Amendments to the Executive Deferred Compensation Plan Sprint's Executive Deferred Compensation Plan (the "Sprint EDCP") was amended effective January 1, 2001 to merge the executive deferred compensation plan maintained by Sprint Spectrum, L.P. (the "PCS EDCP") with and into Sprint EDCP. In addition, the Sprint EDCP was amended to preserve certain features of the PCS EDCP with respect to participants' account balances under that plan, as follows: 1. Form and Timing of Distributions. The form of benefit and timing of distribution elected by participants in the PCS EDCP, as well as the requirement that distribution will be made in a lump sum upon termination of employment, continues to apply with respect to the account balances attributable to the PCS EDCP. 2. Hardship Distributions. Provisions for hardship distributions under the PCS EDCP continue to apply with respect to the account balances attributable to the PCS EDCP. 3. Provisions for Disability. Provisions calling for benefits to commence for disabled participants at age 55, or sooner under certain circumstances, continue to apply with respect to the account balances attributable to the PCS EDCP. EX-10.(J) 5 0005.txt MANAGEMENT INCENTIVE STOCK OPTION PLAN AS AMENDED Exhibit 10(j) MANAGEMENT INCENTIVE STOCK OPTION PLAN 1. Establishment and Purpose. Sprint Corporation, a Kansas corporation (the "Company"), hereby establishes a stock option plan to be named the Management Incentive Stock Option Plan (the "Plan") The purpose of the Plan is to permit employees of the Company and its subsidiaries who are eligible to receive annual incentive compensation to receive nonqualified stock options in lieu of a portion of the target incentive under the Company's management incentive plans ("MIPs"), thereby encouraging the employees to focus on the growth and profitability of the Company and the performance of its common stock. Subject to approval of the Company's stockholders, the Plan provides for options to be granted beginning March 15, 1995, and ending April 18, 2005. Stock options granted prior to or as of April 18, 2005, may extend beyond that date. 2. Administration. The Plan shall be administered by the Organization and Compensation Committee of the Board of Directors (the "Committee"). The Company shall grant options under the Plan in accordance with determinations made by the Committee pursuant to the provisions of the Plan. The Committee from time to time may adopt (and thereafter amend and rescind) such rules and regulations for carrying out the Plan and take such action in the administration of the Plan, not inconsistent with the provisions of the Plan, as it shall deem proper. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, or in any option or restricted shares of common stock granted or issued pursuant to the Plan, in the manner and to the extent it shall deem desirable to effect the terms of the Plan. With respect to any option or restricted stock issued under the Plan, the Committee may determine when the option may become exercisable or the restrictions on restricted stock shall lapse, as the case may be, whenever, in the judgement of the committee, doing so would be in the best interest of the Corporation. The interpretation and construction of any provisions of the Plan by the Committee shall, unless otherwise determined by the Board of Directors of the Company, be final and conclusive. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. The Corporate Secretary shall act as Plan Administrator carrying out the day-to-day administration of the Plan unless the Committee appoints another officer or employee of the Company as Plan Administrator. 3. Eligibility. The Committee will determine each year whether options will be granted in such year, whether participation will be elective or automatic, which class or classes of common stock will be subject to purchase by participants (which may different for different groups of employees) and the amount of incentive compensation to be given up for each stock option. Any salaried employee of the Company and its subsidiaries shall be eligible to be selected for participation in the MIPs. The Committee will, in its discretion, determine the employees who participate in the MIPs and, therefore, who will be eligible for options, the dates on which options shall be granted, and any conditions on the exercise of the options. No option may be granted to any individual who immediately after the option grant owns directly or indirectly stock possessing more than five percent (5%) of the total combined voting power or value of all classes of stock of the Company or any subsidiary. 4. Common Stock Subject to the Plan. The shares of any class of publicly traded common stock of the Company to be issued upon the exercise of a nonqualified option to purchase such common stock granted in lieu of MIP payout may be made available from the authorized but unissued common stock of the Company, shares of common stock held in the treasury, or common stock purchased on the open market or otherwise. Approval of the Plan by the Stockholders of the Company shall constitute authorization to use such shares for the Plan subject to the discretion of the Board or as such discretion may be delegated to the Committee. Subject to the provisions of the following paragraph, the total number of shares for which options may be granted under the Plan each year shall be 0.9% of the total outstanding shares of each class of common stock of the Company (including, with respect to the PCS Stock, both Series 1 and Series 2 PCS Stock) as of the first day of such year; provided, however, that such number shall be increased in any year by the number of shares available in previous years for which options have not been granted. If and when an option granted under the Plan is forfeited, cancelled, expired, or otherwise terminated without having been exercised in full, the remaining shares shall again become available for grant under the Plan. The number and kind of shares subject to the Plan may be appropriately adjusted by the Committee in the circumstances outlined in Section 5(k). 5. Stock Options; Terms and Conditions. Each option will represent the right to purchase a specific class and number of shares of common stock of the Company and shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: a. Consideration for and Class and Number of Options. Each option shall be granted in lieu of a portion of the optionee's payout under the MIPs or in lieu of other incentive compensation as determined by the Committee. The Committee shall determine the class and the number of shares or the manner of determining the class and number of shares available for each option, subject to the total number of shares available under the Plan for such year, and the amount or the method of determining the consideration to be given up by each participant in return for an option, taking into consideration appropriate factors in making such determinations, such as interest rates, volatility of the market price of the class of common stock of the Company and the term of the option; provided, however that shares 2 subject to options granted to any individual employee during any calendar year shall not exceed a total of 1,000,000 shares of FON Stock (as defined in the Company's articles of incorporation) or 500,000 shares of Series 1 PCS Stock (as defined in the Company's articles of incorporation). Consideration for and Class and Number of Options. b. Participation in the Plan. Participation in the Plan may be voluntary or automatic, as determined by the Committee. The rules and procedures for voluntary participation, when applicable, shall be established and implemented by the Plan Administrator. c. Exercise Price. Unless the Committee determines otherwise, the price at which each share covered by an option may be purchased shall be one hundred percent (100%) of the fair market value of the Company's common stock subject to purchase under the option on the date the option is granted, but in no event at a price lower than the fair market value of one share of such stock. Fair market value shall be deemed to be the average of the high and low prices of the Company's common stock for composite transactions as published by major newspapers for the date the option is granted or, if no sale of the Company's common stock shall have been made on that day, the next preceding day on which there was a sale of such stock. d. Vesting. Unless the Committee determines otherwise, stock option grants shall provide: (i) with respect to options issued in lieu of annual management incentive compensation, that the total number of shares subject to an option shall become exercisable December 31 in the year of the date of grant and (ii) with respect to options issued in lieu of or as part of long-term incentive compensation ("LTIP Options") that the total number of shares subject to the option shall become exercisable in full on the third December 31 following the grant date. Unless the Committee provides otherwise, if the grantee of an LTIP Option terminates employment by reason of the grantee's death, total disability, or normal retirement (except in the case of mandatory retirement of any outside director, with respect to options outstanding at least 1 year on retirement), the LTIP Option shall become exercisable in full on the grantee's termination date. Unless the Committee provides otherwise, if the grantee of any other option terminates employment before the option becomes exercisable for any reason other than termination for good cause, the option shall be forfeited and any incentive compensation foregone to acquire the options shall be restored to the grantee as if an election to acquire options were not made. e. Term of Option. Options shall not be exercisable after the expiration of ten (10) years from the date of grant. f. Payment of Exercise Price. Options shall be exercisable only upon payment to the Company of the full purchase price of the shares with respect to which options are exercised. Payment for the shares shall be either in United States dollars, payable in cash or by check, or by 3 surrender of stock certificates representing the same class of common stock of the Company having an aggregate fair market value, determined as of the date of exercise, equal to the number of shares with respect to which such options are exercised multiplied by the exercise price per share. The fair market value of common stock on the date of exercise of options shall be determined in the same manner as the fair market value of common stock on the date of grant of options is determined. In that event, fair market value of the shares of restricted stock will be determined as if the shares were not restricted. In lieu of the delivery of physical certificates, the optionee may deliver shares in payment of the exercise price by attesting, on a form established for such purpose by the Secretary, to the ownership, either outright or through ownership of a broker account, of a sufficient number of Seasoned Shares (at defined in the 1990 Stock Option Plan). The attestation must be notarized and signed by the optionee's spouse if the spouse is a joint owner of the shares with respect to which such attestation is made and must be accompanied by such documentation as the Corporate Secretary may consider necessary to evidence actual ownership of such shares. g. Manner of Exercise. A completed exercise form and the exercise price, whether in the form of cash or stock, must be delivered to the Plan Administrator in order to exercise an option. An option shall be deemed exercised on the date such exercise form and payment are received by the Plan Administrator. h. Time for Exercise. Each option expires if it has not been exercised within its term. Once an option has expired for any reason, it can no longer be exercised. If the grantee's employment with the Company or a subsidiary of the Company is terminated, the optionee may exercise options that are exercisable on the date of termination of employment until the earlier of (1) the date on which the option expires and (2) the end of the applicable period below, beginning on the grantee's: (i) retirement: five years after the grantee's retirement date. (ii) disability (qualifying for long-term disability benefits under the Company's Basic Long-Term Disability Plan): five years after the grantee's qualification date. (iii) death: one year after the grantee's death for the estate or designated beneficiary to exercise the decedent's options. (iv) involuntary termination other than for cause: the date on which the option expires. (v) voluntary termination: three months from the grantee's date of termination of employment. If a grantee's employment is terminated for a reason constituting good cause, any outstanding options granted under the Plan shall 4 automatically terminate. "Good cause" means conduct by the grantee that reflects adversely on the grantee's honesty, trustworthiness or fitness as an employee, or the grantee's willful engagement in conduct which is demonstrably and materially injurious to the Company. If a grantee becomes associated with, becomes employed by, renders services to, or owns any interest in (other than an insubstantial interest, as determined by the Committee) any business in competition with the Company, all outstanding options granted to the grantee whether vested or unvested shall automatically terminate and shares of restricted stock received upon the exercise of an option pursuant to Section 6 hereof that continue to be restricted shall be forfeited. For purposes of this Plan, an employee who becomes employed by certain non-subsidiary affiliates designated by the Committee (each, together with their subsidiaries, an "Affiliated Entity"), shall not, except with respect to incentive stock options, be considered to have terminated employment with the Company or a subsidiary of the Company until his employment is terminated with all Affiliated Entities without becoming re-employed by the Company or its subsidiaries. i. Restricted Stock. Certain grantees may elect to receive restricted shares in connection with an exercise of an option by the grantee, as provided in Section 6 hereof. j. Beneficiary Designations. The grantee of an option may designate a beneficiary or beneficiaries to exercise unexpired options held by the grantee and to own shares issued upon any such exercise after the grantee's death without order of any probate court or otherwise. A beneficiary so designated may exercise an option upon presentation to the Company of evidence satisfactory to the Corporate Secretary of (1) the beneficiary's identity and (2) the death of the grantee. A grantee may change any beneficiary designation of options held by the grantee at anytime before his death but may not do so by testamentary designation in his will or otherwise. Beneficiary designations must be made in writing on a form provided by the Corporate Secretary. Beneficiary designations shall become effective on the date that the form, properly completed, signed and notarized, is received by the Secretary. Any designation of a beneficiary with respect to any option shall be deemed canceled upon the transfer of such option to a trust in accordance with the terms of the Plan. k. Change in Stock, Adjustments. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, spin- off, or other change in the corporate structure affecting the shares, such adjustment shall be made in the aggregate number and class of shares that may be delivered under the Plan, in the number and class of shares that may be subject to an option granted to any individual in any year under the Plan, and in the number, class, and option price of shares subject to outstanding options granted under the Plan, as may be determined to be appropriate by the Committee, in its sole discretion, 5 provided that the number of shares subject to any option shall always be a whole number. l. Limitations on Transfer. Options may not be transferred, levied, garnished, executed upon, subjected to a security interest, or assigned to any person other than the grantee, except that the grantee may transfer an option to a trust of the kind described in Section 6(b). Any such trust as transferee of an option may not (1) dispose of shares received in an exercise of such options until such shares are validly registered or exempt from registration under any applicable exemption from registration under the Securities Act of 1933, as amended, in the opinion of the Corporate Secretary or (2) while continuing to hold options issued under this plan, be amended to change beneficiaries to persons other than those permissible under Section 6(b). Documents evidencing the transfer of any option and the identity of the transferee shall be in such form as may be required by the Corporate Secretary. 6. Restricted Stock. Certain grantees, as determined by the Committee, may elect to receive restricted shares upon payment for the exercise of an option in the form of unrestricted common stock. The grantee will receive the same number of unrestricted shares as the number of shares surrendered to pay the exercise price, while the shares received in excess of the number surrendered to pay the exercise price may be restricted. The Company shall be authorized to issue restricted shares of common stock upon such exercises of stock options, subject to the following conditions: a. The grantee shall elect a vesting period for the restricted common stock to be received upon exercise of the option of between 6 months and 10 years, subject to rules and procedures established by the Plan Administrator. At any time on or before the 13th calendar month preceding the date on which restrictions on shares of restricted stock would otherwise lapse, the grantee may elect to extend the vesting period on all but not a portion of such shares by six months or any multiple of six months. b. The grantee who receives restricted stock may not sell, transfer, assign, pledge or otherwise encumber or dispose of shares of restricted stock until such time as all restrictions on such stock have lapsed except to a trust of which the grantee, the grantee's spouse, or descendants (by blood, adoption, or marriage) of the grantee are the primary beneficiaries and which is a grantor trust treated as owned by the grantee under Subchapter J of the Internal Revenue Code, upon the following terms: (A) the Company receives, prior to such transfer, a true copy of the trust agreement and an opinion from grantee's counsel (1) that the trust will be treated as a grantor trust owned by the grantee under Subchapter J of the Internal Revenue Code at all times until the restrictions on such stock lapse or the stock is forfeited under the terms of its grant, (2) that the terms of the trust provide that upon the forfeiture of the restricted stock 6 under the terms of its grant or the earlier termination of the trust for whatever reason, ownership of the restricted stock shall revert to the grantee or to the Company, (3) that the trustee of such trust may not, prior to the lapsing of restrictions on such stock, sell, transfer, assign, pledge, or otherwise encumber or dispose of shares of restricted stock except to the Company or to the grantee, subject to the restrictions provided for in this Plan, and (4) that, until the restrictions lapse, the trustee is not authorized to incur liabilities on behalf of the trust, other than to the beneficiaries of the trust; and (B) the grantee and the trustee of the trust shall execute stock powers in blank to be held in the custody of the Company; and (C) the Corporate Secretary of the Company may, in his discretion, enforce the foregoing transfer restrictions by maintaining physical custody of the certificate or certificates representing such shares of restricted stock, by placing a restrictive legend on such certificates, by requiring the grantee and the trustee to execute other documents as a pre-condition to such transfer, or otherwise. c. A grantee who elects to receive restricted common stock upon an exercise shall have the right to satisfy tax withholding obligations in the manner provided in Section 8 hereof. d. The shares of restricted common stock received in an exercise of a stock option that continue to be restricted shall be forfeited in the event that vesting conditions are not satisfied, subject to the discretion of the Committee, except in the case of death, disability, normal retirement, or involuntary termination for reasons other than for good cause, in which case all restrictions lapse. If restricted shares are forfeited, the grantee or his representative shall sign any document and take any other action required to assign said restricted shares back to the Company. e. The grantee will have all the rights of a stockholder with respect to shares of restricted stock received upon the exercise of an option, including the right to vote the shares of stock and the right to dividends on the stock. Unless the Plan Administrator establishes alternative procedures, the shares of restricted stock will be registered in the name of the grantee and the certificates evidencing such shares shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to the award and shall be held in escrow by the Company. The grantee shall execute a stock power or powers assigning the shares of restricted stock back to the Company, which stock powers shall be held in escrow by the Company and used only in the event of the forfeiture of any of the shares of restricted stock. A certificate 7 evidencing unrestricted shares of common stock shall be issued to the grantee promptly after the restrictions lapse on any restricted shares. f. The Plan Administrator shall have the discretion and authority to establish any rules in connection with restricted stock, including but not limited to regulating the timing of the lapse of restrictions within the six-month to ten-year period and prescribing election forms as the Plan Administrator deems necessary or desirable for the orderly administration of such exercises. 7. Reload Options. The Committee may provide that optionees have the right to a reload option, which shall be subject to the following terms and conditions: a. Grant of the Reload Option; Number of Shares; Price. Subject to subsections (b) and (c) of this Section 7 and to the availability of shares to be optioned under the Plan, if an optionee has an option to purchase shares of any class of common stock (the "original option") with reload rights and pays for the exercise of the original option by surrendering common stock of the same class, the optionee shall receive a new option ("reload option") to purchase the number and class of shares so surrendered (or, if applicable, the number of shares provided for in paragraph (h) of this Section 7) at an exercise price equal to the fair market value of the class of stock on the date of the exercise of the original option. If, in the judgment of the Company's Corporate Secretary, the number of shares available on the exercise of the original options falls below a number sufficient to provide for the grant of reload options and for other purposes under the Plan, the Company's Corporate Secretary may authorize the issuance of reload options from any other plan of the Company's under which sufficient shares are authorized but not issued. b. Minimum Purchase Required. A reload option will be granted only if the exercise of the original option is an exercise of at least 25% of the total number of shares granted under the original option (or an exercise of all the shares remaining under the original option if less than 25% of the shares remain to be exercised). c. Other Requirements. A reload option: (1) will not be granted if the market value of the common stock of the Company on the date of exercise of the original option is less than the exercise price of the original option; (2) will not be granted if the grantee is not, on the exercise date, an employee of Sprint or a Sprint subsidiary; (3) will not be granted if the original option is exercised less than one year before the expiration of the original option; and (4) with respect to options transferred by the grantee to another person in accordance with this Plan, reload options shall be granted to the grantee upon a stock-for-stock exercise by the optionee to the same extent as if the grantee had exercised the option in a similar manner. d. Term of Option. The reload option shall expire on the same date as the original option. 8 e. Type of Option. The reload option shall be a nonqualified option to purchase shares of the same class of shares as the original option. f. No Additional Reload Options. The reload options shall not include any right to a second reload option. g. Date of Grant, Vesting. The date of grant of the reload option shall be the date of the exercise of the original option. The reload options shall be exercisable in full beginning one year from date of grant; provided, however, that all shares purchased upon the exercise of the original option (except for any shares withheld for tax withholding obligations) shall not be sold, transferred or pledged within six months from the date of exercise of the original option, except in a Permitted Disposition (as defined in the 1990 Stock Option Plan). The reload option shall become exercisable in full if the optionee terminates employment by reason of the grantee's death, disability, or normal retirement. In no event shall a reload option be exercised after the original option expires as provided in subsection (d) of this Section 7. h. Stock Withholding; Grants of Reload Options. If the other requirements of this Section 7 are satisfied, and if shares are withheld or shares surrendered for tax withholding, a reload option will be granted for the number of shares surrendered as payment for the exercise of the original option plus the number of shares surrendered or withheld to satisfy tax withholding. In connection with reload options for officers who are subject to Section 16 of the Securities Exchange Act of 1934, the Committee may at any time impose any limitations which, in the Committee's sole discretion, are necessary or desirable in order to comply with Section 16(b) of the Securities Exchange Act of 1934 and the rules and regulations thereunder, or in order to obtain any exemption therefrom. i. Other Terms and Conditions. Except as otherwise provided in this Section 7, all the provisions of the Plan shall apply to reload options. 8. Stock Withholding Election. When taxes are withheld in connection with the exercise of a stock option by delivering shares of stock in payment of the exercise price, or upon the lapse of restrictions on restricted stock received upon the exercise of an option (the date on which such exercise occurs or such restrictions lapse hereinafter referred to as the "Tax Date"), the optionee may elect to make payment for the withholding of federal, state and local taxes, including Social Security and Medicare ("FICA") taxes, up to the optionee's marginal tax rate, by one or both of the following methods: (i) delivering part or all of the payment in previously-owned shares of the same class (which shall be valued at fair market, as defined herein, on the Tax Date) which shares, if acquired from the Company, must have been held for at least six months; 9 (ii) requesting the Company to withhold from those shares that would otherwise be received upon exercise of the option or upon the lapse of restrictions, a number of shares having a fair market value (as defined herein) on the Tax Date equal to the amount to be withheld. The amount of tax withholding to be satisfied by withholding shares from the option exercise is limited to the minimum amount of taxes, including FICA taxes, required to be withheld under federal, state and local law. Such election is irrevocable after the Tax Date. Any fractional share amount and any additional withholding not paid by the withholding or surrender of shares must be paid in cash. If no timely election is made, cash must be delivered to satisfy all tax withholding requirements. If the exercise of an option by an optionee other than the grantee after transfer of the option pursuant to this plan from the grantee to the optionee results in a withholding obligation on the part of the grantee, the grantee may elect to satisfy his withholding obligation by delivery of shares to the Company as permitted in clause (i) above. 9. Acceleration on a Change in Control a. With respect to any LTIP Option outstanding for at least one year or any restricted shares issued under the Plan the options shall (subject to the 280G limitations applicable under the 1990 Stock Option Plan) become exercisable in full and the restrictions shall lapse, as the case may be, upon a change in control of the Company. b. For purposes of this Plan, a "change in control of the Company" shall be deemed to have occurred whenever a "Change in Control" occurs for purposes of the Company's 1990 Stock Option Plan, as amended from time to time. 10. Miscellaneous. a. Amendment. The Company reserves the right to amend the Plan at any time by action of the Board of Directors provided that no such amendment may materially and adversely affect any outstanding stock options without the consent of the optionee, and provided that, without the approval of the stockholders, no such amendment may increase the total number of shares reserved for the purposes of the Plan. b. Effectiveness of Plan. This Plan shall be effective as of February 18, 1995, subject to approval of Stockholders of the Company prior to February 18, 1996. c. Rights in Securities. All certificates for shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the shares are then listed, and any 10 applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. No optionee or optionee's beneficiary, executor or administrator, legatees or distributees, as the case may be, will be, or will be deemed to be, a holder of any shares subject to an option unless and until a stock certificate or certificates for such shares are issued to such person or persons under the terms of the Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 5(k) hereof. d. Date of Grant. The grant of an option shall be effective no earlier than the date the Committee decides to grant the option, except that grants of reload options shall be effective as provided in Section 7(g) hereof. e. Application of Funds. The proceeds received by the Company from the sale of stock subject to option are to be added to the general funds of the Company and used for its corporate purposes. f. No Obligation to Exercise Option. Granting of an option shall impose no obligation on the optionee to exercise such option. 11 EX-10.(R) 6 0006.txt SHORT-TERM INCENTIVE COMPENSATION PLAN Exhibit 10(r) Management Incentive Plan 1.0 Establishment The Management Incentive Plan is effective January 1, 1984. Thereafter, it will continue from year to year, until the Board amends or terminates it. 2.0 Definitions 2.01 "Board" is the Board of Directors of Sprint Corporation. 2.02 "Committee" is the Organization, Compensation and Nominating Committee of the Board. 2.03 "Company" is Sprint Corporation. 2.04 "Employee" is any person (including officers and directors of the Company) employed by the Company, or a subsidiary of the Company, on a full-time salaried basis. 2.05 "Participant" is an employee designated by the Committee to participate in the Plan. 2.06 "Senior Officer" is an officer of the Company holding the office of Senior Vice President or higher. 2.07 "Termination for Cause", in the case of an employee, means an involuntary termination of employment because (i) the employee has materially breached the Company's Code of Ethics; (ii) the employee has materially breached the Sprint Employee Agreement Regarding Property Rights and Business Practices; (iii) the employee has engaged in acts or omissions constituting dishonesty, intentional breach of a fiduciary obligation, or intentional acts of wrongdoing or misfeasance; or (iv) the employee has acted intentionally and in bad faith in a manner that results in a material detriment to the assets, business, or prospects of the employer. In determining whether any particular employee was Terminated for Cause, the characterization of the reason for termination used for purposes of other employee benefit plans of the Company shall apply to this Plan. 3.0 Purpose The Plan is intended to further the Company's objectives by offering competitive incentive compensation to key employees who make substantive contributions to those objectives. 4.0 Administration 4.01 The Committee will be responsible for the administration of the Plan. This Committee is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations deemed advisable to protect the interests of the Company, and to make all other administrative determinations necessary. Any determination, interpretation or other action made or taken by the Committee pursuant to the Plan's provisions will be final for all purposes and upon all persons. 4.02 The Committee may delegate to a Senior Officer or a Committee of Senior Officers the right to select Participants and grant awards under the Plan to employees who are not Senior Officers. The Senior Officer or Committee of Senior Officers shall have the same powers with respect to such awards as the Committee has under this Plan, provided that all decisions must be within the boundaries of the Compensation Philosophy established by the Committee. 5.0 Performance Cycle A Performance Cycle consists of a calendar year. Cash may be awarded to Participants for each year the Committee approves a plan. 6.0 Performance Criteria For each Performance Cycle, the Committee will determine the factors to be used for measuring performance. Such Committee determinations may vary from year to year. 7.0 Adjustments The Committee may make adjustments in the Performance Criteria to compensate for any changes that significantly alter the basis upon which the Criteria were determined. These adjustments may be made before or after the end of the Cycle (normally by the February meeting of the Committee). To the extent the Committee deems appropriate, all changes will be binding upon all parties concerned during the Cycle. 2 8.0 Participation 8.01 For each Performance Cycle, the Committee will determine which key employees, who are in a position to influence the Company's success, will participate in the Plan. 8.02 Employees hired or promoted during a Performance Cycle into a position appropriate for participation in this Plan may either participate in the already existing Cycle on a prorated basis, or be held out until the beginning of the next Cycle. This determination will be made by the Committee. 9.0 Payment 9.01 The Committee will determine the incentive opportunity (or possible cash payment) earned by each Participant for any Performance Cycle. 9.02 The Committee will approve the payment of any award made under the Plan. Payments of amounts due a Participant under the Plan not deferred or carried forward pursuant to the provisions of Paragraphs 10.1 and 10.2 below will be made following the February Committee meeting. 9.03 The department or affiliated company where the employee is located at the end of the Performance Cycle year is responsible for the total Performance Cycle payout, including any pro rata awards from other plans. Management at the final location is responsible for determining the level of payout for the entire Performance Cycle year. The Participant's former company or department is to be solicited to determine the prorata payout from other plans. 10.0 Deferral and Carry-forward 10.01 For each Performance Cycle, an eligible Participant may elect, in writing, to voluntarily defer all or a portion of a potential payment. This will be consistent with the federal income tax code requirements to effectively defer income. The Committee and the Executive Deferred Compensation Plan will determine the terms of all deferrals. 10.02 In the event the percent payout otherwise payable to a Participant for any individual performance measurement exceeds two hundred percent (200%) of target, fifty percent (50%) of the amount by which the payout exceeds two hundred percent (200%) of target will vest upon approval of payout by the Committee and be paid to the Participant at the same time the remainder of the award is paid to the Participant. If the remaining fifty percent (50%) of the amount by which the payout exceeds two hundred percent (200%) of target ("the amount carried forward") is less than 3 $1,000, then the amount will be paid to the Participant at the same time the award is paid to Participant. If the amount carried forward is $1,000 or greater and the Participant is employed with the Company, then the amount will not be deemed vested or earned by the Participant, but will be "carried forward" for possible vesting and payment to the Participant in the future as follows: (i) one-half (1/2) of the amount "carried forward" will vest and be paid to the Participant when the award is normally paid to Participants but not earlier than twelve (12) months following the end of the Performance Cycle to which the amount carried forward pertains, and (ii) the remaining one-half (1/2) of the amount carried forward will vest and be paid to the Participant when the award is normally paid to Participant but not earlier than twenty-four (24) months following the end of the Performance Cycle to which the amount carried forward pertains. If, prior to the scheduled vesting/payment date(s) of the amount carried forward, the Participant voluntarily resigns his/her employment with the Company or is Terminated for Cause, the Participant will forfeit any unpaid portion of the amount carried forward. If, prior to the scheduled vesting/payment date of any portion of the amount carried forward, the Participant's employment with Company ceases for any of the following reasons: (i) a reduction in force; (ii) normal retirement (as determined under the Company's retirement plan); (iii) sale of business when the Participant does not secure employment with the new purchaser or when the Participant secures employment with the new purchaser and remains so employed until the time the carry forward payments are normally paid; (iv) the Participant's death; or (v) the Participant's disability, then any unpaid portion shall not be forfeited, but instead shall be paid to the Participant or the Participant's executor/personal representative at the time payments are scheduled for that performance year. 11.0 Termination of Employment If termination of employment occurs during a Performance Cycle by reason of death, disability (as determined under the Company's long-term disability program), or normal retirement (as determined under the Company's retirement plan), the Participant will be entitled to a prorated award based upon appropriate Performance Criteria that will be determined by the Committee. The Committee will determine the prorated award under the rules and regulations it establishes. The award will be paid when all other payments are made at the end of the Cycle. Should an employee terminate and immediately become employed by an affiliated organization, a pro rata payment may also be extended. If termination of employment occurs for reasons other than death, disability, normal retirement or transfer, all the Participant's interests and rights in this Plan will be forfeited, unless otherwise determined by the Committee. 4 12.0 Non-Transferability A Participant's rights and interests under the Plan may not be sold, pledged, assigned or transferred in any manner other than by will or by the laws of descent and distribution except as provided by the Plan or specified by the Committee. 13.0 Tax Withholding The Company retains the right to deduct from all awards paid in cash any taxes required by law to be withheld with respect to cash awards. 14.0 Continuance of Employment Nothing under the Plan nor any action taken because of the Plan will be construed as giving any employee any right to be retained in the Company's employ. 15.0 Amendment and Termination The Board, at any time may terminate, and at any time and in any respect may amend or modify the Plan. 16.0 Legal Requirements 16.01 The designation of participation and any opportunity in the Plan, together with the payment of cash, will be subject to all applicable federal, state and local laws, rules and regulations. 16.02 The Plan and all related provisions will be construed in accordance with and governed by the laws of the State of Kansas. 5 EX-10.(Y) 7 0007.txt SUMMARY OF EXECUTIVE OFFICER BENEFITS Exhibit 10(y) SUMMARY OF EXECUTIVE OFFICER BENEFITS AND BOARD OF DIRECTORS BENEFITS AND FEES
Description of Eligible Positions Amount/Schedule Benefit Automobile Chief Executive Officer $1,500/month Allowance Chief Operating Officer $1,300/month Division Presidents and $1,100/month Executive Vice Presidents Senior Vice Presidents $1,000/month Club Chief Executive Officer, Dues approved at Membership(1) Chief Operating Officer, discretion of CEO Division Presidents and Executive Vice Presidents Senior Vice Presidents Dues approved at discretion of Executive Vice Presidents Sprint Long- Board of Directors $6,000/year Distance (continues after Telephone retirement for up Service(1) to 120 months) Chief Executive Officer, Unlimited (continues Chief Operating Officer, after retirement) Division Presidents, Executive and Senior Vice Presidents Sprint PCS Board of Directors $2,000/year Service(1) Use of PCS handsets Miscellaneous Chief Executive Officer and $15,000/year services Chief Operating Officer (e.g., Division Presidents and $12,000/year investment/tax Executive Vice Presidents counseling, Senior Vice Presidents $10,000/year income tax preparation, estate planning)(1) Disability Chief Executive Officer, 52 weeks at full Chief Operating Officer, base pay Division Presidents, Executive and Senior Vice Presidents (1) Sprint reimburses for income taxes associated with these benefits.
Description of Eligible Positions Amount/Schedule Benefit Separation Chief Executive Officer, Less than 5 years' services: Chief Operating Officer, 17 weeks' salary Division Presidents, continutation Executive and Senior 5 to 10 years' service Vice Presidents (unless 35 weeks' salary otherwise provided in an continuation individual agreement 11 to 18 years' service with an officer) 43 weeks' salary continuation More than 19 years' service: 1 year salary continuation Fees Board of Directors Annual retainer - $40,000/year Meeting Fee - $1,250/meeting Committee Meeting Fee - $1,000/ meeting
EX-10.(BB) 8 0008.txt EMPLOYMENT AGREEMENTS DATED FEBRUARY 26, 2001 Exhibit 10(bb) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 26, 2001 (the "Effective Date"), by and among SPRINT CORPORATION, a Kansas corporation ("Sprint"), SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation and subsidiary of Sprint ("SUMC") (Sprint, SUMC and the subsidiaries of Sprint are collectively referred to herein as the "Company"), and WILLIAM T. ESREY (the "Executive"). Recitals 1. Because the Company is mindful of the Executive's substantial contributions to the Company and of his attractiveness in the competitive marketplace, both within and outside of the telecommunications industry, it desires to insure his continued employment as Chairman and Chief Executive Officer of Sprint until the time of his retirement, it desires to encourage him to maintain and increase his ownership of Company stock, and it desires to provide him appropriate compensation arrangements that continue to motivate him to focus on and increase shareholder value. 2. The Company and the Executive have previously entered into a Contingency Employment Agreement, dated as of June 5, 1986, and amended as of January 1, 1990, and February 18, 1995 (the "Contingency Employment Agreement"). 3. The Company and the Executive have previously entered into an Agreement Regarding Special Compensation and Post-Employment Restrictive Covenants, dated as of August 8, 1994 (the "Severance Agreement"). 4. The Company and the Executive have previously entered into a Restated Memorandum Agreement, dated January 17, 1987 (the "Memorandum Agreement"), providing Executive a 15-year mid-career pension enhancement. 5. The Company and the Executive have previously entered into an Employment and Post-Retirement Consulting Agreement, dated as of August 7, 2000 (the "Consulting Agreement," and together with the Contingency Employment Agreement, the Severance Agreement, and the Memorandum Agreement, the "Prior Agreements"). 6. The Executive has been, and now is serving as the Chief Executive Officer of Sprint and the Chairman of its Board of Directors (the "Board"). 7. The Company desires to secure the continued long-term employment of the Executive and the Executive's services as a consultant to the Company following the termination of his employment. 1 8. In furtherance of the foregoing, the Company and the Executive desire to amend, combine, and restate the Prior Agreements in the form of this Agreement. 9. Certain capitalized terms used herein are defined in Section 10 of this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration are mutually acknowledged by the parties, the parties hereby agree as follows: 1. Employment and Termination (a) Conditions of Employment Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as the Chief Executive Officer of Sprint and, provided that the Executive continues to be so nominated and elected, the Executive shall also serve as Chairman of the Sprint Board, in each case with such authority, power, responsibilities, and duties customarily exercised by a person holding such positions in a company of the size and nature of the Company. (b) Performance of Duties The Executive shall, during his employment with the Company, owe an undivided duty of loyalty to the Company and agrees to use his best efforts to promote and develop the business of the Company. The Executive agrees that during his employment with the Company, he must devote his full business time, energies and talents to serving as its Chairman and Chief Executive Officer and that he shall perform his duties faithfully and efficiently subject to the directions of the Board. Notwithstanding the foregoing, the Executive may (i) serve as a director, trustee or officer or otherwise participate in not-for- profit educational, welfare, social, religious and civic organizations, (ii) serve as a director of any for-profit business listed on Exhibit A hereto or, with the prior consent of the Board, serve as a director of any for-profit business that is not a Competitor, and (iii) acquire passive investment interests in one or more entities, to the extent that such other activities do not inhibit or interfere with the performance of the Executive's duties under this Agreement, or to the knowledge of the Executive conflict in any material way with the business or policies of the Company. (c) Term of Employment The term of the Executive's employment under this Agreement (the "Employment Term") begins on the Effective Date and ends on the earlier of (i) May 1, 2005, or (ii) the date of the Company's first annual shareholders meeting following the Executive's 65th birthday (the earlier of (i) and (ii), the "End Date"). 2 This Agreement sets forth certain terms of Executive's employment during the Employment Term, the consequences of any termination of employment during the Employment Term, the terms of certain restrictive covenants by the Executive during and after the Employment Term, and the terms of certain services to be provided by Executive if he terminates his employment after the second anniversary of the Effective Date or if his employment terminates under certain other circumstances described herein. The Company and Executive agree that the employment relationship is at will, and either party may terminate the employment relationship for any reason in accordance with the procedures and with the consequences set forth in this Agreement. (d) Procedures for Termination (A) General Procedures. Except as set forth below, any purported termination of this Agreement or of the Executive's employment by the Company or by the Executive during the Employment Term, other than by Executive's death, shall be communicated by a written notice of termination to the other party hereto delivered in accordance with Section 37 below indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated. Any such termination will be effective on the Termination Date. (B) Cause Termination. The Company may not terminate Executive's employment for Cause during the Employment Term until it delivers to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board, excluding Executive, at a meeting of the Board (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of conduct constituting Cause and specifying the particulars thereof in detail. The subject of Executive's termination for Cause must be included in the agenda in the notice of the meeting sent to members of the Board. Delivery of the resolution constitutes notice of termination for Cause by the Company. (C) Good Reason Termination. Executive may terminate his employment for Good Reason during the Employment Term only within the Change in Control Protected Period, except that Executive may not give notice of termination for Good Reason during any period in which the Executive is unable to substantially perform his duties with the Company due to physical or mental illness. In order to effect a termination for Good Reason, Executive must deliver a written notice to the Company that sets forth the specific event or circumstance giving rise to Good Reason by reference to one or more portions of the definition of Good Reason set forth in Section 30 of this Agreement. 3 (D) Constructive Discharge. Executive may terminate his employment upon Constructive Discharge any time during the Employment Term following written notice and an opportunity for the Company to cure. In order to effect a termination for Constructive Discharge, Executive must deliver a written notice to the Company within 60 days following the event giving rise to Executive's claim for Constructive Discharge. The notice must set forth the specific event or circumstance giving rise to Constructive Discharge by reference to one or more portions of the definition of Constructive Discharge set forth in Section 30 of this Agreement. If, within 30 days following notice from the Executive, the Company fully corrects the circumstances giving rise to the Executive's claim for Constructive Discharge, the Executive shall not be entitled to terminate his employment for Constructive Discharge by reason of such event. (e) Payment of Compensation Earned Through Termination Date. Upon a termination of the Executive's employment hereunder for any reason, the Executive or, in the event of his death, the Executive's estate, in addition to any other payments or benefits to which the Executive may be entitled hereunder, is entitled to the Executive's Base Salary prorated through the Termination Date, any payment under the Incentive Plans for Performance Periods ending before the Termination Date, unless eliminated or reduced, and then only to the extent that such payments are eliminated or reduced, for all Senior Officers continuing employment with the Company, and any vacation pay for vacation accrued by the Executive in the calendar year of termination but not taken at the Termination Date. Except as otherwise provided herein, the Company must pay any other employee benefits to which the Executive is entitled by reason of his employment to the Executive or his estate at the time or times required by the terms of the applicable Company plan or policy. (f) Effect of Termination on Other Positions. If, on the Termination Date, the Executive (i) is a member of the Board of Sprint or any of its subsidiaries, (ii) serves on the board of directors of any other corporation by nomination, appointment, or designation by the Company, or (iii) holds any other position with Sprint or any of its subsidiaries, the Executive shall, unless otherwise agreed to by the Board, be deemed to have resigned from all such positions as of the Termination Date. Executive agrees to execute such documents and take such other actions as the Company may request to reflect such resignations. 2. Compensation Subject to the terms of this Agreement, during the Employment Term, while the Executive is employed by the Company, the Company will compensate him for his services as follows: 4 (a) Base Salary. The Executive shall receive an annual base salary in an amount not less than his annual salary on the Effective Date, payable in monthly or more frequent installments in accordance with the Company's payroll policies (such annual base salary as adjusted pursuant to this Section 23(a) shall hereinafter be referred to as the "Base Salary"). The Executive's Base Salary shall be reviewed, and may be increased but not decreased below the rate in effect on the Effective Date (other than across-the-board reductions similarly affecting all Senior Officers), by the Board in a manner that is fair and pursuant to its normal performance review policies for Senior Officers. (b) Initial Option Grant As of the Effective Date, the Company grants the Executive a non-qualified stock option (the "PCS Option") under the Company's 1990 Stock Option Plan (the "1990 Plan") to purchase 1,500,000 shares of PCS Common Stock, having a strike price equal to the Fair Market Value (as defined in the 1990 Plan) of a share of PCS Common Stock on the Effective Date. In addition, as of the Effective Date, the Company grants the Executive a non-qualified stock option (the "FON Option" and, together with the PCS Option, the "Options") under the 1990 Plan to purchase 1,500,000 shares of FON Common Stock, at a strike price equal to the Fair Market Value (as defined in the 1990 Plan) of a share of FON Common Stock on the Effective Date. Subject to the Executive's continued employment with the Company, the Options shall become exercisable in full on the fourth anniversary of the Effective Date. In addition, the Options shall become exercisable in full (1) upon the Company's termination of the Executive's employment without Cause, but only if the Board's decision to terminate the Executive's employment without Cause was voted against by at least two of the Board's non-employee directors, (2) upon a Change in Control on or after the first anniversary of the Effective Date, and (3) under Section 7.01(i)(1) of the 1990 Plan upon the Executive's Death or Total Disability (as those terms are defined in the 1990 Plan), but shall not become exercisable pursuant to Section 7.01(i)(2) of the 1990 Plan upon Executive's Normal Retirement (as defined in the 1990 Plan). The Options shall otherwise have the standard terms set forth in the 1990 Plan and shall be subject to the 1990 Plan, except that, for purposes of the Options, (A) the terms "Change in Control" and "Termination Date" (except as provided in Section 26(b)) shall have the meanings set forth in this Agreement rather than the meanings set forth in the 1990 Plan, and (B) the Executive need not make the agreement required by Section 7.01(m) of the 1990 Plan to remain employed by the Company for one year from the Effective Date. (c) Subsequent Option Grants The grants of the Options are in lieu of annual executive stock option grants under the Option Plans to the Executive for the years 2002 and 2003, and, unless otherwise determined by the Committee, the Executive will not be considered for or 5 entitled to option grants under the Option Plans in those years. Option grants to the Executive for years subsequent to 2003 shall be reviewed by the Board in a manner that is fair and pursuant to its normal performance review policies for option grants to Senior Officers. (d) Incentive Payments. The Executive will continue to participate in the Incentive Plans, subject to the terms and conditions of the Incentive Plans as they may from time to time be established, amended, or terminated in accordance with the Company's plans or policies governing such benefits to the Company's Senior Officers generally. The Executive's Targeted Compensation under the Incentive Plans shall be reviewed, and may be increased but not decreased below his highest Targeted Compensation in effect in 2001 (other than across-the-board reductions similarly affecting all Senior Officers), by the Board in a manner that is fair and pursuant to its normal performance review policies for Senior Officers. (e) Employee Benefits, Fringe Benefits and Perquisites. The Company will provide the Executive with employee benefits, fringe benefits, and perquisites (including, without limitation, miscellaneous services, life, disability, medical and dental insurance coverages, and participation in the Company's Executive Deferred Compensation Plan, Key Management Benefit Plan, Savings Plan, and the Pension Plan) that are no less favorable in the aggregate to the Executive than those provided to him as of the Effective Date, subject to amendment, modification or termination in accordance with the Company's plans or policies governing such benefits to Senior Officers generally. (f) Expense Reimbursement. The Company will reimburse the Executive for reasonable expenses incurred and accounted for in accordance with the policies and procedures of the Company for Senior Officers generally, as they may from time to time be established, amended, or terminated. (g) Standby Loan Arrangement. The Board will consider in good faith and in a reasonable manner the Executive's request from time to time for the Company to facilitate or make a loan (in either case, the "Loan Arrangement") to enable the Executive (i) to retain ownership of Sprint stock, (ii) to acquire, through option exercise or otherwise, Sprint stock, (iii) to pay taxes associated with the retaining ownership of Sprint stock, or (iv) to pay taxes associated the acquisition of Sprint stock. It is the current intent of the Board to view favorably the Executive's request for a Loan Arrangement, though the parties acknowledge that any action taken by the Board must be consistent with the Board's 6 view of its fiduciary duties and must be based on its determination that the action is in the best interests of the Company and its shareholders. Any loan to the Executive, if made by the Company, shall bear interest at the Applicable Federal Rate or such other rate that at the time is appropriate, giving consideration to any expense to the Company and any imputed income to the Executive, and all other terms and conditions of the Loan Arrangement shall be approved by the Board in its discretion, based on its good faith consideration of the factors relevant to the fulfillment of the Board's fiduciary duties, such as: (i) the amount necessary to enable the Executive to increase or retain all or a significant portion of his stock holdings in the Company, (ii) the likely impact of the Executive's sale of his Company stock on the market price of such stock, (iii) the Executive's borrowing capacity, (iv) the collateral given by the Executive to secure the Loan, (v) the terms of comparable loans to executives of other companies, (vi) the market price of the Company's stock and the value of the Executive's stock holdings in the Company, (vii) the short-term and long-term cash flow needs of the Executive, and (viii) the potential accounting and tax consequences of the Loan Arrangement to the Company. (h) Supplemental Retirement Benefits. The Company agrees that for the purpose of determining the pension benefits to be provided under this Agreement, the Executive shall be credited with 15 years of service as a Mid-Career Pension Enhancement under the Company's Supplemental Executive Retirement Plan ("SERP") in lieu of benefits under the Memorandum Agreement. While receiving supplemental retirement benefits associated with the Mid-Career Pension Enhancement, Executive covenants that he will not compete against the Company, but Section 5.4 of the SERP shall not apply to the Executive. The pension benefit determined under the SERP shall be offset by the pension benefit determined under the Pension Plan. It is further agreed that the terms of the Pension Plan and the terms of the SERP, including any amendments hereafter adopted for said plans, shall be deemed to be incorporated by reference in this Agreement except to the extent any provisions in the plans would be inconsistent with the specific terms of this Agreement. Notwithstanding Section 1(g) of the Key Management Benefit Plan of Section 2(b) of Executive's participation agreement thereunder, Executive may retire 7 after the first day of the month following his 65th and on or before the End Date without losing benefits under that plan. (i) Elimination of Section 280G Limitations. If during the Employment Term, a Change in Control or other change in the equity structure of the Company occurs that would result in the acceleration of benefits under the Company's stock option plans, restricted stock plans or other benefit plans of the Company, except for the fact that such plans or agreements under such plans limit acceleration to amounts deductible by the Company under Code Section 280G (or any successor provision), then such limitations shall not apply to the Executive. 3. Post-Retirement Consulting (a) Consulting Services. If (i) the Executive terminates his employment after the second anniversary of the Effective Date, or (ii) the Company terminates the Executive's employment during the Employment Term for any reason other than Cause or Total Disability (as defined in the Company's Long-Term Disability Plan), or (iii) the Executive terminates his employment with the Company (A) during the Employment Term for Constructive Discharge or (B) during the Change in Control Protected Period for Good Reason, the Company agrees to retain Executive as a consultant to and representative of the Company, and when and as requested by the Chief Executive Officer of the Company, the Executive will provide consulting and advice to the Company and will participate in various external activities and events for the benefit of the Company on the terms and conditions provided in this Section 3. This Section 3 will not apply, and neither the Company nor the Executive shall have any rights or obligations under this Section 3, unless the events set forth in (i), (ii) or (iii) of the preceding sentence occur. The Executive agrees to provide up to thirty (30) days per year to the Company, subject to the Executive's reasonable availability, for such services. The Executive will perform services under this Section 3 as an independent contractor. The Company agrees that Executive will be considered an agent of the Company while performing services under this Section 3 for purposes of the Indemnification Agreement between the Company and Executive dated April 14, 1987. (b) Compensation for Consulting Services. In return for the foregoing commitments by the Executive, the Company will pay the Executive, for consulting services or participation in external activities and events performed at the request of the Chief Executive Officer of the Company, a daily consulting fee, for the days the Executive renders services, equal to 1/250th of his Base Salary rate at his Termination Date. The Company will also provide the Executive continued access to office facilities and services comparable to those provided to him 8 before his Termination Date, including office and secretarial support, use of the Company aircraft (or private aircraft at the Company's discretion), communications services, two club memberships, and financial planning services, in each case comparable to those provided to Executive on his Termination Date. The Company will continue to provide these services for a period of 10 years following Executive's Termination Date, but will continue to provide an office and secretarial support for Executive's lifetime. The Company will also reimburse the Executive, upon the receipt of appropriate documentation, for reasonable travel and living expenses that he incurs in providing services at the request of the Company's Chief Executive Officer or that he incurs because of his position as a retired Chairman and Chief Executive Officer of Sprint. Subject only to the Executive's compliance, to the best of his ability, with his commitments set forth in this Section 3, the Company's obligations set forth in this agreement are unconditional and irrevocable and shall apply irrespective of the Executive's incapacitation, before or after his retirement, to perform services hereunder. (c) Benefits to Cease upon Performance of Services for a Competitor. If the Executive performs services for a Competitor, his right to receive benefits under this Section 3 shall cease immediately. 4. Executive Covenants (a) Principles of Business Conduct. The Executive shall adhere in all respects to the Company's Principles of Business Conduct (or any successor code of conduct) as in effect on the Effective Date and as they may from time to time be established, amended, or terminated. (b) Proprietary Information. The Executive acknowledges that during the course of his employment and consulting he has learned or will learn or develop Proprietary Information. The Executive further acknowledges that unauthorized disclosure or use of such Proprietary Information, other than in discharge of the Executive's duties, will cause the Company irreparable harm. Except in the course of his employment with and consulting for the Company under this Agreement, in the pursuit of the business of the Company, or as otherwise required in employment with or consulting for the Company, the Executive shall not, during the course of his employment or at any time following termination of his employment, directly or indirectly, disclose, publish, communicate, or use on his behalf or another's behalf, any Proprietary Information. If during or after his employment or consulting the Executive has any questions about whether particular information is Proprietary Information he shall consult with the Company's General Counsel. 9 The Executive also agrees to promptly disclose to the Company any information, ideas, or inventions made or conceived by him that result from or are suggested by services performed by him for the Company under this Agreement, and to assign to the Company all rights pertaining to such information, ideas, or inventions. Knowledge or information of any kind disclosed by the Executive to the Company shall be deemed to have been disclosed without obligation on the part of the Company to hold the same in confidence, and the Company shall have the full right to use and disclose such knowledge and information without compensation to the Executive beyond that specifically provided in this Agreement. (c) Non-Competition. During the Executive's employment with the Company and during the Non- Compete Period, Executive shall not engage in Competitive Employment, whether paid or unpaid and whether as a consultant, employee, or otherwise. If the Executive ceases to be employed by the Company because of the sale, spin-off, divestiture, or other disposition by the Company of a subsidiary, division, or other divested unit employing the Executive, this provision shall continue to apply during the Non-Compete Period, except that the Executive's continued employment for the subsidiary, division, or other divested unit disposed of by the Company shall not be deemed a violation of this provision. The Executive agrees that because of the worldwide nature of the Company's business, breach of this Agreement by accepting Competitive Employment would irreparably injure the Company and that, therefore, a limited geographic restriction is neither feasible nor appropriate to protect the Company's interests. In addition, during the Executive's employment with the Company, during the term of consulting services under Section 3, and during the Non-Compete Period, the Executive agrees to obtain the approval of the Board before serving as the chairman or chief executive officer of any Fortune 100 company. (d) Inducement of Employees, Customers and Others. During the Executive's employment with the Company, during the term of consulting services under Section 3, and during the Non-Compete Period, Executive may not directly or indirectly solicit, induce, or encourage any employee, consultant, agent, customer, vendor, or other parties doing business with the Company to terminate their employment, agency, or other relationship with the Company or to render services for or transfer business to any Competitor, and the Executive shall not initiate discussion with any such person for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity on behalf of the Competitor. 10 (e) No Adverse Actions. During the term of consulting services under Section 3 and during the Non- Compete Period, the Executive shall not, without the prior written consent of the Company, in any manner, solicit, request, advise, or assist any other person or entity to (a) undertake any action that would be reasonably likely to, or is intended to, result in a Change in Control, or (b) seek to control in any material manner the Board. (f) Return of Property. The Executive shall, upon his Termination Date, return to the Company all property of the Company in his possession, including all notes, reports, sketches, plans, published memoranda or other documents, whether in hard copy or in electronic form, created, developed, generated, received, or held by the Executive during his employment, concerning or related to the Company's business, whether containing or relating to Proprietary Information or not. The Executive shall not remove, by e-mail, by removal of computer discs or hard drives, or by other means, any of the above property containing Proprietary Information, or reproductions or copies thereof, or any apparatus from the Company's premises without the Company's written consent. The Executive may, with the consent of the Company, maintain in his possession such property as may be necessary or useful in carrying out his duties as a consultant and representative under Section 3, but must return any such property as set forth in this Section at the request of the Company. (g) Mutual Nondisparagement. The Executive agrees to refrain from making any statements about the Company or its officers or directors that would disparage, or reflect unfavorably upon the image or reputation of the Company or any such officer or director. The Company agrees to refrain from making any statements about the Executive that would disparage, or reflect unfavorably upon the image or reputation of the Executive. (h) Assistance with Claims. Executive agrees that, consistent with the Executive's business and personal affairs, during and after his employment by the Company, he will assist the Company in the defense of any claims or potential claims that may be made or threatened to be made against it in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding") and will assist the Company in the prosecution of any claims that may be made by the Company in any Proceeding, to the extent that such claims may relate to the Executive's services provided under this Agreement. Executive agrees, unless precluded by law, to promptly inform the Company if Executive is asked to participate (or otherwise become involved) in any Proceeding involving such claims or potential claims. Executive also agrees, unless precluded by 11 law, to promptly inform the Company if Executive is asked to assist in any investigation (whether governmental or private) of the Company (or its actions), regardless of whether a lawsuit has then been filed against the Company with respect to such investigation. The Company agrees to reimburse Executive for all of Executive's reasonable out-of-pocket expenses associated with such assistance, including travel expenses and any attorneys' fees and shall pay a reasonable per diem fee (equal to 1/250th of his Base Salary rate at his Termination Date ) for Executive's services. (i) Key Man Life Insurance. The Company may, at its discretion, purchase for its own benefit and at its own expense, key man life insurance on the life of the Executive to cover the repayment of any unpaid loan balances at the Executive's death, and the Executive shall not have any right, title or interest in or to such insurance. The Executive agrees to cooperate with the life insurance company and the Company in the insurance underwriting process, including a physical examination and other tests necessary to secure coverage, and to sign all appropriate applications and written forms as may be required by the insurance company. 5. MCI WorldCom Merger Not a Change in Control Notwithstanding anything contained herein or in any of the Prior Agreements, the Executive agrees that neither the approval by the Company's stockholders of the proposed merger of the Company with MCI WorldCom, Inc., pursuant to the Agreement and Plan of Merger, dated October 4, 1999, as amended and restated as of March 8, 2000 (the "Proposed Merger"), which Proposed Merger was terminated by the Company and MCI WorldCom, Inc., on July 13, 2000, nor any other action or event that occurred in connection with the Proposed Merger may form the basis for any claim or benefit arising from the Prior Agreements not made by or provided to Executive before the Effective Date. The Executive hereby represents and warrants that he has not made (or caused to be made) such a claim or taken (or caused to be taken) any action which would result in such a claim or the provision of such benefit. In addition, the Executive agrees that neither the approval by the Company's stockholders of the Proposed Merger nor any other action or event that occurred in connection with the Proposed Merger may form the basis for any claim or benefit arising from this Agreement. The Executive hereby represents and warrants that he will not make (or cause to be made) such a claim or take (or cause to be taken) any action which would result in such a claim or the provision of such benefit. This Agreement supersedes the Prior Agreements, which as of the Effective Date, are null and void. 12 6. Payments on Certain Terminations (a) Payments on Certain Terminations Not in Connection with Change in Control If, during the Employment Term but not within the Change in Control Protected Period, (a) the Company terminates Executive's employment with the Company for any reason other than (x) Cause or (y) Executive's Total Disability or (b) the Executive terminates his employment with the Company upon Constructive Discharge, then the Executive shall, subject to the other provisions of this Section 26, be entitled to the following payments and benefits (the "Non-Change in Control Benefits") in lieu of any payments or benefits available under any and all Company separation plans or policies: (i) The Company will pay Executive his Base Salary, in equal installments in arrears and on the same schedule as paid before his Termination Date, for a period (the "Non-Change in Control Severance Period") commencing on the Termination Date and ending on the earlier to occur of (A) the eighteen (18) month anniversary of the Termination Date, or (B) the End Date, at the rate in effect on his Termination Date; (ii) For the Performance Period in which the Termination Date occurs, the Company will pay the Executive, at the time when payouts are made for that Performance Period under the Short-Term Incentive Plan, an amount equal to the Termination Period Incentive Payout. In addition, the Company will pay Executive an amount equal to 1/12th (adjusted appropriately if the Performance Period in which the Termination Date occurs is other than a 12-month period) of the Termination Period Incentive Payout at the end of each month that (1) follows the Performance Period in which the Termination Date occurs and (2) ends with or within the Non-Change in Control Severance Period. In determining the number of months, for purposes of this clause (ii), both the Termination Date and the end of the Non-Change in Control Severance Period will be rounded to the nearest month boundary by rounding to the beginning of the month if the date falls on or before the 15th of the month and to the beginning of the following month if the date falls after the 15th of the month. Any stock options granted in lieu of Targeted Compensation under the Short-Term Incentive Plan will continue to vest during the Non- Change in Control Severance Period; (iii) (A) For Performance Periods in which the Termination Date occurs and in which the Long-Term Incentive Plan awards are to be measured in cash, the Company will pay the award with respect to each Performance Period at the time payment would be made under the plan for the Performance Period, without regard to any participation requirement, and, with respect to each Performance Period, will pay an amount equal to the Termination Period Incentive Payout; (B) for Performance Periods in which the Termination Date 13 occurs and in which the Long-Term Incentive Plan awards are to be measured in stock options, the options granted with respect to each Performance Period will continue to vest during the Non-Change in Control Severance Period; (iv) During the Non-Change in Control Severance Period, the Company will provide any executive medical, dental, life, and qualified or nonqualified retirement benefits that the Executive was receiving or was entitled to receive as of the Termination Date, except that long-term disability and short-term disability benefits shall cease on the Executive's last day worked as an employee of the Company, but if the Executive becomes employed full-time during the Non-Change in Control Severance Period, the Executive's entitlement to continuation of these benefits shall immediately cease, except that the Executive shall retain any rights to continue coverage under the COBRA continuation provisions of the Company's welfare benefit plans by paying the applicable premium therefor; (v) During the Non-Change in Control Severance Period, the Company will pay outplacement counseling by a firm selected by the Company to continue until such time as Executive becomes re-employed; and (vi) During the Non-Change in Control Severance Period, the Company will provide Executive with all applicable executive perquisites that the Executive was receiving or was entitled to receive on the Termination Date (including automobile allowance, communications services and all miscellaneous services) other than country club membership dues and accrual of vacation. In all events, the Executive's right to receive the Non-Change in Control Benefits shall cease immediately if the Executive is re-employed by the Company or an affiliate of the Company or if the Executive breaches the Restrictive Covenants. In all cases, the Company's rights under Section 29(a) shall continue. (b) Payments on Certain Terminations in Connection with a Change in Control If a Change in Control occurs during the Employment Term and, within the Change in Control Protected Period, the Executive's employment with the Company is terminated (a) by the Company for any reason other than (x) Cause or (y) Executive's Total Disability, or (b) by the Executive for Good Reason, the Executive shall be entitled to the following payments and benefits (the "Change in Control Benefits") in lieu of any payments or benefits available under Section 26(a) above or under any and all Company separation plans or policies: (i) In lieu of any further salary payments to the Executive for periods after the Termination Date, the Company will pay to the Executive monthly (for a period (the "Change in Control Severance Period") commencing on the Termination Date and ending on the earlier to occur of (A) the thirty-five (35) month anniversary of the Termination Date or (B) the End Date) a payment equal to 14 the Executive's highest monthly Base Salary (without regard to any deferred amounts) paid during the 36-month period ending on the Termination Date; (ii) In lieu of any payments under, and notwithstanding any provisions of the Incentive Plans, the Company shall pay to the Executive an amount (the "Maximum Payout Amount") up to three times the sum of (1) the highest short-term incentive payment (without regard to any deferred amounts and without regard to any amounts with respect to which Executive elected to purchase options under the Management Incentive Stock Option Plan) and (2) the highest long-term incentive payment received by the Executive under the Incentive Plans with respect to the three Performance Periods ending most recently on or before the Termination Date. The payments will be made in up to three installments on the first day of the 13th, 25th, and 35th month following the Termination Date, and each installment shall be one-third of the Maximum Payout Amount, or a lesser amount until the cumulative amount of all payments is equal to the Maximum Payout Amount times a fraction, the numerator of which is the number of months in the Change in Control Severance Period and the denominator of which is 36. For purposes of the foregoing, payments under the Long-Term Incentive Plan for Performance Periods with respect to which payments were not made in cash, but in vesting of stock options, the "payment" will be deemed to be equal to the Executive's Targeted Compensation for that Performance Period multiplied by the Performance Period Stock Appreciation for that Performance Period. Any stock options granted with respect to Performance Periods under the Long-Term Incentive Plan beginning before the Termination Date will continue to vest during the Change in Control Severance Period; (iii) For purposes of the Company's Executive Deferred Compensation Plan, notwithstanding any provision to the contrary in such plan, the rate at which interest shall be credited to the Executive's Deferred Compensation Account A and AA (as defined in such plan) shall be equal to the maximum interest rate allowed for the account under such plan if and as amended; (iv) Notwithstanding anything in the Company Savings Plan, the Executive shall be entitled to receive a cash payment in an amount equal to the value of the nonvested portion of his Company Contribution Account (as defined in such plan) as of the Termination Date; (v) In addition to the retirement benefits to which the Executive is entitled under the Sprint Retirement Pension Plan (the "Pension Plan") or any successor plans thereto, (1) the Executive shall be credited with three years of additional service at the Executive's highest annual compensation rate during the term of the Contingency Employment Agreement or the Employment Term for purposes of determining the amount of the Executive's pension, (2) the Executive shall, at the time of the Executive's retirement, receive the life and medical post- 15 retirement benefits that would be due to a retiree under the Pension Plan, (3) for purposes of the Executive's supplemental retirement benefits under Section 2(h) of this Agreement, the Executive shall be credited as of the Termination Date with the maximum number of years of service at the Executive's highest annual compensation rate during the term of the Contingency Employment Agreement or the Employment Term potentially available to the Executive under the SERP as modified by Section 2(h), and (4) if the Executive takes early retirement, the Company shall supplement the Executive's pension so that the Executive is, notwithstanding the Pension Plan early retirement provisions, not subject to any early retirement pension reduction; (vi) During the Change in Control Severance Period, the Company will arrange to provide the Executive with or reimburse the Executive for life, disability, medical and dental insurance coverages substantially similar to and at the same cost to the Executive as the cost to the Senior Officers during such period, but the coverages shall cease immediately if the Executive obtains subsequent employment; (vii) During the Change in Control Severance Period, the Company will pay outplacement counseling by a firm selected by the Company to continue until such time as Executive becomes re-employed; and (viii) The Options shall continue to vest during the Change in Control Severance Period and the last day of the Change in Control Severance Period shall be the Termination Date for purposes of the 1990 Plan. In all events, the Executive's right to receive the Change in Control Benefits shall cease immediately if the Executive is re-employed by the Company or an affiliate of the Company or if the Executive breaches the Restrictive Covenants. In all cases, the Company's rights under Section 29(a) shall continue. (c) Other Provisions Regarding Payments and Benefits (A) No Mitigation; No Offset. In the event of any termination of employment resulting in payments under this Section 26, the Executive need not seek other employment and, except as expressly provided herein, there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. The payments and benefits provided for hereunder shall be in full settlement and satisfaction of all of Executive's claims and demands relating to or arising out of his employment with the Company or the termination thereof, and the Company's obligation to provide such payments and benefits is expressly made subject to and conditioned upon (i) the Executive's execution, within forty-five (45) days after the Termination Date, of a release of such claims and demands in such form as the 16 Company may reasonably determine and (ii) the Executive's non-revocation of such release in accordance with the terms thereof. (B) Nature of Payments. Any amounts due under this Section 26 are in the nature of severance payments considered to be reasonable by the parties and are not in the nature of a penalty. (C) Benefit Plans. If, for any period during which the Executive is entitled to continued benefits under this Section 26, the Company reasonably determines that the Executive cannot participate in any benefit plan because he is not actively performing services for the Company, then, in lieu of providing benefits under any such plan, the Company shall provide comparable benefits or the cash equivalent of the cost thereof (after taking into account incremental payroll and income tax consequences thereof to the Executive and the Executive's dependents as the case may be) to the Executive and, if applicable, the Executive's dependents through other arrangements. (D) Other Severance Arrangements. Except as may be otherwise specifically provided in an amendment of this Section 26(c)(D) adopted in accordance with this Agreement, the Executive's rights under Section 26 shall be in lieu of any benefits that may be otherwise payable to or on behalf of the Executive pursuant to the terms of any severance pay arrangement of the Company or any other similar arrangement of the Company providing benefits upon termination of employment. (E) Time of Payments. If the amount of any payment provided for in Section 26(b) cannot be calculated on or before the date on which such payment is due, the Company shall pay to the Executive on such day an estimate, as calculated in good faith by the Company, of the minimum amount of such payment and shall pay the remainder of such payments when calculable. 7. Tax Reimbursement If the benefits provided under this Agreement together with other benefits, if any, the Executive receives from the Company constitute "excess parachute payments," (the "Affected Benefits") as defined in Section 280G of the Code, the Company shall pay the Executive an additional amount such that the net amount retained by the Executive after payment of any excise tax that would be imposed by Section 4999 of the Code (the "Excise Tax") and any federal, state and local income tax, FICA tax and Excise Tax payable with respect to the payment provided for in this Section 27, shall equal the amount the Affected Benefits would have been in the absence of the Excise Tax. For the purpose of determining the amount of the payment provided for in this Section 27, the Executive shall be deemed to pay federal, state and local income taxes at 17 the highest marginal rates in effect as of the payment date and the calculation shall take into account, as applicable, the deduction of any state, federal, or local income taxes. 8. Interest on Payments If the Company fails to pay any amounts due to Executive under this Agreement as they come due, the Company agrees to pay interest on such amounts at the Applicable Federal Rate plus two percent (2%) per annum. If any payment is in excess of the amount due, the excess shall constitute a loan by the Company to the Executive, payable on the 90th day after demand by the Company, together with interest at the Applicable Federal Rate. 9. Enforcement and Remedies (a) Equitable Remedies The Executive acknowledges that the Company would be irreparably injured by a violation of Sections 24(b) through 24(e) (the "Restrictive Covenants") and he agrees that the Company, in addition to any other remedies available to it for any breach or threatened breach, shall be entitled to a preliminary or permanent injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of the Restrictive Covenants. If a bond is required to be posted in order for the Company to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum. The Executive shall be entitled to seek specific performance of his right to be paid amounts earned through the Termination Date pursuant to Section 22(e) during the pendency of any dispute or controversy arising under or in connection with this Agreement. (b) Resolution of Disputes All disputes, claims, or controversies arising under or in connection with this Agreement, other than those contemplated by Section 29(a) above, shall be settled exclusively by binding arbitration administered by JAMS/Endispute in the greater Kansas City area in accordance with the then existing JAMS/Endispute Arbitration Rules and Procedures for Employment Disputes, except that the parties agree that the arbitrator is not authorized or empowered to impose punitive damages on either of the parties. If it is determined that any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced, the arbitrator shall have the authority to modify the provision or term to the minimum extent required to permit enforcement. In the event of such an arbitration proceeding, the Administrator of JAMS/Endispute will appoint the arbitrator. 18 (c) Attorney Fees If either party seeks to enforce this Agreement and prevails on the merits, the losing party agrees to pay to the prevailing party all reasonable legal fees and expenses incurred by the prevailing party in seeking such enforcement. Such payments shall be made within five (5) days after the prevailing party's request for payment accompanied by such evidence of fees and expenses incurred as the losing party reasonably may require. 10. Definitions As used in the Agreement, the following terms shall have the meanings set forth below. (a) Actual Incentive Payout "Actual Incentive Payout" means, with respect to a Performance Period, the product of (1) the Performance Measure for the Performance Period and (2) the Executive's Targeted Compensation for the Performance Period. (b) Applicable Federal Rate "Applicable Federal Rate" means the applicable Federal rate within the meaning of Section 7872 of the Code. (c) Capped Incentive Payout "Capped Incentive Payout" means (i) with respect to a Performance Period under the Short-Term Incentive Plan, the product of (1) the lesser of (a) 100% and (b) the Performance Measure for the Performance Period and (2) the Executive's Targeted Compensation for the Performance Period, and (ii) with respect to a Performance Period under the Long-Term Incentive Plan, zero dollars. (d) Cause Termination by the Company of the Executive's employment for "Cause" means termination upon (A) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties, or (B) the willful engaging by the Executive in conduct that is a serious violation of the Company's Principles of Business Conduct, or (C) the willful engaging by the Executive in conduct that is demonstrably and materially injurious to the Company. For purposes of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be 19 done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Failure to meet performance expectations, unless willful, continuing, and substantial shall not be considered "Cause." (e) Change in Control "Change in Control" means the occurrence of any of the following events: (i) the acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder, including, without limitation, Rule 13d-5(b)) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of Sprint that represent 30% or more of the combined voting power of Sprint's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by Sprint or any person controlled by Sprint or by any employee benefit plan (or related trust) sponsored or maintained by Sprint or any person controlled by Sprint, or (B) an acquisition of voting securities by Sprint or a corporation owned, directly or indirectly, by the stockholders of Sprint in substantially the same proportions as their ownership of the stock of Sprint, or (C) an acquisition of voting securities pursuant to a transaction described in clause (iii) below that would not be a Change in Control under clause (iii); (ii) a change in the composition of the Board that causes less than a majority of the directors of Sprint to be directors that meet one or more of the following descriptions: (A) a director who has been a director of Sprint for a continuous period of at least 24 months, or (B) a director whose election or nomination as director was approved by a vote of at least two-thirds of the then directors described in clauses (ii)(A), (B), or (C) by prior nomination or election, but excluding, for the purpose of this subclause (B), any director whose initial assumption of office occurred as a result of an actual or threatened (y) election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board or (z) tender offer, merger, sale of substantially all of Sprint's assets, consolidation, reorganization, or 20 business combination that would be a Change in Control under clause (iii) on consummation thereof, or (C) who were serving on the Board as a result of the consummation of a transaction described in clause (iii) that would not be a Change in Control under clause (iii); (iii) the consummation by Sprint (whether directly involving Sprint or indirectly involving Sprint through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of Sprint's assets or (z) the acquisition of assets or stock of another entity, in each case, other than in a transaction (A) that results in Sprint's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of Sprint or the person that, as a result of the transaction, controls, directly or indirectly, Sprint or owns, directly or indirectly, all or substantially all of Sprint's assets or otherwise succeeds to the business of Sprint (Sprint or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which more than 50% of the members of the board of directors of the Successor Entity were members of the Board at the time of the Board's approval of the agreement providing for the transaction or other action of the Board approving the transaction (or whose election or nomination was approved by a vote of at least two-thirds of the members who were members of the Board at that time), and (C) after which no person or group beneficially owns voting securities representing 30% or more of the combined voting power of the Successor Entity; provided, however, no person or group shall be treated for purposes of this clause (C) as beneficially owning 30% or more of combined voting power of the Successor Entity solely as a result of the voting power held in Sprint prior to the consummation of the transaction; or (iv) a liquidation or dissolution of Sprint. For purposes of clarification, (x) a change in the voting power of Sprint voting securities based on the relative trading values of Sprint's then outstanding securities as determined pursuant to Sprint's Articles of Incorporation or (y) an acquisition of Sprint securities by Sprint that, in either case, by itself (or in combination only with the other event listed in this sentence) causes the Sprint's voting securities beneficially owned by a person or group to represent 30% or more of the combined voting power of Sprint's then outstanding voting securities is not to be treated as an "acquisition" by any person 21 or group for purposes of clause (i) above. For purposes of clause (i) above, Sprint makes the calculation of voting power as if the date of the acquisition were a record date for a vote of Sprint's shareholders, and for purposes of clause (iii) above, Sprint makes the calculation of voting power as if the date of the consummation of the transaction were a record date for a vote of Sprint's shareholders. (f) Change in Control Protected Period "Change in Control Protected Period" means the period commencing on the date of a Change in Control and ending on the earlier to occur of (A) the three year anniversary of the date of the Change in Control or (B) the day before the End Date. (g) Code "Code" means the Internal Revenue Code of 1986, as amended, and references to sections of the Code include any successor provision. (h) Committee "Committee" means the Organization, Compensation, and Nominating Committee of the Board or any successor committee primarily responsible for executive compensation. (i) Competitive Employment "Competitive Employment" means the performance of duties or responsibilities, or the supervision of individuals performing such duties or responsibilities, for a Competitor (i) that are of a similar nature or employ similar professional or technical skills (for example, executive, managerial, marketing, engineering, legal, etc.) to those employed by the Executive in his performance of services for the Company at any time during the two years before the Termination Date, (ii) that relate to products or services that are competitive with the Company's products or services with respect to which the Executive performed services for the Company at any time during the two years before the Termination Date, or (iii) in the performance of which Proprietary Information to which the Executive had access at any time during the two-year period before the Termination Date could be of substantial economic value to the Competitor. (j) Competitor Because of the highly competitive, evolving nature of the Company's industry, the identities of companies in competition with the Company are likely to change over time. The following tests, while not exclusive indications of what employment may be competitive, are designed to assist the parties and any court in evaluating whether particular employment is prohibited under this Agreement. 22 "Competitor" means any one or more of the following (i) any person or entity (a "Person") doing business in the United States or any of its Divisions employing the Executive if the Person or its Division receives at least 15% of its gross operating revenues from providing communications services of any type (for example, voice, data, including Internet, and video), employing any transmission medium (for example, wireline, wireless, or any other technology), over any distance (for example, local, long-distance, and distance insensitive services), using any protocol (for example, circuit-switched, or packet-based, such as Internet Protocol), or services or capabilities ancillary to such communications services (for example, web hosting and network security services); (ii) any Person doing business in the United States or its Division employing the Executive if the Person or its Division receives at least 15% of its gross operating revenue from a line of business in which the Company receives at least 3% of its gross operating revenues; (iii) any Person doing business in the United States, or its Division employing the Executive, operating for less than 5 years a line of business from which the Company derives at least 3% of its gross operating revenues, notwithstanding such Person's or Division's lack of substantial revenues in such line of business; and (iv) any Person doing business in the United States, or its Division employing the Executive, if the Person or its Division receives at least 15% of its gross operating revenue from a line of business in which the Company has operated for less than 5 years, notwithstanding the Company's lack of substantial revenues in such line of business. For purposes of the foregoing, gross operating revenues of the Company and such other Person shall be those of the Company or such Person, together with their Consolidated Affiliates, but those of any Division employing or proposing to employ the Executive shall be on a stand-alone basis, all measured by the most recent available financial information of both the Company and such other Person or Division at the time the Executive accepts, or proposes to accept, employment with or to otherwise perform services for such Person. If financial information is not publicly available or is inadequate for purposes of applying this definition, the burden shall be on the Executive to demonstrate that such Person is not a Competitor. (k) Consolidated Affiliate "Consolidated Affiliate" means, with respect to any person or entity, all affiliates and subsidiaries of such person or entity, if any, with whom the financial statements of such person or entity are required, under generally accepted accounting principles, to be reported on a consolidated basis. (l) Constructive Discharge "Constructive Discharge" means the occurrence of any of the following circumstances without the Executive's prior written consent unless the circumstances are fully corrected before the Termination Date specified in the notice of termination given in respect thereof: (1) the removal of the Executive from his position with the 23 Company or Board other than as a result of Executive's being offered to a position of equal or superior scope and responsibility; (2) a reduction within any 24-month period (other than an across-the-board reduction similarly affecting all Senior Officers) of the Executive's Targeted Total Compensation to an amount that is less than 90% of the Executive's highest Targeted Total Compensation during the 24-month period, or (3) the Company's requiring that the Executive be based anywhere other than his present location or the Kansas City metropolitan area (or any other location to which the Executive has consented to be relocated), except for required travel on business to an extent substantially consistent with Executive's business travel obligations as of the Effective Date. (m) Division "Division" means any distinct group or unit organized as a segment or portion of a Person that is devoted to the production, provision, or management of a common product or service or group of related products or services, regardless of whether the group is organized as a legally distinct entity. (n) FON Common Stock "FON Common Stock" means the Company's FON Common Stock, Series 1, $2.00 par value per share. (o) Good Reason "Good Reason" means, without the Executive's express written consent, the occurrence of any of the following circumstances unless such circumstances are fully corrected prior to the Termination Date specified in the notice of termination given in respect thereof: (i) the assignment to the Executive of any duties inconsistent with the Executive's status as Chairman of the Board and Chief Executive Officer of Sprint or a substantial adverse alteration in the nature or status of the Executive's responsibilities or organizational reporting relationships from those in effect immediately before the Change in Control or any downgrading of the Executive's title or position from that in effect immediately before the Change in Control; (ii) a reduction by the Company in the Executive's Base Salary as in effect on the Effective Date or as the same may be increased from time to time, except for across-the-board salary reductions similarly affecting all officers of the Company and all officers of any business entity or entities in control of the Company; (iii) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation within 7 days of 24 the date it is due, except pursuant to an across-the-board compensation deferral similarly affecting all officers of the Company and all officers of any business entity or entities in control of the Company; (iv) (A) the relocation of the Company's principal executive offices to a location outside the metropolitan area in which such offices are located immediately before the Change in Control; or (B) the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; or (C) the Company's requiring the Executive to travel to an extent substantially inconsistent with the Executive's present business travel obligations; (v) a substantial adverse alteration in the physical conditions under or in which the Executive is expected to perform the Executive's duties, other than an alteration similarly affecting all officers of the Company and all officers of any person in control of the Company; (vi) the Company's failure to continue in effect any compensation plan in which the Executive participated immediately before the Change in Control and that is material to the Executive's total compensation, including but not limited to the Incentive Plans or any substitute plans adopted before the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to the plan, or the Company's failure to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other Senior Officers, as existed at the time of the Change in Control; (vii) the Company's failure to continue to provide the Executive with benefits substantially similar in the aggregate to those he enjoyed under any of the Company's plans, including but not limited to the Pension Plan, stock option plans, savings plan, supplemental employee retirement agreement, the Key Management Benefit Plan, the Executive Deferred Compensation Plan, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control; the taking of any action by the Company that would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control; or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such benefits; 25 (viii) the Company's failure to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 31 hereof; or (ix) the Company's attempt to terminate the Executive's employment without complying with the procedures set forth in Section 1(d); any such attempt shall not be effective. (p) Incentive Plans "Incentive Plans" means the Long-Term Incentive Plan and the Short-Term Incentive Plan. (q) Long-Term Incentive Plan "Long-Term Incentive Plan" means the Company's Long-Term Incentive Plan, together with other incentive compensation plans specifically approved for this purpose by the Committee. (r) Non-Compete Period "Non-Compete Period" means the 36-month period beginning on the Termination Date. If the Executive breaches or violates any of the covenants or provisions of this Agreement, the running of the Non-Compete Period shall be tolled during the period the breach or violation continues. (s) Option Plans "Option Plans" means the 1990 Plan and Sprint's 1997 Long-Term Stock Incentive Program. (t) Performance Measure "Performance Measure" means, with respect to any Performance Period, a measure, expressed as a percentage, of the extent to which the performance goals were achieved, as determined by the Committee, during the Performance Period. (u) Performance Period "Performance Period" means a period of time under the Short-Term Incentive Plan or Long-Term Incentive Plan (1) for which the Committee establishes performance goals for the Company's business units and authorizes payment of incentive compensation based on a measure of the extent to which those goals were achieved during the period or (2) with respect to which the Committee grants employee stock options in lieu of such performance goals, the period beginning on the first day of the 26 year in which the options are granted and ending on the first date on which the options become exercisable in full, without regard to any acceleration of vesting. (v) Performance Period Stock Appreciation "Performance Period Stock Appreciation" means, with respect to any Performance Period, 1.52 times the ratio of (1) the stock price on the last trading day of the Performance Period to (2) the stock price on the first trading day of the Performance Period. For this purpose, the stock price on any day is (1) for days before November 24, 1998, the market price of the Company's common stock, par value, $2.50 per share, on that day and (2) for days on or after November 24, 1998, an amount equal to the sum of the market price of one share of FON Common Stock and one-half the market price of one share of PCS Common Stock on that day. The market price of a stock on any day is the average of the high and low prices on that day. This definition shall be adjusted to equitably reflect changes in Sprint's capital structure after the Effective Date. (w) PCS Common Stock "PCS Common Stock" means the Company's PCS Common Stock, Series 1, $1.00 par value per share. (x) Proprietary Information "Proprietary Information" means trade secrets (such as customer information, technical and non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process) and other confidential and proprietary information concerning the products, processes, or services of the Company or the Company's affiliates, including but not limited to: computer programs, unpatented or unpatentable inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development results and plans; business and strategic plans; sales forecasts and plans; personnel information, including the identity of other employees of the Company, their responsibilities, competence, abilities, and compensation; pricing and financial information; current and prospective customer lists and information on customers or their employees; information concerning purchases of major equipment or property; and information about potential mergers or acquisitions which information: (i) has not been made known generally to the public; and (ii) is useful or of value to the current or anticipated business, or research or development activities of the Company or of any customer or supplier of the Company, or (iii) has been identified to the Executive as confidential by the Company, either orally or in writing. (y) Senior Officer "Senior Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended (or any 27 successor statute or statutes thereto), and the rules and regulations promulgated thereunder. (z) Short-Term Incentive Plan "Short-Term Incentive Plan" means the Company's Management Incentive Plan, together with other incentive compensation plans specifically approved for this purpose by the Committee. (aa) Targeted Compensation "Targeted Compensation" means, (1) with respect to any Performance Period in which the award is measured in cash, the amount established by the Committee that would be the payout under the Short-Term Incentive Plan or the Long-Term Incentive Plan, as the case may be, if the Performance Measure for the Performance Period were 100% and (2) with respect to any Performance Period in which the award is measured in stock options, the dollar amount on which the number of options to grant was based. (bb) Targeted Total Compensation "Targeted Total Compensation" means, as of any time, the sum of the Executive's (1) Base Salary, (2) Targeted Compensation for the Short-Term Incentive Plan, (3) Targeted Compensation for the Long-Term Incentive Plan, and (4) targeted value of his annual stock option award (ignoring the value of the Options granted pursuant to Section 2(b) of this Agreement and any options granted before the Effective Date) as adopted by the Committee. (cc) Termination Date "Termination Date" means (i) in the case of a termination of the Executive's employment by reason of the Executive's death, the Executive's date of death, (ii) in the case of a termination of the Executive's employment by reason of a Constructive Discharge, the date which is thirty (30) days after the notice of termination is given, and (iii) in all other cases, the date of any notice of termination or the date, if any, on which the notice declares itself to be effective (but in no event later than the 60th day after the date on which such notice is given). (dd) Termination Period Incentive Payout "Termination Period Incentive Payout" means an amount equal to the weighted average of (1) the Actual Incentive Payout for the Performance Period in which the Termination Date occurs and (2) the Capped Incentive Payout for the Performance Period in which the Termination Date occurs. The weights in the weighted average will be for the amount in clause (1), the number of months in the Performance Period occurring before the Termination Date, and, for clause (2), the number of months in the 28 Performance Period occurring after the Termination Date, in each case divided by the number of months in the Performance Period. In determining the number of months, the Termination Date will be rounded to the nearest month, rounding to the beginning of the month if the Termination Date falls on or before the 15th of the month and to the beginning of the following month if the Termination Date falls after the 15th of the month. 11. Assignability, Binding Nature This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs (in the case of the Executive), and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred to any subsidiary of Sprint or pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, but only if the assignee or transferee becomes the successor to all or substantially all of the assets of the Company and assumes the liabilities, obligations, and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it will take whatever action it legally can in order to cause the assignee or transferee to expressly assume the liabilities, obligations, and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only in connection with the Executive's estate planning objectives or by will or operation of law. 12. Amendment This Agreement may be amended, modified, or canceled only by mutual agreement of the parties in writing. 13. Applicable Law The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Kansas, without regard to the conflict of law provisions of any state. 14. Tax Withholding All payments made pursuant to this Agreement shall be subject to applicable federal and state income and to other withholding taxes. 29 15. Severability The various provisions of this Agreement are intended to be severable and to constitute independent and distinct binding obligations. If any provision of this Agreement is determined to be invalid, illegal, or incapable of being enforced, in whole or in part, it shall not affect or impair the validity of any other provision or part of this Agreement, and the provision or part shall be deemed modified to the minimum extent required to permit enforcement. Upon such a determination that any term or other provision is invalid, illegal, or incapable of being enforced, the court or arbitrator, as applicable, shall have the authority to so modify the provision or term. If such provision or term is not modified by the court or arbitrator, the parties must negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the provisions of this Agreement are preserved to the greatest extent possible. 16. Waiver of Breach No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by the other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of either party to take any action by reason of such breach will not deprive the party of the right to take action at any time while the breach continues. 17. Notices Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice): If to the Company: Sprint Corporation Attn: General Counsel 2330 Shawnee Mission Parkway Westwood, KS 66205 If to the Executive: William T. Esrey Sprint Corporation 2330 Shawnee Mission Parkway Westwood, KS 66205 (or to the latest address furnished by Executive to Company for purposes of general communications). 30 Each party, by written notice furnished to the other party, may modify the applicable delivery address, but any notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail, but in no event will any such communications be deemed to be given later than the date they are actually received. 18. Survivorship Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties shall survive the expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement. In particular, without limiting the generality of the preceding sentence, any obligation of the Company to make payments or provide services under Sections 3 and 26 shall continue beyond the end of the Employment Term and the obligations and covenants of Executive set forth in Sections 3 and 24 shall continue beyond the Employment Term. 19. Entire Agreement Except as otherwise noted herein, this Agreement constitutes the entire agreement between the parties concerning the subject matter specifically addressed herein and, except for the terms and provisions of any other employee benefit or other compensation plans (or any agreements or awards thereunder) referred to herein or contemplated hereby, this Agreement supersedes (i) all prior and contemporaneous oral agreements, if any, between the parties relating to the subject matter specifically addressed herein; and (ii) each of the Prior Agreements. 20. Headings The headings in this Agreement are for convenience of reference only and will not affect the construction of any of its provisions. 21. Counterparts This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. [SIGNATURE PAGE FOLLOWS] 31 IN WITNESS THEREOF, the parties hereto have caused this Agreement to be duly executed as of the date set forth above. "COMPANY" SPRINT CORPORATION, a Kansas corporation By: /s/ J. Richard Devlin Name: J. Richard Devlin Title: Executive Vice President - General Counsel and External Affairs "SUMC" SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation By: /s/ J. Richard Devlin Name: J. Richard Devlin Title: Executive Vice President - Legal/External Afffairs "EXECUTIVE" /s/ William T. Esrey William T. Esrey 32 EXHIBIT A BOARDS OF DIRECTORS OF FOR-PROFIT BUSINESSES Sprint Corporation Duke Energy Corporation Exxon-Mobil Corporation General Mills, Inc. EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 26, 2001 (the "Effective Date"), by and among SPRINT CORPORATION, a Kansas corporation ("Sprint"), SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation and subsidiary of Sprint ("SUMC") (Sprint, SUMC and the subsidiaries of Sprint are collectively referred to herein as the "Company"), and RONALD T. LEMAY (the "Executive"). Recitals 1. Because the Company is mindful of the Executive's substantial contributions to the Company and of his attractiveness in the competitive marketplace, both within and outside of the telecommunications industry, it desires to insure his continued employment with the Company until the time of his retirement, it desires to encourage him to maintain and increase his ownership of Company stock, and it desires to provide him appropriate compensation arrangements that continue to motivate him to focus on and increase shareholder value. 2. The Company and the Executive have previously entered into a Contingency Employment Agreement, dated as of October 30, 1997, and amended as of June 30, 1999 (the "Contingency Employment Agreement"). 3. The Company and the Executive have previously entered into an Agreement Regarding Special Compensation and Post-Employment Restrictive Covenants, dated as of October 30, 1997 (the "Severance Agreement," and together with the Contingency Employment Agreement, the "Prior Agreements"). 4. The Executive has been, and now is serving as the President and Chief Operating Officer of Sprint. 5. The Company desires to secure the continued long-term employment of the Executive. 6. In furtherance of the foregoing, the Company and the Executive desire to amend, combine, and restate the Prior Agreements in the form of this Agreement. 7. Certain capitalized terms used herein are defined in Section 30 of this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration are mutually acknowledged by the parties, the parties hereby agree as follows: 1 1. Employment and Termination (a) Conditions of Employment Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as the President and Chief Operating Officer of Sprint, with such authority, power, responsibilities, and duties customarily exercised by a person holding such positions in a company of the size and nature of the Company. (b) Performance of Duties The Executive shall, during his employment with the Company, owe an undivided duty of loyalty to the Company and agrees to use his best efforts to promote and develop the business of the Company. The Executive agrees that during his employment with the Company, he must devote his full business time, energies and talents to serving as its President and Chief Operating Officer and that he shall perform his duties faithfully and efficiently subject to the directions of the Board of Directors of Sprint (the "Board"). Notwithstanding the foregoing, the Executive may (i) serve as a director, trustee or officer or otherwise participate in not-for-profit educational, welfare, social, religious and civic organizations; (ii) serve as a director of any for-profit business listed on Exhibit A hereto or, with the prior consent of the Board, serve as a director of any for-profit business that is not a Competitor, and (iii) acquire passive investment interests in one or more entities, to the extent that such other activities do not inhibit or interfere with the performance of the Executive's duties under this Agreement, or to the knowledge of the Executive conflict in any material way with the business or policies of the Company. (c) Term of Employment The term of the Executive's employment under this Agreement (the "Employment Term") begins on the Effective Date and ends on the Executive's 65th birthday (the "End Date"). This Agreement sets forth certain terms of Executive's employment during the Employment Term, the consequences of any termination of employment during the Employment Term, and the terms of certain restrictive covenants by the Executive during and after the Employment Term. The Company and Executive agree that the employment relationship is at will, and either party may terminate the employment relationship for any reason in accordance with the procedures and with the consequences set forth in this Agreement. (d) Procedures for Termination (A) General Procedures. Except as set forth below, any purported termination of this Agreement or of the Executive's employment by the Company or by the Executive during the Employment 2 Term, other than by Executive's death, shall be communicated by a written notice of termination to the other party hereto delivered in accordance with Section 37 below indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated. Any such termination will be effective on the Termination Date. (B) Cause Termination. The Company may not terminate Executive's employment for Cause during the Employment Term until it delivers to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board, excluding Executive, at a meeting of the Board (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of conduct constituting Cause and specifying the particulars thereof in detail. The subject of Executive's termination for Cause must be included in the agenda in the notice of the meeting sent to members of the Board. Delivery of the resolution constitutes notice of termination for Cause by the Company. (C) Good Reason Termination. Executive may terminate his employment for Good Reason during the Employment Term only within the Change in Control Protected Period, except that Executive may not give notice of termination for Good Reason during any period in which the Executive is unable to substantially perform his duties with the Company due to physical or mental illness. In order to effect a termination for Good Reason, Executive must deliver a written notice to the Company that sets forth the specific event or circumstance giving rise to Good Reason by reference to one or more portions of the definition of Good Reason set forth in Section 30 of this Agreement. (D) Constructive Discharge. Executive may terminate his employment upon Constructive Discharge any time during the Employment Term following written notice and an opportunity for the Company to cure. In order to effect a termination for Constructive Discharge, Executive must deliver a written notice to the Company within 60 days following the event giving rise to Executive's claim for Constructive Discharge. The notice must set forth the specific event or circumstance giving rise to Constructive Discharge by reference to one or more portions of the definition of Constructive Discharge set forth in Section 30 of this Agreement. If, within 30 days following notice from the Executive, the Company fully corrects the circumstances giving rise to the Executive's claim for Constructive Discharge, the Executive shall not be entitled to terminate his employment for Constructive Discharge by reason of such event. 3 (e) Payment of Compensation Earned Through Termination Date. Upon a termination of the Executive's employment hereunder for any reason, the Executive or, in the event of his death, the Executive's estate, in addition to any other payments or benefits to which the Executive may be entitled hereunder, is entitled to the Executive's Base Salary prorated through the Termination Date, any payment under the Incentive Plans for Performance Periods ending before the Termination Date, unless eliminated or reduced, and then only to the extent that such payments are eliminated or reduced, for all Senior Officers continuing employment with the Company, and any vacation pay for vacation accrued by the Executive in the calendar year of termination but not taken at the Termination Date. Except as otherwise provided herein, the Company must pay any other employee benefits to which the Executive is entitled by reason of his employment to the Executive or his estate at the time or times required by the terms of the applicable Company plan or policy. (f) Effect of Termination on Other Positions. If, on the Termination Date, the Executive (i) is a member of the Board of Sprint or any of its subsidiaries, (ii) serves on the board of directors of any other corporation by nomination, appointment, or designation by the Company, or (iii) holds any other position with Sprint or any of its subsidiaries, the Executive shall, unless otherwise agreed to by the Board, be deemed to have resigned from all such positions as of the Termination Date. Executive agrees to execute such documents and take such other actions as the Company may request to reflect such resignations. 2. Compensation Subject to the terms of this Agreement, during the Employment Term, while the Executive is employed by the Company, the Company will compensate him for his services as follows: (a) Base Salary. The Executive shall receive an annual base salary in an amount not less than his annual salary on the Effective Date, payable in monthly or more frequent installments in accordance with the Company's payroll policies (such annual base salary as adjusted pursuant to this Section 23(a) shall hereinafter be referred to as the "Base Salary"). The Executive's Base Salary shall be reviewed, and may be increased but not decreased below the rate in effect on the Effective Date (other than across-the-board reductions similarly affecting all Senior Officers), by the Board in a manner that is fair and pursuant to its normal performance review policies for Senior Officers. 4 (b) Initial Option Grant As of the Effective Date, the Company grants the Executive a non-qualified stock option (the "PCS Option") under the Company's 1990 Stock Option Plan (the "1990 Plan") to purchase 1,500,000 shares of PCS Common Stock, having a strike price equal to the Fair Market Value (as defined in the 1990 Plan) of a share of PCS Common Stock on the Effective Date. In addition, as of the Effective Date, the Company grants the Executive a non-qualified stock option (the "FON Option" and, together with the PCS Option, the "Options") under the 1990 Plan to purchase 1,500,000 shares of FON Common Stock, at a strike price equal to the Fair Market Value (as defined in the 1990 Plan) of a share of FON Common Stock on the Effective Date. Subject to the Executive's continued employment with the Company, the Options shall become exercisable in cumulative installments as follows: (i) each Option shall become exercisable with respect to 20% of the shares subject thereto on the fourth anniversary of the Effective Date, (ii) each Option shall become exercisable with respect to an additional 30% of the shares subject thereto on the fifth anniversary of the Effective Date, and (iii) each Option shall become exercisable with respect to the remaining 50% of the shares subject thereto on the sixth anniversary of the Effective Date. In addition, the Options shall become exercisable in full (1) upon the Executive's termination of his employment by reason of a Resignation for Non-Succession, (2) upon the Company's termination of the Executive's employment without Cause, but only if the Board's decision to terminate the Executive's employment without Cause was voted against by at least two of the Board's non-employee directors, (3) upon a Change in Control on or after the first anniversary of the Effective Date, and (4) under Section 7.01(i)(1) of the 1990 Plan upon the Executive's Death or Total Disability (as those terms are defined in the 1990 Plan), but shall not become exercisable pursuant to Section 7.01(i)(2) of the 1990 Plan upon Executive's Normal Retirement (as defined in the 1990 Plan). The Options shall otherwise have the standard terms set forth in the 1990 Plan and shall be subject to the 1990 Plan, except that, for purposes of the Options, (A) the terms "Change in Control" and "Termination Date" (except as provided in Section 26(b)) shall have the meanings set forth in this Agreement rather than the meanings set forth in the 1990 Plan, and (B) the Executive need not make the agreement required by Section 7.01(m) of the 1990 Plan to remain employed by the Company for one year from the Effective Date. (c) Subsequent Option Grants The grants of the Options are in lieu of annual executive stock option grants under the Option Plans to the Executive for the years 2002 and 2003, and, unless otherwise determined by the Committee, the Executive will not be considered for or entitled to option grants under the Option Plans in those years. Option grants to the Executive for years subsequent to 2003 shall be reviewed by the Board in a manner that is fair and pursuant to its normal performance review policies for option grants to Senior Officers. 5 (d) Incentive Payments. The Executive will continue to participate in the Incentive Plans, subject to the terms and conditions of the Incentive Plans as they may from time to time be established, amended, or terminated in accordance with the Company's plans or policies governing such benefits to the Company's Senior Officers generally. The Executive's Targeted Compensation under the Incentive Plans shall be reviewed, and may be increased but not decreased below his highest Targeted Compensation in effect in 2001 (other than across-the-board reductions similarly affecting all Senior Officers), by the Board in a manner that is fair and pursuant to its normal performance review policies for Senior Officers. (e) Employee Benefits, Fringe Benefits and Perquisites. The Company will provide the Executive with employee benefits, fringe benefits, and perquisites (including, without limitation, miscellaneous services, life, disability, medical and dental insurance coverages, and participation in the Company's Executive Deferred Compensation Plan, Key Management Benefit Plan, Savings Plan, and the Pension Plan) that are no less favorable in the aggregate to the Executive than those provided to him as of the Effective Date, subject to amendment, modification or termination in accordance with the Company's plans or policies governing such benefits to Senior Officers generally. (f) Expense Reimbursement. The Company will reimburse the Executive for reasonable expenses incurred and accounted for in accordance with the policies and procedures of the Company for Senior Officers generally, as they may from time to time be established, amended, or terminated. (g) Standby Loan Arrangement. The Board will consider in good faith and in a reasonable manner the Executive's request from time to time for the Company to facilitate or make a loan (in either case, the "Loan Arrangement") to enable the Executive (i) to retain ownership of Sprint stock, (ii) to acquire, through option exercise or otherwise, Sprint stock, (iii) to pay taxes associated with the retaining ownership of Sprint stock, or (iv) to pay taxes associated the acquisition of Sprint stock. It is the current intent of the Board to view favorably the Executive's request for a Loan Arrangement, though the parties acknowledge that any action taken by the Board must be consistent with the Board's view of its fiduciary duties and must be based on its determination that the action is in the best interests of the Company and its shareholders. Any loan to the Executive, if made by the Company, shall bear interest at the Applicable Federal Rate or such other rate that at the time is appropriate, giving 6 consideration to any expense to the Company and any imputed income to the Executive, and all other terms and conditions of the Loan Arrangement shall be approved by the Board in its discretion, based on its good faith consideration of the factors relevant to the fulfillment of the Board's fiduciary duties, such as: (i) the amount necessary to enable the Executive to increase or retain all or a significant portion of his stock holdings in the Company, (ii) the likely impact of the Executive's sale of his Company stock on the market price of such stock, (iii) the Executive's borrowing capacity, (iv) the collateral given by the Executive to secure the Loan, (v) the terms of comparable loans to executives of other companies, (vi) the market price of the Company's stock and the value of the Executive's stock holdings in the Company, (vii) the short-term and long-term cash flow needs of the Executive, and (viii) the potential accounting and tax consequences of the Loan Arrangement to the Company. (h) Supplemental Retirement Benefits. The Company acknowledges that the Executive has previously been credited with 13 years of service as a Mid-Career Pension Enhancement under the Company's Supplemental Executive Retirement Plan ("SERP"). The pension benefit determined under the SERP shall be offset by the pension benefit determined under the Pension Plan. It is further agreed that the terms of the Pension Plan and the terms of the SERP, including any amendments hereafter adopted for said plans, shall be deemed to be incorporated by reference in this Agreement except to the extent any provisions in the plans would be inconsistent with the specific terms of this Agreement. (i) Elimination of Section 280G Limitations. If during the Employment Term, a Change in Control or other change in the equity structure of the Company occurs that would result in the acceleration of benefits under the Company's stock option plans, restricted stock plans or other benefit plans of the Company, except for the fact that such plans or agreements under such plans limit acceleration to amounts deductible by the Company under Code Section 280G (or any successor provision), then such limitations shall not apply to the Executive. 7 3. Executive Covenants (a) Principles of Business Conduct. The Executive shall adhere in all respects to the Company's Principles of Business Conduct (or any successor code of conduct) as in effect on the Effective Date and as they may from time to time be established, amended, or terminated. (b) Proprietary Information. The Executive acknowledges that during the course of his employment he has learned or will learn or develop Proprietary Information. The Executive further acknowledges that unauthorized disclosure or use of such Proprietary Information, other than in discharge of the Executive's duties, will cause the Company irreparable harm. Except in the course of his employment with the Company under this Agreement, in the pursuit of the business of the Company, or as otherwise required in employment with the Company, the Executive shall not, during the course of his employment or at any time following termination of his employment, directly or indirectly, disclose, publish, communicate, or use on his behalf or another's behalf, any Proprietary Information. If during or after his employment the Executive has any questions about whether particular information is Proprietary Information he shall consult with the Company's General Counsel. The Executive also agrees to promptly disclose to the Company any information, ideas, or inventions made or conceived by him that result from or are suggested by services performed by him for the Company under this Agreement, and to assign to the Company all rights pertaining to such information, ideas, or inventions. Knowledge or information of any kind disclosed by the Executive to the Company shall be deemed to have been disclosed without obligation on the part of the Company to hold the same in confidence, and the Company shall have the full right to use and disclose such knowledge and information without compensation to the Executive beyond that specifically provided in this Agreement. (c) Non-Competition. During the Executive's employment with the Company and during the Non- Compete Period, Executive shall not engage in Competitive Employment, whether paid or unpaid and whether as a consultant, employee, or otherwise. If the Executive ceases to be employed by the Company because of the sale, spin-off, divestiture, or other disposition by the Company of a subsidiary, division, or other divested unit employing the Executive, this provision shall continue to apply during the Non-Compete Period, except that the Executive's continued employment for the subsidiary, division, or other divested unit disposed of by the Company shall not be deemed a violation of this provision. The Executive agrees that because of the worldwide nature of the Company's business, breach of this Agreement by accepting Competitive Employment 8 would irreparably injure the Company and that, therefore, a limited geographic restriction is neither feasible nor appropriate to protect the Company's interests. (d) Inducement of Employees, Customers and Others. During the Executive's employment with the Company and during the Non- Compete Period, Executive may not directly or indirectly solicit, induce, or encourage any employee, consultant, agent, customer, vendor, or other parties doing business with the Company to terminate their employment, agency, or other relationship with the Company or to render services for or transfer business to any Competitor, and the Executive shall not initiate discussion with any such person for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity on behalf of the Competitor. (e) No Adverse Actions. During the Non-Compete Period, the Executive shall not, without the prior written consent of the Company, in any manner, solicit, request, advise, or assist any other person or entity to (a) undertake any action that would be reasonably likely to, or is intended to, result in a Change in Control, or (b) seek to control in any material manner the Board. (f) Return of Property. The Executive shall, upon his Termination Date, return to the Company all property of the Company in his possession, including all notes, reports, sketches, plans, published memoranda or other documents, whether in hard copy or in electronic form, created, developed, generated, received, or held by the Executive during his employment, concerning or related to the Company's business, whether containing or relating to Proprietary Information or not. The Executive shall not remove, by e-mail, by removal of computer discs or hard drives, or by other means, any of the above property containing Proprietary Information, or reproductions or copies thereof, or any apparatus from the Company's premises without the Company's written consent. (g) Mutual Nondisparagement. The Executive agrees to refrain from making any statements about the Company or its officers or directors that would disparage, or reflect unfavorably upon the image or reputation of the Company or any such officer or director. The Company agrees to refrain from making any statements about the Executive that would disparage, or reflect unfavorably upon the image or reputation of the Executive. 9 (h) Assistance with Claims. Executive agrees that, consistent with the Executive's business and personal affairs, during and after his employment by the Company, he will assist the Company in the defense of any claims or potential claims that may be made or threatened to be made against it in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding") and will assist the Company in the prosecution of any claims that may be made by the Company in any Proceeding, to the extent that such claims may relate to the Executive's services provided under this Agreement. Executive agrees, unless precluded by law, to promptly inform the Company if Executive is asked to participate (or otherwise become involved) in any Proceeding involving such claims or potential claims. Executive also agrees, unless precluded by law, to promptly inform the Company if Executive is asked to assist in any investigation (whether governmental or private) of the Company (or its actions), regardless of whether a lawsuit has then been filed against the Company with respect to such investigation. The Company agrees to reimburse Executive for all of Executive's reasonable out-of-pocket expenses associated with such assistance, including travel expenses and any attorneys' fees and shall pay a reasonable per diem fee (equal to 1/250th of his Base Salary rate at his Termination Date) for Executive's services. (i) Key Man Life Insurance. The Company may, at its discretion, purchase for its own benefit and at its own expense, key man life insurance on the life of the Executive to cover the repayment of any unpaid loan balances at the Executive's death, and the Executive shall not have any right, title or interest in or to such insurance. The Executive agrees to cooperate with the life insurance company and the Company in the insurance underwriting process, including a physical examination and other tests necessary to secure coverage, and to sign all appropriate applications and written forms as may be required by the insurance company. 4. MCI WorldCom Merger Not a Change in Control Notwithstanding anything contained herein or in any of the Prior Agreements, the Executive agrees that neither the approval by the Company's stockholders of the proposed merger of the Company with MCI WorldCom, Inc., pursuant to the Agreement and Plan of Merger, dated October 4, 1999, as amended and restated as of March 8, 2000 (the "Proposed Merger"), which Proposed Merger was terminated by the Company and MCI WorldCom, Inc., on July 13, 2000, nor any other action or event that occurred in connection with the Proposed Merger may form the basis for any claim or benefit arising from the Prior Agreements not made by or provided to Executive before the Effective Date. The Executive hereby represents and warrants that he has not made (or caused to be made) such a claim or taken (or caused to be taken) any action which would result in such a claim or the provision of such benefit. In addition, the Executive agrees that neither the approval by the Company's stockholders of the 10 Proposed Merger nor any other action or event that occurred in connection with the Proposed Merger may form the basis for any claim or benefit arising from this Agreement. The Executive hereby represents and warrants that he will not make (or cause to be made) such a claim or take (or cause to be taken) any action which would result in such a claim or the provision of such benefit. This Agreement supersedes the Prior Agreements, which as of the Effective Date, are null and void. 5. Payments on Certain Terminations (a) Payments on Certain Terminations Not in Connection with Change in Control If, during the Employment Term but not within the Change in Control Protected Period, (a) the Company terminates Executive's employment with the Company for any reason other than (x) Cause or (y) Executive's Total Disability or (b) the Executive terminates his employment with the Company upon Constructive Discharge or Resignation for Non-Succession, then the Executive shall, subject to the other provisions of this Section 26, be entitled to the following payments and benefits (the "Non-Change in Control Benefits") in lieu of any payments or benefits available under any and all Company separation plans or policies: (i) The Company will pay Executive his Base Salary, in equal installments in arrears and on the same schedule as paid before his Termination Date, for a period (the "Non-Change in Control Severance Period") commencing on the Termination Date and ending on the earlier to occur of (A) the eighteen (18) month anniversary of the Termination Date (or, if the Executive terminates his employment by reason of a Resignation for Non-Succession, the twelve (12) month anniversary of the Termination Date or the date on which the Executive becomes re-employed, whichever occurs first), or (B) the End Date, at the rate in effect on his Termination Date; (ii) For the Performance Period in which the Termination Date occurs, the Company will pay the Executive, at the time when payouts are made for that Performance Period under the Short-Term Incentive Plan, an amount equal to the Termination Period Incentive Payout. In addition, the Company will pay Executive an amount equal to 1/12th (adjusted appropriately if the Performance Period in which the Termination Date occurs is other than a 12- month period) of the Termination Period Incentive Payout at the end of each month that (1) follows the Performance Period in which the Termination Date occurs and (2) ends with or within the Non-Change in Control Severance Period. In determining the number of months, for purposes of this clause (ii), both the Termination Date and the end of the Non-Change in Control Severance Period will be rounded to the nearest month boundary by rounding to the beginning of the month if the date falls on or before the 15th of the month and to the beginning of the following month if the date falls after the 15th of the month. Any stock options granted in lieu of Targeted Compensation under the Short- 11 Term Incentive Plan will continue to vest during the Non-Change in Control Severance Period; (iii)(A) For Performance Periods in which the Termination Date occurs and in which the Long-Term Incentive Plan awards are to be measured in cash, the Company will pay the award with respect to each Performance Period at the time payment would be made under the plan for the Performance Period, without regard to any participation requirement, and, with respect to each Performance Period, will pay an amount equal to the Termination Period Incentive Payout; (B) for Performance Periods in which the Termination Date occurs and in which the Long-Term Incentive Plan awards are to be measured in stock options, the options granted with respect to each Performance Period will continue to vest during the Non-Change in Control Severance Period; (iv) During the Non-Change in Control Severance Period, the Company will provide any executive medical, dental, life, and qualified or nonqualified retirement benefits that the Executive was receiving or was entitled to receive as of the Termination Date, except that long term-disability and short-term disability benefits shall cease on the Executive's last day worked as an employee of the Company, but if the Executive becomes employed full-time during the Non-Change in Control Severance Period, the Executive's entitlement to continuation of these benefits shall immediately cease, except that the Executive shall retain any rights to continue coverage under the COBRA continuation provisions of the Company's welfare benefit plans by paying the applicable premium therefor; (v) During the Non-Change in Control Severance Period, the Company will pay outplacement counseling by a firm selected by the Company to continue until such time as Executive becomes re-employed; and (vi) During the Non-Change in Control Severance Period, the Company will provide Executive with all applicable executive perquisites that the Executive was receiving or was entitled to receive on the Termination Date (including automobile allowance, communications services and all miscellaneous services) other than country club membership dues and accrual of vacation. In all events, the Executive's right to receive the Non-Change in Control Benefits shall cease immediately if the Executive is re-employed by the Company or an affiliate of the Company or if the Executive breaches the Restrictive Covenants. In all cases, the Company's rights under Section 29(a) shall continue. (b) Payments on Certain Terminations in Connection with a Change in Control If a Change in Control occurs during the Employment Term and, within the Change in Control Protected Period, the Executive's employment with the Company is 12 terminated (a) by the Company for any reason other than (x) Cause or (y) Executive's Total Disability, or (b) by the Executive for Good Reason, the Executive shall be entitled to the following payments and benefits (the "Change in Control Benefits") in lieu of any payments or benefits available under Section 26(a) above or under any and all Company separation plans or policies: (i) In lieu of any further salary payments to the Executive for periods after the Termination Date, the Company will pay to the Executive monthly (for a period (the "Change in Control Severance Period") commencing on the Termination Date and ending on the earlier to occur of (A) the thirty- five (35) month anniversary of the Termination Date or (B) the End Date) a payment equal to the Executive's highest monthly Base Salary (without regard to any deferred amounts) paid during the 36-month period ending on the Termination Date; (ii) In lieu of any payments under, and notwithstanding any provisions of the Incentive Plans, the Company shall pay to the Executive an amount (the "Maximum Payout Amount") up to three times the sum of (1) the highest short-term incentive payment (without regard to any deferred amounts and without regard to any amounts with respect to which Executive elected to purchase options under the Management Incentive Stock Option Plan) and (2) the highest long-term incentive payment received by the Executive under the Incentive Plans with respect to the three Performance Periods ending most recently on or before the Termination Date. The payments will be made in up to three installments on the first day of the 13th, 25th, and 35th month following the Termination Date, and each installment shall be one-third of the Maximum Payout Amount, or a lesser amount until the cumulative amount of all payments is equal to the Maximum Payout Amount times a fraction, the numerator of which is the number of months in the Change in Control Severance Period and the denominator of which is 36. For purposes of the foregoing, payments under the Long-Term Incentive Plan for Performance Periods with respect to which payments were not made in cash, but in vesting of stock options, the "payment" will be deemed to be equal to the Executive's Targeted Compensation for that Performance Period multiplied by the Performance Period Stock Appreciation for that Performance Period. Any stock options granted with respect to Performance Periods under the Long-Term Incentive Plan beginning before the Termination Date will continue to vest during the Change in Control Severance Period; (iii) For purposes of the Company's Executive Deferred Compensation Plan, notwithstanding any provision to the contrary in such plan, the rate at which interest shall be credited to the Executive's Deferred Compensation Account A and AA (as defined in such plan) shall be equal to the maximum interest rate allowed for the account under such plan if and as amended; 13 (iv) For purposes of the Company's Key Management Benefit Plan, even if the Executive is not 60 years of age on the Termination Date, the Executive shall be deemed to have remained a Key Executive (as defined in such plan) until age 60; (v) Notwithstanding anything in the Company Savings Plan, the Executive shall be entitled to receive a cash payment in an amount equal to the value of the nonvested portion of his Company Contribution Account (as defined in such plan) as of the Termination Date; (vi) In addition to the retirement benefits to which the Executive is entitled under the Sprint Retirement Pension Plan (the "Pension Plan") or any successor plans thereto, (1) the Executive shall be credited with three years of additional service at the Executive's highest annual compensation rate during the term of the Contingency Employment Agreement or the Employment Term for purposes of determining the amount of the Executive's pension, (2) the Executive shall, at the time of the Executive's retirement, receive the life and medical post-retirement benefits that would be due to a retiree under the Pension Plan, (3) for purposes of the Executive's supplemental retirement benefits under Section 2(h) of this Agreement, the Executive shall be credited as of the Termination Date with the maximum number of years of service at the Executive's highest annual compensation rate during the term of the Contingency Employment Agreement or the Employment Term potentially available to the Executive under the SERP as modified by Section 2(h); and (4) if the Executive takes early retirement, the Company shall supplement, the Executive's pension so that the Executive is, notwithstanding the Pension Plan early retirement provisions, not subject to any early retirement pension reduction; (vii) During the Change in Control Severance Period, the Company will arrange to provide the Executive with or reimburse the Executive for life, disability, medical and dental insurance coverages substantially similar to and at the same cost to the Executive as the cost to the Senior Officers during such period, but the coverages shall cease immediately if the Executive obtains subsequent employment; (viii) During the Change in Control Severance Period, the Company will pay outplacement counseling by a firm selected by the Company to continue until such time as Executive becomes re-employed; and (ix) The Options shall continue to vest during the Change in Control Severance Period and the last day of the Change in Control Severance Period shall be the Termination Date for purposes of the 1990 Plan. In all events, the Executive's right to receive the Change in Control Benefits shall cease immediately if the Executive is re-employed by the Company or an affiliate 14 of the Company or if the Executive breaches the Restrictive Covenants. In all cases, the Company's rights under Section 29(a) shall continue. (c) Other Provisions Regarding Payments and Benefits (A) No Mitigation; No Offset. In the event of any termination of employment resulting in payments under this Section 26, the Executive need not seek other employment and, except as expressly provided herein, there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. The payments and benefits provided for hereunder shall be in full settlement and satisfaction of all of Executive's claims and demands relating to or arising out of his employment with the Company or the termination thereof, and the Company's obligation to provide such payments and benefits is expressly made subject to and conditioned upon (i) the Executive's execution, within forty-five (45) days after the Termination Date, of a release of such claims and demands in such form as the Company may reasonably determine and (ii) the Executive's non-revocation of such release in accordance with the terms thereof. (B) Nature of Payments. Any amounts due under this Section 26 are in the nature of severance payments considered to be reasonable by the parties and are not in the nature of a penalty. (C) Benefit Plans. If, for any period during which the Executive is entitled to continued benefits under this Section 26, the Company reasonably determines that the Executive cannot participate in any benefit plan because he is not actively performing services for the Company, then, in lieu of providing benefits under any such plan, the Company shall provide comparable benefits or the cash equivalent of the cost thereof (after taking into account incremental payroll and income tax consequences thereof to the Executive and the Executive's dependents as the case may be) to the Executive and, if applicable, the Executive's dependents through other arrangements. (D) Other Severance Arrangements. Except as may be otherwise specifically provided in an amendment of this Section 26(c)(D) adopted in accordance with this Agreement, the Executive's rights under Section 26 shall be in lieu of any benefits that may be otherwise payable to or on behalf of the Executive pursuant to the terms of any severance pay arrangement of the Company or any other similar arrangement of the Company providing benefits upon termination of employment. (E) Time of Payments. If the amount of any payment provided for in Section 26(b) cannot be calculated on or before the date on which such payment is due, the Company shall pay to the Executive on such day an estimate, as calculated in good faith by the Company, of the 15 minimum amount of such payment and shall pay the remainder of such payments when calculable. 6. Tax Reimbursement If the benefits provided under this Agreement together with other benefits, if any, the Executive receives from the Company constitute "excess parachute payments," (the "Affected Benefits") as defined in Section 280G of the Code, the Company shall pay the Executive an additional amount such that the net amount retained by the Executive after payment of any excise tax that would be imposed by Section 4999 of the Code (the "Excise Tax") and any federal, state and local income tax, FICA tax and Excise Tax payable with respect to the payment provided for in this Section 27, shall equal the amount the Affected Benefits would have been in the absence of the Excise Tax. For the purpose of determining the amount of the payment provided for in this Section 27, the Executive shall be deemed to pay federal, state and local income taxes at the highest marginal rates in effect as of the payment date and the calculation shall take into account, as applicable, the deduction of any state, federal, or local income taxes. 7. Interest on Payments If the Company fails to pay any amounts due to Executive under this Agreement as they come due, the Company agrees to pay interest on such amounts at the Applicable Federal Rate plus two percent (2%) per annum. If any payment is in excess of the amount due, the excess shall constitute a loan by the Company to the Executive, payable on the 90th day after demand by the Company, together with interest at the Applicable Federal Rate. 8. Enforcement and Remedies (a) Equitable Remedies The Executive acknowledges that the Company would be irreparably injured by a violation of Sections 24(b) through 24(e) (the "Restrictive Covenants") and he agrees that the Company, in addition to any other remedies available to it for any breach or threatened breach, shall be entitled to a preliminary or permanent injunction, temporary restraining order, or other equivalent relief, restraining the Executive from any actual or threatened breach of the Restrictive Covenants. If a bond is required to be posted in order for the Company to secure an injunction or other equitable remedy, the parties agree that said bond need not be more than a nominal sum. The Executive shall be entitled to seek specific performance of his right to be paid amounts earned through the Termination Date pursuant to Section 22(e) during the pendency of any dispute or controversy arising under or in connection with this Agreement. 16 (b) Resolution of Disputes All disputes, claims, or controversies arising under or in connection with this Agreement, other than those contemplated by Section 29(a) above, shall be settled exclusively by binding arbitration administered by JAMS/Endispute in the greater Kansas City area in accordance with the then existing JAMS/Endispute Arbitration Rules and Procedures for Employment Disputes, except that the parties agree that the arbitrator is not authorized or empowered to impose punitive damages on either of the parties. If it is determined that any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced, the arbitrator shall have the authority to modify the provision or term to the minimum extent required to permit enforcement. In the event of such an arbitration proceeding, the Administrator of JAMS/Endispute will appoint the arbitrator. (c) Attorney Fees If either party seeks to enforce this Agreement and prevails on the merits, the losing party agrees to pay to the prevailing party all reasonable legal fees and expenses incurred by the prevailing party in seeking such enforcement. Such payments shall be made within five (5) days after the prevailing party's request for payment accompanied by such evidence of fees and expenses incurred as the losing party reasonably may require. 9. Definitions As used in the Agreement, the following terms shall have the meanings set forth below. (a) Actual Incentive Payout "Actual Incentive Payout" means, with respect to a Performance Period, the product of (1) the Performance Measure for the Performance Period and (2) the Executive's Targeted Compensation for the Performance Period. (b) Applicable Federal Rate "Applicable Federal Rate" means the applicable Federal rate within the meaning of Section 7872 of the Code. (c) Capped Incentive Payout "Capped Incentive Payout" means (i) with respect to a Performance Period under the Short-Term Incentive Plan, the product of (1) the lesser of (a) 100% and (b) the Performance Measure for the Performance Period and (2) the Executive's Targeted Compensation for the Performance Period, and (ii) with respect to a Performance Period under the Long-Term Incentive Plan, zero dollars. 17 (d) Cause Termination by the Company of the Executive's employment for "Cause" means termination upon (A) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties, or (B) the willful engaging by the Executive in conduct that is a serious violation of the Company's Principles of Business Conduct, or (C) the willful engaging by the Executive in conduct that is demonstrably and materially injurious to the Company. For purposes of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Failure to meet performance expectations, unless willful, continuing, and substantial shall not be considered "Cause." (e) Change in Control "Change in Control" means the occurrence of any of the following events: (i) the acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder, including, without limitation, Rule 13d-5(b)) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of Sprint that represent 30% or more of the combined voting power of Sprint's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by Sprint or any person controlled by Sprint or by any employee benefit plan (or related trust) sponsored or maintained by Sprint or any person controlled by Sprint, or (B) an acquisition of voting securities by Sprint or a corporation owned, directly or indirectly, by the stockholders of Sprint in substantially the same proportions as their ownership of the stock of Sprint, or (C) an acquisition of voting securities pursuant to a transaction described in clause (iii) below that would not be a Change in Control under clause (iii); 18 (ii) a change in the composition of the Board that causes less than a majority of the directors of Sprint to be directors that meet one or more of the following descriptions: (A) a director who has been a director of Sprint for a continuous period of at least 24 months, or (B) a director whose election or nomination as director was approved by a vote of at least two-thirds of the then directors described in clauses (ii)(A), (B), or (C) by prior nomination or election, but excluding, for the purpose of this subclause (B), any director whose initial assumption of office occurred as a result of an actual or threatened (y) election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board or (z) tender offer, merger, sale of substantially all of Sprint's assets, consolidation, reorganization, or business combination that would be a Change in Control under clause (iii) on consummation thereof, or (C) who were serving on the Board as a result of the consummation of a transaction described in clause (iii) that would not be a Change in Control under clause (iii); (iii) the consummation by Sprint (whether directly involving Sprint or indirectly involving Sprint through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of Sprint's assets or (z) the acquisition of assets or stock of another entity, in each case, other than in a transaction (A) that results in Sprint's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of Sprint or the person that, as a result of the transaction, controls, directly or indirectly, Sprint or owns, directly or indirectly, all or substantially all of Sprint's assets or otherwise succeeds to the business of Sprint (Sprint or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which more than 50% of the members of the board of directors of the Successor Entity were members of the Board at the time of the Board's approval of the agreement providing for the transaction or other action of the Board approving the transaction (or whose election or nomination was approved by a vote of at least two-thirds of the members who were members of the Board at that time), and 19 (C) after which no person or group beneficially owns voting securities representing 30% or more of the combined voting power of the Successor Entity; provided, however, no person or group shall be treated for purposes of this clause (C) as beneficially owning 30% or more of combined voting power of the Successor Entity solely as a result of the voting power held in Sprint prior to the consummation of the transaction; or (iv) a liquidation or dissolution of Sprint. For purposes of clarification, (x) a change in the voting power of Sprint voting securities based on the relative trading values of Sprint's then outstanding securities as determined pursuant to Sprint's Articles of Incorporation or (y) an acquisition of Sprint securities by Sprint that, in either case, by itself (or in combination only with the other event listed in this sentence) causes the Sprint's voting securities beneficially owned by a person or group to represent 30% or more of the combined voting power of Sprint's then outstanding voting securities is not to be treated as an "acquisition" by any person or group for purposes of clause (i) above. For purposes of clause (i) above, Sprint makes the calculation of voting power as if the date of the acquisition were a record date for a vote of Sprint's shareholders, and for purposes of clause (iii) above, Sprint makes the calculation of voting power as if the date of the consummation of the transaction were a record date for a vote of Sprint's shareholders. (f) Change in Control Protected Period "Change in Control Protected Period" means the period commencing on the date of a Change in Control and ending on the earlier to occur of (A) the three year anniversary of the date of the Change in Control or (B) the day before the End Date. (g) Code "Code" means the Internal Revenue Code of 1986, as amended, and references to sections of the Code include any successor provision. (h) Committee "Committee" means the Organization, Compensation, and Nominating Committee of the Board or any successor committee primarily responsible for executive compensation. (i) Competitive Employment "Competitive Employment" means the performance of duties or responsibilities, or the supervision of individuals performing such duties or responsibilities, for a Competitor (i) that are of a similar nature or employ similar professional or technical skills (for example, executive, managerial, marketing, engineering, legal, etc.) to those 20 employed by the Executive in his performance of services for the Company at any time during the two years before the Termination Date, (ii) that relate to products or services that are competitive with the Company's products or services with respect to which the Executive performed services for the Company at any time during the two years before the Termination Date, or (iii) in the performance of which Proprietary Information to which the Executive had access at any time during the two-year period before the Termination Date could be of substantial economic value to the Competitor. (j) Competitor Because of the highly competitive, evolving nature of the Company's industry, the identities of companies in competition with the Company are likely to change over time. The following tests, while not exclusive indications of what employment may be competitive, are designed to assist the parties and any court in evaluating whether particular employment is prohibited under this Agreement. "Competitor" means any one or more of the following (i) any person or entity (a "Person") doing business in the United States or any of its Divisions employing the Executive if the Person or its Division receives at least 15% of its gross operating revenues from providing communications services of any type (for example, voice, data, including Internet, and video), employing any transmission medium (for example, wireline, wireless, or any other technology), over any distance (for example, local, long-distance, and distance insensitive services), using any protocol (for example, circuit-switched, or packet-based, such as Internet Protocol), or services or capabilities ancillary to such communications services (for example, web hosting and network security services); (ii) any Person doing business in the United States or its Division employing the Executive if the Person or its Division receives at least 15% of its gross operating revenue from a line of business in which the Company receives at least 3% of its gross operating revenues; (iii) any Person doing business in the United States, or its Division employing the Executive, operating for less than 5 years a line of business from which the Company derives at least 3% of its gross operating revenues, notwithstanding such Person's or Division's lack of substantial revenues in such line of business; and (iv) any Person doing business in the United States, or its Division employing the Executive, if the Person or its Division receives at least 15% of its gross operating revenue from a line of business in which the Company has operated for less than 5 years, notwithstanding the Company's lack of substantial revenues in such line of business. For purposes of the foregoing, gross operating revenues of the Company and such other Person shall be those of the Company or such Person, together with their Consolidated Affiliates, but those of any Division employing or proposing to employ the Executive shall be on a stand-alone basis, all measured by the most recent available financial information of both the Company and such other Person or Division at the time the Executive accepts, or proposes to accept, employment with or to otherwise perform services for such Person. If financial information is not publicly available or is 21 inadequate for purposes of applying this definition, the burden shall be on the Executive to demonstrate that such Person is not a Competitor. (k) Consolidated Affiliate "Consolidated Affiliate" means, with respect to any person or entity, all affiliates and subsidiaries of such person or entity, if any, with whom the financial statements of such person or entity are required, under generally accepted accounting principles, to be reported on a consolidated basis. (l) Constructive Discharge "Constructive Discharge" means the occurrence of any of the following circumstances without the Executive's prior written consent unless the circumstances are fully corrected before the Termination Date specified in the notice of termination given in respect thereof: (1) the removal of the Executive from his position with the Company or Board other than as a result of Executive's being offered to a position of equal or superior scope and responsibility; (2) a reduction within any 24-month period (other than an across-the-board reduction similarly affecting all Senior Officers) of the Executive's Targeted Total Compensation to an amount that is less than 90% of the Executive's highest Targeted Total Compensation during the 24-month period; or (3) the Company's requiring that the Executive be based anywhere other than his present location or the Kansas City metropolitan area (or any other location to which the Executive has consented to be relocated), except for required travel on business to an extent substantially consistent with Executive's business travel obligations as of the Effective Date. (m) Division "Division" means any distinct group or unit organized as a segment or portion of a Person that is devoted to the production, provision, or management of a common product or service or group of related products or services, regardless of whether the group is organized as a legally distinct entity. (n) FON Common Stock "FON Common Stock" means the Company's FON Common Stock, Series 1, $2.00 par value per share. (o) Good Reason "Good Reason" means, without the Executive's express written consent, the occurrence of any of the following circumstances unless such circumstances are fully corrected prior to the Termination Date specified in the notice of termination given in respect thereof: 22 (i) the assignment to the Executive of any duties inconsistent with the Executive's status as President and Chief Operating Officer of Sprint or a substantial adverse alteration in the nature or status of the Executive's responsibilities or organizational reporting relationships from those in effect immediately before the Change in Control or any downgrading of the Executive's title or position from that in effect immediately before the Change in Control; (ii) a reduction by the Company in the Executive's Base Salary as in effect on the Effective Date or as the same may be increased from time to time, except for across-the-board salary reductions similarly affecting all officers of the Company and all officers of any business entity or entities in control of the Company; (iii) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation within 7 days of the date it is due, except pursuant to an across-the-board compensation deferral similarly affecting all officers of the Company and all officers of any business entity or entities in control of the Company; (iv) (A) the relocation of the Company's principal executive offices to a location outside the metropolitan area in which such offices are located immediately before the Change in Control; or (B) the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; or (C) the Company's requiring the Executive to travel to an extent substantially inconsistent with the Executive's present business travel obligations; (v) a substantial adverse alteration in the physical conditions under or in which the Executive is expected to perform the Executive's duties, other than an alteration similarly affecting all officers of the Company and all officers of any person in control of the Company; (vi) the Company's failure to continue in effect any compensation plan in which the Executive participated immediately before the Change in Control and that is material to the Executive's total compensation, including but not limited to the Incentive Plans or any substitute plans adopted before the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to the plan, or the Company's failure to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other Senior Officers, as existed at the time of the Change in Control; 23 (vii) the Company's failure to continue to provide the Executive with benefits substantially similar in the aggregate to those he enjoyed under any of the Company's plans, including but not limited to the Pension Plan, stock option plans, savings plan, supplemental employee retirement agreement, the Key Management Benefit Plan, the Executive Deferred Compensation Plan, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control; the taking of any action by the Company that would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control; or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such benefits; (viii) the Company's failure to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 31 hereof; or (ix) the Company's attempt to terminate the Executive's employment without complying with the procedures set forth in Section 1(d); any such attempt shall not be effective. (p) Incentive Plans "Incentive Plans" means the Long-Term Incentive Plan and the Short-Term Incentive Plan. (q) Long-Term Incentive Plan "Long-Term Incentive Plan" means the Company's Long-Term Incentive Plan, together with other incentive compensation plans specifically approved for this purpose by the Committee. (r) Non-Compete Period "Non-Compete Period" means the 36-month period beginning on the Termination Date. If the Executive breaches or violates any of the covenants or provisions of this Agreement, the running of the Non-Compete Period shall be tolled during the period the breach or violation continues. 24 (s) Option Plans "Option Plans" means the 1990 Plan and Sprint's 1997 Long-Term Stock Incentive Program. (t) Performance Measure "Performance Measure" means, with respect to any Performance Period, a measure, expressed as a percentage, of the extent to which the performance goals were achieved, as determined by the Committee, during the Performance Period. (u) Performance Period "Performance Period" means a period of time under the Short-Term Incentive Plan or Long-Term Incentive Plan (1) for which the Committee establishes performance goals for the Company's business units and authorizes payment of incentive compensation based on a measure of the extent to which those goals were achieved during the period or (2) with respect to which the Committee grants employee stock options in lieu of such performance goals, the period beginning on the first day of the year in which the options are granted and ending on the first date on which the options become exercisable in full, without regard to any acceleration of vesting. (v) Performance Period Stock Appreciation "Performance Period Stock Appreciation" means, with respect to any Performance Period, 1.52 times the ratio of (1) the stock price on the last trading day of the Performance Period to (2) the stock price on the first trading day of the Performance Period. For this purpose, the stock price on any day is (1) for days before November 24, 1998, the market price of the Company's common stock, par value, $2.50 per share, on that day and (2) for days on or after November 24, 1998, an amount equal to the sum of the market price of one share of FON Common Stock and one-half the market price of one share of PCS Common Stock on that day. The market price of a stock on any day is the average of the high and low prices on that day. This definition shall be adjusted to equitably reflect changes in Sprint's capital structure after the Effective Date. (w) PCS Common Stock "PCS Common Stock" means the Company's PCS Common Stock, Series 1, $1.00 par value per share. (x) Proprietary Information "Proprietary Information" means trade secrets (such as customer information, technical and non-technical data, a formula, pattern, compilation, program, device, 25 method, technique, drawing, process) and other confidential and proprietary information concerning the products, processes, or services of the Company or the Company's affiliates, including but not limited to: computer programs, unpatented or unpatentable inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development results and plans; business and strategic plans; sales forecasts and plans; personnel information, including the identity of other employees of the Company, their responsibilities, competence, abilities, and compensation; pricing and financial information; current and prospective customer lists and information on customers or their employees; information concerning purchases of major equipment or property; and information about potential mergers or acquisitions which information: (i) has not been made known generally to the public; and (ii) is useful or of value to the current or anticipated business, or research or development activities of the Company or of any customer or supplier of the Company, or (iii) has been identified to the Executive as confidential by the Company, either orally or in writing. (y) Resignation for Non-Succession "Resignation for Non-Succession" means the Executive's resignation of his employment with the Company within 60 days after (i) the election or other designation by the Board of any person other than the Executive as successor to William T. Esrey's position as the Chief Executive Officer of Sprint when Mr. Esrey ceases to hold such position, or (ii) the failure by the Board to elect or designate the Executive as the Chief Executive Officer of Sprint by May 1, 2005. (z) Senior Officer "Senior Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended (or any successor statute or statutes thereto), and the rules and regulations promulgated thereunder. (aa) Short-Term Incentive Plan "Short-Term Incentive Plan" means the Company's Management Incentive Plan, together with other incentive compensation plans specifically approved for this purpose by the Committee. (bb) Targeted Compensation "Targeted Compensation" means, (1) with respect to any Performance Period in which the award is measured in cash, the amount established by the Committee that would be the payout under the Short-Term Incentive Plan or the Long-Term Incentive Plan, as the case may be, if the Performance Measure for the Performance Period were 100% and (2) with respect to any Performance Period in which the award is measured in stock options, the dollar amount on which the number of options to grant was based. 26 (cc) Targeted Total Compensation "Targeted Total Compensation" means, as of any time, the sum of the Executive's (1) Base Salary, (2) Targeted Compensation for the Short-Term Incentive Plan, (3) Targeted Compensation for the Long-Term Incentive Plan, and (4) targeted value of his annual stock option award (ignoring the value of the Options granted pursuant to Section 2(b) of this Agreement and options granted before the Effective Date) as adopted by the Committee. (dd) Termination Date "Termination Date" means (i) in the case of a termination of the Executive's employment by reason of the Executive's death, the Executive's date of death, (ii) in the case of a termination of the Executive's employment by reason of a Constructive Discharge, the date which is thirty (30) days after the notice of termination is given, and (iii) in all other cases, the date of any notice of termination or the date, if any, on which the notice declares itself to be effective (but in no event later than the 60th day after the date on which such notice is given). (ee) Termination Period Incentive Payout "Termination Period Incentive Payout" means an amount equal to the weighted average of (1) the Actual Incentive Payout for the Performance Period in which the Termination Date occurs and (2) the Capped Incentive Payout for the Performance Period in which the Termination Date occurs. The weights in the weighted average will be for the amount in clause (1), the number of months in the Performance Period occurring before the Termination Date, and, for clause (2), the number of months in the Performance Period occurring after the Termination Date, in each case divided by the number of months in the Performance Period. In determining the number of months, the Termination Date will be rounded to the nearest month, rounding to the beginning of the month if the Termination Date falls on or before the 15th of the month and to the beginning of the following month if the Termination Date falls after the 15th of the month. 10. Assignability, Binding Nature This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs (in the case of the Executive), and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred to any subsidiary of Sprint or pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, but only if the assignee or transferee becomes the successor to all or substantially all of the assets of the Company and assumes the liabilities, obligations, and duties of the Company, as contained in this Agreement, either 27 contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it will take whatever action it legally can in order to cause the assignee or transferee to expressly assume the liabilities, obligations, and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only in connection with the Executive's estate planning objectives or by will or operation of law. 11. Amendment This Agreement may be amended, modified, or canceled only by mutual agreement of the parties in writing. 12. Applicable Law The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Kansas, without regard to the conflict of law provisions of any state. 13. Tax Withholding All payments made pursuant to this Agreement shall be subject to applicable federal and state income and to other withholding taxes. 14. Severability The various provisions of this Agreement are intended to be severable and to constitute independent and distinct binding obligations. If any provision of this Agreement is determined to be invalid, illegal, or incapable of being enforced, in whole or in part, it shall not affect or impair the validity of any other provision or part of this Agreement, and the provision or part shall be deemed modified to the minimum extent required to permit enforcement. Upon such a determination that any term or other provision is invalid, illegal, or incapable of being enforced, the court or arbitrator, as applicable, shall have the authority to so modify the provision or term. If such provision or term is not modified by the court or arbitrator, the parties must negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the provisions of this Agreement are preserved to the greatest extent possible. 15. Waiver of Breach No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any 28 subsequent breach by the other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of either party to take any action by reason of such breach will not deprive the party of the right to take action at any time while the breach continues. 16. Notices Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice): If to the Company: Sprint Corporation Attn: General Counsel 2330 Shawnee Mission Parkway Westwood, KS 66205 If to the Executive: Ronald T. LeMay Sprint Corporation 2330 Shawnee Mission Parkway Westwood, KS 66205 (or to the latest address furnished by Executive to Company for purposes of general communications). Each party, by written notice furnished to the other party, may modify the applicable delivery address, but any notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail, but in no event will any such communications be deemed to be given later than the date they are actually received. 17. Survivorship Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties shall survive the expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement. In particular, without limiting the generality of the preceding sentence, any obligation of the Company to make payments or provide services under Section 26 shall continue beyond the end of the Employment Term and the obligations and covenants of Executive set forth in Section 24 shall continue beyond the Employment Term. 29 18. Entire Agreement Except as otherwise noted herein, this Agreement constitutes the entire agreement between the parties concerning the subject matter specifically addressed herein and, except for the terms and provisions of any other employee benefit or other compensation plans (or any agreements or awards thereunder) referred to herein or contemplated hereby, this Agreement supersedes (i) all prior and contemporaneous oral agreements, if any, between the parties relating to the subject matter specifically addressed herein; and (ii) each of the Prior Agreements. 19. Headings The headings in this Agreement are for convenience of reference only and will not affect the construction of any of its provisions. 20. Counterparts This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. [SIGNATURE PAGE FOLLOWS] 30 IN WITNESS THEREOF, the parties hereto have caused this Agreement to be duly executed as of the date set forth above. "COMPANY" SPRINT CORPORATION, a Kansas corporation By: /s/ J. Richard Devlin Name: J. Richard Devlin Title: Executive Vice President - General Counsel and External Affairs "SUMC" SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation By: /s/ J. Richard Devlin Name: J. Richard Devlin Title: Executive Vice President - Legal/External Affairs "EXECUTIVE" /s/ Ronald T. LeMay Ronald T. LeMay 31 EXHIBIT A BOARDS OF DIRECTORS OF FOR-PROFIT BUSINESSES Sprint Corporation Allstate Corp. Ceridian Corp. Imation Corp. Transportation.com EX-12 9 0009.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Sprint Corporation - ------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------ (millions) Earnings Income (loss) from continuing operations before income taxes $ (702) $(1,072) $1,039 $1,748 $1,994 Capitalized interest (175) (151) (167) (93) (104) Equity in losses of less than 50% owned entities 256 80 42 680 199 - ------------------------------------------------------------------------------------ Subtotal (621) (1,143) 914 2,335 2,089 - ------------------------------------------------------------------------------------ Fixed charges Interest charges 1,165 1,011 885 277 301 Interest factor of operating rents 348 311 275 135 120 - ------------------------------------------------------------------------------------ Total fixed charges 1,513 1,322 1,160 412 421 - ------------------------------------------------------------------------------------ Earnings, as adjusted $ 892 $ 179 $2,074 $2,747 $2,510 ------------------------------------------------------------ Ratio of earnings to fixed charges -- (/1/) -- (/2/) 1.79(/3/) 6.67(/4/) 5.96(/5/) ------------------------------------------------------------
(/1/) Earnings, as adjusted, were inadequate to cover fixed charges by $621 million in 2000. Earnings, as adjusted, includes nonrecurring items. These items include a charge of $238 million which principally represents a write-down of goodwill, $187 million for costs associated with the terminated WorldCom merger, $122 million for the write-downs of certain equity investments, net gains of $71 million from the sale of an independent directory publishing operation and from investment activities, and a $28 million gain from the sale of customers and network infrastructure to a PCS affiliate. Excluding these items, earnings, as adjusted, would have been inadequate to cover fixed charges by $173 million. (/2/) Earnings, as adjusted, were inadequate to cover fixed charges by $1.1 billion in 1999. Earnings, as adjusted, includes a net nonrecurring gain of $54 million from investment activities. Excluding this gain, earnings, as adjusted, would have been inadequate to cover fixed charges by $1.2 billion. (/3/) Earnings as computed for the ratio of earnings to fixed charges includes nonrecurring net gains of $104 million mainly relating to sales of local exchanges and a nonrecurring charge to write off $179 million of acquired in-process research and development costs related to the PCS Restructuring. Excluding these items, the ratio of earnings to fixed charges would have been 1.85 for 1998. (/4/) Earnings as computed for the ratio of earnings to fixed charges includes nonrecurring items. These items include a litigation charge of $20 million and gains of $71 million mainly from sales of local exchanges and certain investments. Excluding these items, the ratio of earnings to fixed charges would have been 6.54 for 1997. (/5/) Earnings as computed for the ratio of earnings to fixed charges includes the nonrecurring charge related to litigation of $60 million recorded in 1996. Excluding this charge, the ratio of earnings to fixed charges would have been 6.10 for 1996. Note: The ratios were computed by dividing fixed charges into the sum of earnings (after certain adjustments) and fixed charges. Earnings include income from continuing operations before taxes, plus equity in the net losses of less-than-50% owned entities, less capitalized interest. Fixed charges include interest on all debt of continuing operations, including amortization of debt issuance costs, and the interest component of operating rents. EX-21 10 0010.txt SUBSIDIARIES OF REGISTRANT EXHIBIT (21) SUBSIDIARIES OF REGISTRANT Sprint Corporation Sprint Corporation is the parent. The subsidiaries of Sprint Corporation are as follows: - -----------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation or Immediate Name Organization Parent - ----------------------------------------------------------------------------- American Telecasting, Inc. Delaware 100 American Telecasting Development, Inc. Delaware 100 Fresno MMDS Associates, A General Partnership California Partnership 35 FMA Licensee Subsidiary, Inc. California 100 American Telecasting of Anchorage, Inc. Delaware 100 American Telecasting of Bend, Inc. Delaware 100 American Telecasting of Billings, Inc. Delaware 100 American Telecasting of Bismarck, Inc. Delaware 100 American Telecasting of Central Florida, Inc. Delaware 100 American Telecasting of Cincinnati, Inc. Delaware 100 American Telecasting of Colorado Springs, Inc. Delaware 100 American Telecasting of Columbus, Inc. Delaware 100 American Telecasting of Denver, Inc. Delaware 100 American Telecasting of Fort Collins, Inc. Delaware 100 American Telecasting of Fort Myers, Inc. Delaware 100 American Telecasting of Green Bay, Inc. Delaware 100 American Telecasting of Minnesota, Inc. Delaware 100 American Telecasting of Nebraska, Inc. Delaware 100 American Telecasting of North Dakota, Inc. Delaware 100 American Telecasting of South Dakota, Inc. Delaware 100 American Telecasting of Hawaii, Inc. Delaware 100 American Telecasting of Jackson, Inc. Delaware 100 American Telecasting of Jacksonville, Inc. Delaware 100 American Telecasting of Lansing, Inc. Delaware 100 American Telecasting of Lincoln, Inc. Delaware 100 American Telecasting of Little Rock, Inc. Delaware 100 American Telecasting of Louisville, Inc. Delaware 100 American Telecasting of Medford, Inc. Delaware 100 American Telecasting of Michiana, Inc. Delaware 100 American Telecasting of Monterey, Inc. Delaware 100 American Telecasting of Oklahoma, Inc. Delaware 100 American Telecasting of Portland, Inc. Delaware 100 American Telecasting of Rapid City, Inc. Delaware 100 American Telecasting of Redding, Inc. Delaware 100 American Telecasting of Rockford, Inc. Delaware 100 American Telecasting of Salem/Eugene, Inc. Delaware 100 American Telecasting of Santa Barbara, Inc. Delaware 100 American Telecasting of Santa Rosa, Inc. Delaware 100 American Telecasting of Sarasota, Inc. Delaware 100 American Telecasting of Seattle, Inc. Delaware 90 American Telecasting of Sheridan, Inc. Delaware 100 American Telecasting of Sioux Valley, Inc. Delaware 100 American Telecasting of Toledo, Inc. Delaware 100 American Telecasting of Youngstown, Inc. Delaware 100 American Telecasting of Yuba City, Inc. Delaware 100 Fresno Wireless Cable Television, Inc. Washington 100 Fresno MMDS Associates, A General Partnership California Partnership 65 Superchannels of Las Vegas, Inc. Arizona 58 Carolina Telephone and Telegraph Company North Carolina 100 Carolina Telephone Long Distance, Inc. North Carolina 100 SC One Company Kansas 100
EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - --------------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------- Centel Corporation Kansas 91.4(/1/) Centel Capital Corporation Delaware 100 Centel Credit Company Delaware 100 Centel Directory Company Delaware 100 The CenDon Partnership Illinois Partnership 50 Centel-Texas, Inc. Texas 100 Central Telephone Company of Texas Texas 100 Central Telephone Company Delaware 100 Central Telephone Company of Illinois Illinois 100 Central Telephone Company of Virginia Virginia 100 Sprint-Florida, Incorporated Florida 100 United Telephone Communications Systems, Incorporated Florida 100 United Telephone Long Distance, Incorporated Florida 100 C FON Corporation Delaware 100 DirectoriesAmerica, Inc. Kansas 100 Sprint Publishing & Advertising, Inc. Kansas 100 LD Corporation Kansas 100 North Supply Company Ohio 100 Northstar Transportation, Inc. Kansas 100 North Supply Company of Lenexa Delaware 100 North Supply International, Ltd. Kansas 100 NSC Advertising, Inc. Kansas 100 Sprint Products Group, Inc. Kansas 100 People's Choice TV Corporation Delaware 100 Alda Gold, Inc. Delaware 100 Alda Tucson, Inc. Delaware 100 Alda Wireless Holdings, Inc. Delaware 100 Broadcast Cable, Inc. Indiana 24.9 PCTV Development Co. Delaware 100 PCTV Gold, Inc. Delaware 100 People's Choice TV of Albuquerque, Inc. Delaware 100 People's Choice TV of Houston, Inc. Delaware 100 People's Choice TV of Milwaukee, Inc. Delaware 100 People's Choice TV of Salt Lake City, Inc. Delaware 100 People's Choice TV of St. Louis, Inc. Delaware 100 People's Choice TV of Tucson, Inc. Delaware 100 Preferred Entertainment, Inc. Delaware 100 Sat-Tel Services, Inc. Arizona 100 SpeedChoice Equipment, Inc. Delaware 100 SpeedChoice of Detroit, Inc. Delaware 100 SpeedChoice of Phoenix, Inc. Delaware 100 Waverunner, Inc. Delaware 100 Wireless Cable of Indianapolis, Inc. Delaware 100 Broadcast Cable, Inc. Indiana 75.2 Sprint Asian American, Inc. Kansas 100 Sprint Capital Corporation Delaware 100 SprintCom, Inc. Kansas 100 SVC BidCo, L.P. Delaware 80(/2/)
- -------------------------------------------------------------------------------- (/1/) Sprint Corporation owns all of the common stock. The voting preferred stock is held by 11 Sprint subsidiaries. (/2/) SprintCom, Inc. owns a limited partnership interest. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - --------------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation Immediate Name or Organization Parent - -------------------------------------------------------------------------- Sprint Communications of Michigan, Inc. Michigan 100 Sprint Credit General, Inc. Kansas 100 Sprint Credit Limited, Inc. Kansas 100 Sprint eBusiness, Inc. Kansas 100 Sprint Enterprise Network Services, Inc. Kansas 100 Sprint Paranet Canada, Inc. Canada 100 Sprint eWireless, Inc. Kansas 100 Sprint Healthcare Systems, Inc. Kansas 100 Sprint International Holding, Inc. Kansas 100 Japanese Branch of Sprint International Holding, Inc. Japan 100 SIHI Mexico, S. de R.L. de C.V. Mexico 99 SIHI Scandinavia AB Sweden 100 SIHI South Africa (Pty) Ltd. South Africa 100 Sprint Cayman Holding, Ltd. Cayman Islands 100 Shanghai Cayman Holding, Ltd. Cayman Islands 100 SprintCom Belgium BVBA Belgium 99.5 Sprint France SAS France 100 Sprint Hong Kong Limited Hong Kong 50 Sprint International Australia Pty. Limited Australia 100 Sprint International Communications Canada ULC Canada 100 Sprint International Communications Singapore Pte. Ltd. Singapore 100 Sprint International Communications S.r.l. Italy 99 Sprint International do Brasil Ltda. Brazil 50 Sprint International Holding Inc.--India Liaison Office India 100 Sprint International Japan Kabushiki Kaisha Japan 100 Sprint Netherlands B.V. Netherlands 100 Sprint UK Holdings Limited United Kingdom 100 SprintLink Belgium BVBA Belgium .5 Telecom Entity Participacoes Ltda. Brazil 50 JVCO Participacoes Ltda Brazil 50 Holdco Participacoes Ltda. Brazil 99.9 Intelig Telecomunicacoes Ltda. Brazil 99.9 SprintLink Global Holdings, Inc. Kansas 100 SLGH Scandinavia AB Sweden 100 SprintLink Belgium BVBA Belgium 99.5 SprintLink Denmark ApS Denmark 100 SprintLink France SAS France 100 SprintLink Germany GmbH Germany 100 SprintLink International Singapore Pte. Ltd. Singapore 100 SprintLink Italy S.r.l Italy 99 SprintLink Netherlands B.V. Netherlands 100 SprintLink UK Limited United Kingdom 100 Sprint Mexico, Inc. Kansas 100 Sprint Mid-Atlantic Telecom, Inc. North Carolina 100 Sprint Minnesota, Inc. Minnesota 100 Sprint Missouri, Inc. Missouri 100 SC Eight Company Kansas 100 Sprint Payphone Services, Inc. Florida 100 Sprint PCS Canada Holdings, Inc. Kansas 100 Sprint TELECENTERS Inc. Florida 100
EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - --------------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------- Sprint/United Management Company Kansas 100 Sprint Services, Inc. Kansas 100 Sprint Ventures, Inc. Kansas 100 Sprint Wavepath Holdings, Inc. Delaware 100 Sprint (Bay Area), Inc. Florida 100 Wavepath Holdings, Inc. Delaware 62.5 Bay Area Cablevision, Inc. California 100 Transworld Wireless T.V.--Spokane, Inc. Delaware 100 TTI Acquisition Corporation Delaware 100 Desert Winds Comm, Inc. California 100 WHI--San Diego, Inc. California 100 Wireless Holdings Purchasing Co. Delaware 100 SWV Eight, Inc. Delaware 100 SWV Three Telephony Partnership Delaware Partnership 22 Cox Communications PCS, L.P. Delaware Partnership 40.8 Cox PCS Assets, L.L.C. Delaware 100 Cox PCS License, L.L.C. Delaware 100 PCS Leasing Company, L.P. Delaware Partnership 51 SWV Five, Inc. Delaware 100 PhillieCo Partners I, L.P. Delaware Partnership 35.3 PhillieCo Sub, L.P. Delaware Partnership 99 PhillieCo, L.P. Delaware Partnership 99 PhillieCo Equipment & Realty Company, L.P. Delaware Partnership 99 PhillieCo Partners II, L.P. Delaware Partnership 35.3 PhillieCo Equipment & Realty Company, L.P. Delaware Partnership 1 PhillieCo, L.P. Delaware Partnership 1 PhillieCo Sub, L.P. Delaware Partnership 1 SWV Four, Inc. Delaware 100 PhillieCo Partners I, L.P. Delaware Partnership 17.6 PhillieCo Partners II, L.P. Delaware Partnership 17.6 SWV Two Telephony Partnership Delaware Partnership 99 MinorCo, L.P. Delaware Partnership 15 American PCS, L.P. Delaware Partnership (/3/) American PCS Communications, LLC Delaware 99(/4/) APC PCS, LLC Delaware 99(/5/) APC Realty and Equipment Company, LLC Delaware 99(/5/) American Personal Communications Holdings, Inc. Delaware 100 American PCS Communications, LLC Delaware (/6/) APC PCS, LLC Delaware (/6/) APC Realty and Equipment Company, LLC Delaware (/6/) NewTelco, L.P. Delaware Partnership (/3/) Sprint Spectrum Equipment Company, L.P. Delaware Partnership (/3/) Sprint Spectrum L.P. Delaware Partnership (/3/) Sprint Spectrum Equipment Company, L.P. Delaware Partnership 99(/7/) Sprint Spectrum Finance Corporation Delaware 100 Sprint Spectrum Realty Company, L.P. Delaware Partnership 99(/7/) WirelessCo, L.P. Delaware Partnership 99(/7/) Sprint Spectrum Realty Company, L.P. Delaware Partnership (/3/) WirelessCo, L.P. Delaware Partnership (/3/)
- -------------------------------------------------------------------------------- (/3/) MinorCo, L.P. holds a limited and preferred partnership interest of less than 1%. (/4/) American PCS, L.P. holds the general partnership interest of greater than 99%. (/5/) American PCS Communications, LLC holds the general partnership interest of greater than 99%. (/6/) American Personal Communications Holdings, Inc. holds a limited partnership interest of less than 1%. (/7/) Sprint Spectrum L.P. holds the general partnership interest of greater than 99%. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - --------------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------- Sprint Spectrum Holding Company, L.P. Delaware Partnership 15 American PCS, L.P. Delaware Partnership 99(/8/) Cox Communications PCS, L.P. Delaware Partnership 59.2 NewTelco, L.P. Delaware Partnership 99(/8/) PCS Leasing Company, L.P. Delaware Partnership 49 Sprint Spectrum L.P. Delaware Partnership 99(/8/) SWV One, Inc. Delaware 100 SWV One Telephony Partnership Delaware Partnership 1 MinorCo, L.P. Delaware Partnership 15 Sprint Spectrum Holding Company, L.P. Delaware Partnership 15 SWV Seven, Inc. Delaware 100 SWV Three Telephony Partnership Delaware Partnership 78 SWV Six, Inc. Colorado 100 MinorCo, L.P. Delaware Partnership 30 Sprint Spectrum Holding Company, L.P. Delaware Partnership 30 SWV Three, Inc. Delaware 100 SWV Two Telephony Partnership Delaware Partnership 1 SWV Two, Inc. Delaware 100 SWV One Telephony Partnership Delaware Partnership 99 TDI Acquisition Corporation Delaware 100 WBS California, LLC Delaware 100 WBSE Licensing Corporation Delaware 100 WBSS Licensing Corporation Delaware 100 WBS Idaho, LLC Delaware 100 WBSB Licensing Corporation Delaware 100 WBS Montana, LLC Delaware 100 WBSH Licensing Corporation Delaware 100 WBS Oregon, LLC Delaware 100 WBSCB Licensing Corporation Delaware 100 WBSK Licensing Corporation Delaware 100 WBSR Licensing Corporation Delaware 100 WBS Washington, LLC Delaware 100 Kennewick Licensing, LLC Delaware 100 WBSY Licensing Corporation Delaware 100 Wireless Broadband Services of America, LLC Delaware 100 Wireless Broadcasting Systems of America, Inc. Delaware 100 Wireless Broadcasting Systems of Boise, Inc. Delaware 100 Wireless Broadcasting Systems of Coos Bay, Inc. Delaware 100 Wireless Broadcasting Systems of Eureka, Inc. Delaware 100 Wireless Broadcasting Systems of Ft. Pierce, Inc. Delaware 100 WBSFP Licensing Corporation Delaware 100 Wireless Broadcasting Systems of Helena, Inc. Delaware 100 Wireless Broadcasting Systems of Klamath Falls, Inc. Delaware 100 Wireless Broadcasting Systems of Melbourne, Inc. Delaware 100 WBSM Licensing Corporation Delaware 100 Wireless Broadcasting Systems of Roseburg, Inc. Delaware 100 Wireless Broadcasting Systems of Sacramento, Inc. Delaware 100 Wireless Broadcasting Systems of West Palm, Inc. Delaware 100 WBSWP Licensing Corporation Delaware 100 Wireless Broadcasting Systems of Yakima, Inc. Delaware 100 Wireless Broadcasting Systems of Knoxville, LLC Delaware 100 Cherokee Wireless of Knoxville, Inc. Delaware 100 Transworld Telecommunications, Inc. Pennsylvania 100 Wavepath Holdings, Inc. Delaware 37.5
- -------------------------------------------------------------------------------- (/8/) Sprint Spectrum Holding Company, L.P. holds the general partnership interest of greater than 99%. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - --------------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------ UCOM, Inc. Missouri 100 Sprint Communications Company L.P. Delaware Partnership 34.1 Sprint Communications Company of New Hampshire, Inc. New Hampshire 100 Sprint Communications Company of Virginia, Inc. Virginia 100 Sprint Licensing, Inc. Kansas 100 United Telephone Company of Kansas Kansas 1(/9/) USST of Texas, Inc. Texas 100 UTI Holding Company, Inc. Kansas 100 SprintCom Equipment Company L.P. Delaware 49 Sprint Enterprises, L.P. Delaware Partnership 48.9 MinorCo, L.P. Delaware Partnership 40 PhillieCo Partners I, L.P. Delaware Partnership 47.1 PhillieCo Partners II, L.P. Delaware Partnership 47.1 Sprint Spectrum Holding Company, L.P. Delaware Partnership 40 Sprint Global Venture, Inc. Kansas (/10/) SGV Corporation Kansas 100 United Telephone Company of the Carolinas South Carolina 100 SC Two Company Kansas 100 United Telephone Company of Eastern Kansas Delaware 100 Sprint/United Midwest Management Services Company Kansas 20 United Teleservices, Inc. Kansas 100 United Telephone Company of Florida Florida 100 Vista-United Telecommunications Florida 49 United Telephone Company of Indiana, Inc. Indiana 100 SC Four Company Kansas 100 United Telephone Company of Kansas Kansas 99(/9/) Sprint/United Midwest Management Services Company Kansas 80 United Telephone Company of New Jersey, Inc. New Jersey 100 United Telephone Company of the Northwest Oregon 100 United Telephone Company of Ohio Ohio 100 SC Five Company Kansas 100 United Telephone Communications Services of Ohio, Inc. Ohio 100 United Telephone Company of Pennsylvania, The Pennsylvania 100 SC Six Company Kansas 100 United Telephone Long Distance, Inc. Pennsylvania 100 Valley Network Partnership Virginia Partnership 20 United Telephone Company of Southcentral Kansas Arkansas 100 United Telephone Company of Texas, Inc. Texas 100 SC Seven Company Kansas 50 United Telephone Company of the West Delaware 100 United Telephone-Southeast, Inc. Virginia 100 SC Three Company Kansas 100 Valley Network Partnership Virginia Partnership 20
- -------------------------------------------------------------------------------- (/9/) Sprint Corporation owns all of the common stock. The voting preferred stock is held by Sprint Communications Company L.P. (/10/) Ucom, Inc., US Telecom, Inc., and Utelcom, Inc. each holds less than 1% of the common stock. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - --------------------------------------------------------------------------------
Ownership Interest Jurisdiction of Held By Its Incorporation or Immediate Name Organization Parent - -------------------------------------------------------------------------------- US Telecom, Inc. Kansas 100 ASC Telecom, Inc. Kansas 100 LCF, Inc. California 100 SC Seven Company Kansas 50 Sprint Communications Company L.P. Delaware Partnership 58.9 SprintCom Equipment Company L.P. Delaware 51 Sprint Enterprises, L.P. Delaware Partnership 51 Sprint Global Venture, Inc. Kansas (/10/) Sprint Iridium, Inc. Kansas 100 Iridium U.S., L.P. Delaware Partnership 27 Iridium Canada Communications Inc. Canada 27 Iridium LLC Delaware 3.8 United Telecommunications, Inc. Delaware 100 US Telecom of New Hampshire, Inc. New Hampshire 100 Utelcom, Inc. Kansas 100 Private TransAtlantic Telecommunications System, Inc. Delaware 100 Private Trans-Atlantic Telecommunications System (N.J.), Inc. New Jersey 100 Sprint Communications Company L.P. Delaware Partnership 4.9 Sprint Global Venture, Inc. Kansas (/10/) Sprint International Incorporated Delaware 100 Consortium Communications International, Inc. New York 100 Dial--The Israeli Company for International Communication Services LTD Israel 54.4 Barak I.T.C.--The International Telecommunications Services Corporation Israel 46 Marconi-Sprint Servicos de Comunicacao, Lda Portugal 49 SIHI Mexico S. de R.L. de C.V. Mexico 1 SprintCom Belgium BVBA Belgium .5 SprintLink Italy S.r.l. Italy 1 Sprint FON Inc. Delaware 100 Sprint Global Venture, Inc. Kansas 86 Sprint Hong Kong Limited Hong Kong 50(/11/) Sprint International do Brasil Ltda. Brazil 50 Sprint International Caribe, Inc. Puerto Rico 100 Sprint International Communications Corporation Delaware 100 Sprint Communications Company L.P. Delaware Partnership 1.9 Sprint Global Venture, Inc. Kansas 13 Tianjin Global Communications Co., Ltd. China 39 Sprint International Communications S.r.l. Italy 1 Sprint International Construction Company Delaware 100 Sprint Israel Cellular, Inc. Delaware 100 Sprint R.P. Telekom Sp. z o.o. Poland 50 Sprint Telecommunications Services GmbH Germany 100 Sprint Telecommunications (UK) Limited Delaware 100 Wireless Cable of Florida, Inc. Florida 100
- -------------------------------------------------------------------------------- (/10/) Ucom, Inc., US Telecom, Inc., and Utelcom, Inc. each holds less than 1% of the common stock. (/11/) Held in trust for Sprint International Holding, Inc. EX-23.(A) 11 0011.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT (23)(a) CONSENT OF INDEPENDENT AUDITORS Sprint Corporation We consent to the incorporation by reference in the Registration Statements (Form S-3, No. 33-58488; Form S-3, No. 333-55930; Form S-8, No. 33-38761; Form S-8, No. 33-31802; Form S-8, No. 2-97322; Form S-8, No. 33-59316; Form S-8, No. 33-59322; Form S-8, No. 33-59324; Form S-8, No. 33-59326; Form S-8, No. 33- 53695; Form S-8, No. 33-59349; Form S-8, No. 33-65149; Form S-8, No. 33-25449; Form S-8, No. 333-42077; Form S-8, No. 333-46487; Form S-8, No. 333-46491; Form S-8, No. 333-68737; Form S-8, No. 333-68741; Form S-8, No. 333-68739; Form S-8, No. 333-68795; Form S-8, No. 333-76755; Form S-8, No. 333-76783; Form S-8, No. 333-92809; Form S-8 No. 333-41662 and Form S-8 No. 333-54108) of Sprint Corporation and in the related Prospectuses of our reports dated February 1, 2001 with respect to the consolidated financial statements and schedule of Sprint Corporation and the combined financial statements and schedules of the Sprint FON Group and the Sprint PCS Group included in this Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP ------------------------------------- Ernst & Young LLP Kansas City, Missouri March 9, 2000 EX-23.(B) 12 0012.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT (23)(b) INDEPENDENT AUDITORS' CONSENT Sprint Spectrum Holding Company, L.P. We consent to the incorporation by reference in Registration Statements (Nos. 33-58488 and 333-55930) on Form S-3 and Registration Statements (Nos. 33- 38761, 33-31802, 2-97322, 33-59316, 33-59322, 33-59324, 33-59326, 33-53695, 33-59349, 33-65149, 33-25449, 333-42077, 333-46487, 333-46491, 333-68737, 333-68739, 333-68741, 333-68795, 333-76755, 333-76783, 333-92809, 333-41662 and 333-54108) on Form S-8 of Sprint Corporation of our report dated February 2, 1999, on the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended December 31, 1998 appearing in this Annual Report on Form 10-K of Sprint Corporation for the year ended December 31, 2000. /s/ Deloitte & Touche LLP ------------------------------------- Deloitte & Touche LLP Kansas City, Missouri March 9, 2001 -----END PRIVACY-ENHANCED MESSAGE-----