-----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, WCipdtwDD0EHHtbRiK9CQ+xhKIQLelIZGIwDqbx2nf683IchOXtePSWwimUMAA7E Y4pdcPgUoo7ntHBSKTx0Gg== 0000950131-00-001968.txt : 20000327 0000950131-00-001968.hdr.sgml : 20000327 ACCESSION NUMBER: 0000950131-00-001968 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 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-K405 SEC ACT: SEC FILE NUMBER: 001-04721 FILM NUMBER: 577197 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-K405 1 FORM 10-K405 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, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-04721 SPRINT CORPORATION (Exact name of registrant as specified in its charter) KANSAS 48-0457967 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) P.O. Box 11315, Kansas City, Missouri 64112 (Address of principal executive (Zip Code) offices) (913) 624-3000 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Preferred Stock, without par value First series, $7.50 stated value New York Stock Exchange Second series, $6.25 stated value New York Stock Exchange 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
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 these 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. [X] Aggregate market value of voting and non-voting stock held by non-affiliates at February 29, 2000, was $86,009,182,449. COMMON SHARES OUTSTANDING AT FEBRUARY 29, 2000: FON COMMON STOCK 789,829,611 PCS COMMON STOCK 913,848,026 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, 1999, 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 October 1999, Sprint announced a definitive merger agreement with MCI WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged for $76 of MCI WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. The merger is subject to the approvals of Sprint and MCI WorldCom shareholders as well as approvals from the Federal Communications Commission (FCC), the Justice Department, various state government bodies and foreign antitrust authorities. The companies anticipate that the merger will close in the second half of 2000. 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 S.A. (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. The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. These operations are referred to as the PCS Group. The FON stock is intended to reflect the performance of all of Sprint's other operations. These operations are referred to as the FON Group and include the following: . Core businesses . Long distance division . Local division . Product distribution and directory publishing businesses . Activities to develop and deploy Sprint ION(SM), Integrated On-Demand Network . Other strategic ventures. 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 (other than Class A directors elected by FT and DT) 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. The shares held by the Cable Partners convert into full voting PCS stock upon sale to the public. For 90 days after the merger, each Cable Partner will have the right to convert all of its shares of WorldCom series 2 PCS common stock and WorldCom series 2 common stock into an equivalent number of shares of WorldCom series 1 PCS common stock and WorldCom common stock, respectively. 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 and stock price of 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. 1 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, and (5) 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 decrease the intergroup interest. An intergroup interest of the PCS Group in the FON Group cannot be created. Sprint FON Group General Overview of the Sprint FON Group The main activities of the FON Group include its core businesses, consisting of domestic and international long distance communications, local exchange communications, and product distribution and directory publishing activities. The FON Group also includes results from Sprint ION(SM), and other ventures, including Sprint's investment in EarthLink. Core Businesses--Long Distance Division General The FON Group's long distance division (LDD) is the nation's third-largest long distance phone company. LDD operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. LDD primarily provides domestic and international voice, video and data communications services. It consists mainly of Sprint Communications Company L.P. (the Limited Partnership). LDD's financial performance for 1999, 1998 and 1997 is summarized as follows: - ---------------------------------------------
1999 1998 1997 - --------------------------------------------- (millions) Net operating revenues $10,567 $9,658 $8,684 ------------------------- Operating income(/1/) $ 1,634 $1,367 $1,025 -------------------------
(/1/)Includes nonrecurring litigation charges of $20 million in 1997. Competition The division competes with AT&T, MCI 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. The Regional Bell Operating Companies (RBOCS) are beginning to obtain authorization to provide in-region long distance service, which is expected to heighten competition. 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, LDD intends to leverage its principal strategic assets: its national brand, innovative marketing and pricing plans, its reputation for superior customer service, its state-of-the- art technology, and offerings available from other FON Group operating entities and the PCS Group. LDD 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 companies with complex distributed computing environments. 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 division with Sprint's other operations such as the local division and the PCS Group. The long distance division is also entering local markets of the RBOCS through resale and unbundled network element (UNE) offerings of the RBOCS. These local products will be primarily marketed in connection with long distance products to customers who desire a single voice service provider but do not need advanced services. The long distance division also supports Sprint ION(SM) activities. See "Sprint ION--Strategy" for more details. Core Businesses--Local Division General The local division (LTD) consists of regulated local phone companies serving more than 8 million access lines in 18 states. LTD provides local phone services, access by phone customers and other carriers to LTD's local network, sales of telecommunications equipment, and long distance services within certain regional calling areas, or LATAs. LTD's financial performance for 1999, 1998 and 1997 is summarized as follows: - ----------------------------------------------------
1999 1998 1997 - ---------------------------------------------------- (millions) Net operating revenues(/1/) $ 5,650 $ 5,372 $ 5,294 -------------------------------- Operating income $ 1,500 $ 1,407 $ 1,392 --------------------------------
(/1/)Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. For further discussion, see the FON Group's "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2 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 11% in 1999 and 13% in 1998 and 1997. Revenues from AT&T were 4% of the FON Group's revenues in 1999 and 5% in 1998 and 1997. Competition Because LTD operations are largely in secondary and tertiary markets, competition in its markets is occurring more gradually. There is already some competition in urban areas served by LTD and for business customers located in all areas. There continues to be significant competition for intraLATA toll. The merger of AT&T and TCI may accelerate competition in the areas served by LTD by enabling AT&T to bypass the local phone company and reach local customers through the cable of TCI. In addition, wireless services will continue to grow as an alternative to wireline services as a means of reaching local customers. Strategy To continue to build on its successful track record, LTD has embarked on a growth strategy whereby it will aggressively market Sprint's entire product portfolio to its local customers 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(SM). See "Sprint ION--Strategy" for more details. Core Businesses--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 1999, 1998 and 1997 is summarized as follows: - ----------------------------------------------------
1999 1998 1997 - ---------------------------------------------------- (millions) Net operating revenues(/1/) $ 1,731 $ 1,683 $ 1,454 -------------------------------- Operating income(/1/) $ 242 $ 231 $ 179 --------------------------------
(/1/)Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. For further discussion, see the FON Group's "Management's Discussion and Analysis of Financial Condition and Results of Operations." Sprint ION(SM) Sprint is developing and deploying new integrated communications services, referred to as Sprint ION. Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide advanced services in the competitive local service market. Sprint will use various advanced services last mile technologies including dedicated access, Digital Subscriber Line (xDSL), and Multipoint Multichannel Distribution Services (MMDS). The financial performance for Sprint ION for 1999, 1998 and 1997 is summarized as follows: - --------------------------------------
1999 1998 1997 - -------------------------------------- (millions) Net operating expenses $358 $143 $ 5 -------------
Strategy This 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 long distance division's transmission infrastructure, 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. Other Ventures The "other ventures" segment includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. This segment also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. All of the investments and ventures are accounted for on the equity basis. The financial performance of the operations of other ventures for 1999, 1998 and 1997 is summarized as follows: - ----------------------------------------------------
1999 1998 1997 - ---------------------------------------------------- (millions) Net operating revenues $ 20 $ -- $ -- ---------------------------- Operating expenses $ 68 $ 40 $ 84 ---------------------------- Operating loss $ (48) $ (40) $ (84) ---------------------------- Equity in losses of affiliates $ (89) $ (51) $ (10) ----------------------------
Operating expenses in 1998 and 1997 mainly relate to the FON Group's offering of Internet services. In June 1998, the FON Group completed the strategic alliance to combine its Internet business with EarthLink. As part 3 of the alliance, EarthLink obtained the FON Group's Sprint Internet Passport customers and took over the day-to-day operations of those services. In exchange, the FON Group acquired an equity interest in EarthLink. This segment previously included the FON Group's investment in Global One. In January 2000, Sprint reached a definitive agreement with FT and DT to sell its interest in Global One. The sale was completed in February 2000. 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. Sprint PCS Group General Overview of the Sprint PCS Group The PCS Group includes Sprint's domestic 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 1999, the PCS Group, together with affiliates, operated PCS systems in over 360 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including affiliates, now reaches nearly 190 million people. The PCS Group provides nationwide service through: . operating its own digital network in major U.S. metropolitan areas, . affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, . roaming on other providers' analog cellular networks using dual- band/dual-mode handsets, and . roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The financial performance for the PCS Group for 1999, 1998 and 1997 is summarized as follows: - ------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------ (millions) Net operating revenues(/1/) $ 3,180 $ 1,225 $ -- --------------------------------------- Operating loss(/1/),(/2/) $(3,237) $(2,570) $(19) --------------------------------------- Other partners' loss in Sprint PCS $ -- $ 1,251 $ -- --------------------------------------- Equity in loss of Sprint PCS $ -- $ -- $(660) ---------------------------------------
(/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. Before 1998, Sprint's investment in Sprint PCS was accounted for using the equity method. (/2/)Includes 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." License Coverage The PCS Group holds licenses covering 276 million Pops (one person residing in a license area equals one Pop). 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 service 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 customer base using multiple distribution channels . Continuing to expand coverage 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 phone companies, 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 incumbent local telephone carriers, and is rolling out Sprint ION in cities across the nation. Sprint is also rolling out resold and UNE based local services obtained from other local phone companies under the Telecom Act. This rollout of local services obtained from other local phone companies will occur in major areas across the nation not served by the LTD. 4 In January 1999, the Supreme Court affirmed the FCC's authority to establish rules and prices relating to interconnection and unbundling of the incumbent local phone companies' 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. 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 a FCC ruling that the provision of in-region long distance service is in the public interest. One RBOC, Bell Atlantic, obtained FCC authorization to provide in-region long distance service in New York in December 1999; 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 switch 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; these rules were stayed by the Court of Appeals, and the FCC is currently considering an industry proposal that would streamline the process for adjudicating alleged slams. Mergers As a result of increasing competitive pressures, a number of carriers have combined or proposed to combine. Sprint and MCI WorldCom filed a merger application with the FCC (November 1999) and with the European Commission (January 2000); Sprint and MCI WorldCom are also continuing to provide the Department of Justice with information supporting the proposed merger. SBC completed its merger with Ameritech in 1999; the Bell Atlantic-GTE proposed merger remains pending before the FCC. In 1999, AT&T completed its merger with TCI, and announced its pending merger with MediaOne. AT&T is expected to use its newly acquired cable facilities to provide competitive local telephone services. Universal Services Requirements The FCC continued to address issues related to Universal Service and access charge reform. It increased the amount of money available to schools and libraries under the "e-rate" program; adopted a computer model designed to calculate "high cost" universal service subsidies (and to replace high cost subsidies implicit in interstate access charges with explicit contributions); and continued to shift certain non-traffic sensitive costs from usage-sensitive to flat-rated access charges. Sprint's long distance and local divisions both benefit from cost-based access charges. In addition, the shift in costs from usage-sensitive to flat-rated access charges has contributed to sharp decreases in long distance usage rate charges. 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 end- user revenues. The FON Group's 1999 results contained assessments for 1999. 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 from the universal service fund. 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 local 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 has published guidelines concerning what is required for it to support, at the FCC, petitions for extension of the CALEA enforcement deadlines. 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 Justice Department. 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. Sprint believes it will be in compliance with CALEA by the appropriate deadlines for local circuit-switched equipment. 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. 5 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, a recent FCC order 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 licensees must build networks offering coverage to 1/3 of the population within five years and 2/3 within 10 years. 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. 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 and/or file competing 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 phone companies must program their networks to allow customers to change service providers without changing phone numbers. 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, CMRS providers must be able to offer their own customers number portability in their switches in the 100 largest metropolitan areas. They must also be able to support nationwide roaming. 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 to be completed in phases by October 2001. 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 carriers to meet certain "assistance capability requirements" by the end of June 2000. In 1997, telecommunications industry standard-setting organizations agreed to a joint standard to implement CALEA's capability requirements. The PCS Group believes it will be in compliance with CALEA requirements. 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, certain FCC environmental regulations may cause certain cell site locations to come under National Environmental Policy Act (NEPA) regulation. NEPA requires 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. The PCS Group's 1999 results contained assessments for 1999. 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 a site 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 6 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 17 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 1999, Sprint had approximately 77,600 employees. Approximately 10,600 FON Group employees were represented by unions. During 1999, 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 13 of Sprint's "Notes to Consolidated Financial Statements" and Note 12 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. - -------------------------------------------------------------------------------- Item 2. Properties - -------------------------------------------------------------------------------- Sprint's gross property, plant and equipment totaled $37.1 billion at year-end 1999, of which $15.8 billion relates to the FON Group's local communications services, $9.8 billion relates to the FON Group's long distance communications services, $9.4 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, Sprint ION properties and general support assets. The FON Group's gross property, plant and equipment totaled $27.7 billion at year-end 1999. 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 LDD 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. The PCS Group leases space for base station towers and switch sites for its PCS network. At year-end 1999, the PCS Group had under lease (or options to lease) approximately 14,400 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 $14.3 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 - -------------------------------------------------------------------------------- Eight purported class action suits were filed by shareholders in connection with the proposed merger of Sprint into MCI WorldCom. The suits allege that Sprint's directors breached their fiduciary duties, and certain other duties, to shareholders by entering into the merger agreement with MCI WorldCom and seek various relief, including injunction of the merger, requiring Sprint to conduct an auction for the sale of the company and awarding compensatory damages and costs. Six lawsuits were filed in Johnson County, Kansas District Court and two lawsuits were filed in the Supreme Court of New York. The six lawsuits filed in Kansas were dismissed without prejudice in February 2000. Plaintiffs in the remaining two cases have agreed to dismissal and the documents necessary to dismiss those cases have been filed with the court. The dismissal will become final following a court hearing. 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 expansion of the PCS Group's network coverage. 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 1999. 7 - -------------------------------------------------------------------------------- Item 10(b). Executive Officers of the Registrant - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Office Name Age - ------------------------------------------------------------------------------- Chairman and Chief Executive Officer William T. Esrey(/1/) 60 President and Chief Operating Officer Ronald T. LeMay(/2/) 54 President--Local Telecommunications Division Michael B. Fuller(/3/) 55 President--Sprint PCS Andrew J. Sukawaty(/4/) 44 President--Sprint International John E. Berndt(/5/) 59 President--National Integrated Services and Sprint Business Kevin E. Brauer(/6/) 49 Executive Vice President--General Counsel and External Affairs J. Richard Devlin(/7/) 49 Executive Vice President--Chief Financial Officer Arthur B. Krause(/8/) 58 Senior Vice President and Treasurer Gene M. Betts(/9/) 47 Senior Vice President--One Sprint Strategic Development Arthur A. Kurtze(/10/) 55 Senior Vice President--Federal External Affairs Vonya B. McCann(/11/) 45 Senior Vice President and Controller John P. Meyer(/12/) 49 Senior Vice President--Strategic Planning and Corporate Development Theodore H. Schell(/13/) 55 Senior Vice President--Human Resources I. Benjamin Watson(/14/) 51 Senior Vice President--Consumer Market Strategy and Communications Thomas E. Weigman(/15/) 52 Vice President--Secretary Don A. Jensen(/16/) 64
(/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. From 1989 to 1995, he served as President and Chief Operating Officer--Long Distance Division. 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. Sukawaty was elected President--Sprint PCS in 1998. He was appointed Chief Executive Officer of Sprint Spectrum Holding Company in September 1996. Prior to joining Sprint Spectrum Holding Company, Mr. Sukawaty was Chief Executive Officer of NTL, the British diversified broadcast transmission and communications company, since 1994. (/5/)Mr. Berndt was elected President--Sprint International in 1998. Before that, Mr. Berndt was President of Fluor Daniel Telecommunications since January 1997. He was President--Multimedia Ventures and Technologies for AT&T and Lucent Technologies from 1995 to 1996. From 1993 to 1995, Mr. Berndt was President of New Business Development for AT&T. (/6/)Mr. Brauer became President--National Integrated Services and Sprint Business in July 1999. He had served as President--National Integrated Services since 1997. From 1994 to 1997, he was President of Sprint Business. (/7/)Mr. Devlin was elected Executive Vice President--General Counsel and External Affairs in 1989. (/8/)Mr. Krause was elected Executive Vice President--Chief Financial Officer in 1988. (/9/)Mr. Betts was elected Senior Vice President in 1990. He was elected Treasurer in December 1998. (/10/)Mr. Kurtze was appointed Senior Vice President--One Sprint Strategic Development in February 1999. He had served as Chief Operating Officer of Sprint Spectrum Holding Company since 1995. Prior to joining Sprint Spectrum Holding Company, Mr. Kurtze was Senior Vice President--Operations for Sprint's Local Division since 1993. (/11/)Ms. McCann was elected Senior Vice President--Federal External Affairs in October 1999. Prior to joining Sprint, Ms. McCann served in the U.S. Department of State as Ambassador and Deputy Assistant Secretary for International Communications and Information Policy since 1994. Ms. McCann also served as Principal Deputy Assistant Secretary of State for Economic and Business Affairs since 1997. (/12/)Mr. Meyer was elected Senior Vice President--Controller in 1993. (/13/)Mr. Schell was elected Senior Vice President--Strategic Planning and Corporate Development in 1990. (/14/)Mr. Watson was elected Senior Vice President--Human Resources in 1993. (/15/)Mr. Weigman was appointed Senior Vice President--Consumer Market Strategy and Communications in February 1999. He had served as President--Consumer Services Group of Sprint's Long Distance Division since 1995. From 1993 to 1995, he served as President--Multimedia/Strategic Services of the Long Distance Division. (/16/)Mr. Jensen was elected Vice President--Secretary in 1975. 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. 8 Part II - -------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - -------------------------------------------------------------------------------- Common Stock Data - ---------------------------------------------------
1999 Market Price ----------------------------- End of High Low Period - --------------------------------------------------- FON Stock(/1/) First quarter $50 11/32 $36 7/8 $49 1/16 Second quarter 57 15/32 48 5/8 53 Third quarter 55 11/16 42 5/8 54 1/4 Fourth quarter 75 15/16 54 67 5/16 PCS Stock(/2/) First quarter 24 5/32 10 7/16 22 5/32 Second quarter 30 3/8 20 3/4 28 1/2 Third quarter 39 1/8 26 15/32 37 9/32 Fourth quarter 57 7/32 33 13/32 51 1/4 - --------------------------------------------------- 1998 Market Price ----------------------------- End of High Low Period - --------------------------------------------------- Sprint Stock First quarter $75 5/8 $55 1/4 $67 11/16 Second quarter 75 5/8 65 70 1/2 Third quarter 80 1/8 61 1/2 72 Fourth quarter(/3/) 82 7/8 69 1/16 81 5/16 FON Stock(/1/),(/4/) 42 21/32 35 13/16 42 1/16 PCS Stock(/2/),(/4/) 11 11/16 7 1/32 11 9/16
(/1/)In the second quarter of 1999, Sprint effected a two-for-one stock split of its Sprint FON common stock. Market prices prior to the split have been restated. (/2/)On February 4, 2000, Sprint effected a two-for-one stock split of its Sprint PCS common stock. Market prices prior to the split have been restated. (/3/)Fourth quarter per share market data is for the period October 1, 1998 through November 23, 1998, before the Recapitalization when Sprint stock was reclassified into FON stock and PCS stock. (/4/)FON Stock and PCS Stock per share market data is for the period November 24, 1998 through December 31, 1998. As of February 29, 1999, Sprint had approximately 74,000 FON stock record holders, 68,000 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 1999 and the fourth quarter of 1998. Sprint paid common stock dividends of $0.25 per share in the first three quarters of 1998. Sprint paid Class A common stock dividends of $0.125 per share in each of the last three quarters of 1999 and $0.25 per share in the first quarter of 1999 and in each quarter of 1998. Sprint does not intend to pay dividends on the PCS stock in the foreseeable future. In December 1999, Sprint issued an aggregate of 490,000 shares of Series 3 FON Stock and 478,750 shares of Series 3 PCS stock that were not registered under the Securities Act of 1933 to FT and DT for an aggregate of $57.1 million. These shares were purchased by FT and DT in order to maintain their aggregate voting power at 20% of Sprint's outstanding voting power. The sale of shares to FT and DT was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. No solicitation was made to sell such shares to the public, and all material information regarding Sprint was available to FT and DT. FT and DT are accredited investors having sufficient knowledge and experience in financial and business matters necessary to evaluate the merits and risks of their investment. FT and DT were informed that the transactions were being effected without registration under the Securities Act and that the shares acquired could not be resold without registration under the Securities Act unless the sale is effected pursuant to an exemption from the registration requirements of the Securities Act. FT and DT have been given certain registration rights by Sprint. - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- As previously reported in Sprint's Current Report on Form 8-K dated June 13, 1999, as amended, Deloitte & Touche LLP, the independent auditors for Sprint Spectrum Holding Company, L.P., and its subsidiaries, was replaced by Ernst & Young LLP. 9 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, 1999. 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, 1999. - -------------------------------------------------------------------------------- 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, 1999. - -------------------------------------------------------------------------------- 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, 1999. - -------------------------------------------------------------------------------- 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, 1999. 10 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 (2) Merger Agreement and Transfer Agreement (a) Amended and Restated Agreement and Plan of Merger dated March 8, 2000 between MCI WorldCom, Inc. and Sprint Corporation (filed as Annex I to the Proxy Statement/Prospectus that forms a part of MCI WorldCom's Registration Statement No. 333-90421 and incorporated herein by reference). (b) 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). (c) Amendment No. 1 to the Master Transfer Agreement, dated as of February 22, 2000 (filed as Exhibit 2B to Sprint Corporation's Current Report on Form 8-K dated February 22, 2000 and incorporated herein by reference). (3) Articles of Incorporation and Bylaws: (a) Articles of Incorporation, as amended (filed as Exhibit 4A to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference). (b) Bylaws, as amended (filed as Exhibit 4C to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) 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 S.A. 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). 11 (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). (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 S.A., 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). (b) Amended and Restated Registration Rights Agreement, dated as of November 23, 1998, among Sprint Corporation, France Telecom S.A. 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). (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 6, 1999, 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 National Trust and Savings Association and The Chase Manhattan Bank, as Documentation Agents (filed as Exhibit 99-B to Sprint Corporation's Current Report on Form 8-K dated October 20, 1999 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. (i) Executive Deferred Compensation Plan, as amended. (j) Management Incentive Stock Option Plan, as amended. (k) 1997 Long-Term Stock Incentive Program. (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). 12 (m) Amended and Restated Centel Directors Deferred Compensation Plan. (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) Short-Term Incentive Compensation Plan (filed as Exhibit 10(k) to Sprint Corporation (formerly United Telecommunications, Inc.) Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference). (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, and Exhibit 10 (b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference). Agreements Regarding Special Compensation and Post Employment Restrictive Covenants between Sprint Corporation and certain of its Executive officers. (v) Director's Deferred Fee Plan, as amended. (w) Form of Contingency Employment Agreements between Sprint Corporation and certain of its executive officers (filed as Exhibit 10(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, 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 and Board of Directors Benefits (filed as Exhibit 10(cc) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). (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) Employment Agreement, dated as of July 29, 1996, between Sprint Spectrum Holding Company, L.P. and Andrew Sukawaty (filed as Exhibit 10.20 to Sprint Spectrum L.P. Registration Statement on Form S-1 (No. 333-06609) and incorporated herein by reference). (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 (27) Financial Data Schedules (a) December 31, 1999 13 (b) September 30, 1999 Restated (c) June 30, 1999 Restated (d) March 31, 1999 Restated (e) December 31, 1998 Restated (f) September 30, 1998 Restated (g) June 30, 1998 Restated (h) March 31, 1998 Restated (i) December 31, 1997 Restated 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 Sprint filed a Current Report on Form 8-K dated October 5, 1999, in which it reported that it had entered into a definitive merger agreement with MCI WorldCom, Inc. Sprint filed a Current Report on Form 8-K dated October 20, 1999, in which it reported that it had announced third quarter 1999 results in both its FON Group and its PCS Group. Sprint also reported that seven purported class action lawsuits had been filed by shareholders in connection with the proposed merger of Sprint into MCI WorldCom, Inc. The news release regarding third quarter 1999 results, which was included as an Exhibit to the Current Report dated October 20, 1999, included the following financial information: Sprint FON Group Combined Statements of Income Sprint FON Group Selected Operating Results Sprint FON Group Condensed Combined Balance Sheets Sprint FON Group Condensed Combined Cash Flow Information Sprint PCS Group Combined Statements of Operations Sprint PCS Group Condensed Combined Balance Sheets Sprint PCS Group Condensed Combined Cash Flow Information Sprint Corporation Condensed Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information Sprint filed a Current Report on Form 8-K dated January 26, 2000 in which it reported that it had entered into a definitive agreement with DT and FT to sell Sprint's interest in Global One. Sprint also reported that it had announced fourth quarter 1999 and calendar year 1999 results in both its FON Group and its PCS Group. The news release regarding fourth quarter 1999 and calendar year 1999 results, which was included as an Exhibit to the Current Report dated January 26, 2000, included the following financial information: Sprint FON Group Combined Statements of Income Sprint FON Group Selected Operating Results Sprint FON Group Condensed Combined Balance Sheets Sprint FON Group Condensed Combined Cash Flow Information Sprint PCS Group Combined Statements of Operations Sprint PCS Group Condensed Combined Balance Sheets Sprint PCS Group Condensed Combined Cash Flow Information Sprint Corporation Condensed Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information Sprint filed a Current Report on Form 8-K dated February 22, 2000 in which it reported that it had completed the sale of its interest in Global One. The Current Report included the following unaudited pro forma consolidated financial statements for Sprint Corporation: Pro Forma Consolidated Balance Sheets Pro Forma Consolidated Statements of Operations (c)Exhibits are listed in Item 14(a). 14 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 23, 2000 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 23rd day of March, 2000. /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 15 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 23rd day of March, 2000. /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/ Michel Bon /s/ Charles E. Rice - ------------------------------------- ------------------------------------- Michel Bon, Director Charles E. Rice, Director /s/ W. T. Esrey /s/ Louis W. Smith - ------------------------------------- ------------------------------------- William T. Esrey, Director Louis W. Smith, Director /s/ Irvine O. Hockaday, Jr. /s/ Ron Sommer - ------------------------------------- ------------------------------------- Irvine O. Hockaday, Jr., Director Ron Sommer, Director /s/ Harold S. Hook /s/ Stewart Turley - ------------------------------------- ------------------------------------- Harold S. Hook, Director Stewart Turley, Director 16 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-2 Consolidated Financial Statements Management Report I-11 Report of Independent Auditors I-12 Consolidated Statements of Operations for each of the three years ended December 31, 1999 I-13 Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended December 31, 1999 I-15 Consolidated Balance Sheets as of December 31, 1999 and 1998 I-16 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999 I-17 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1999 I-18 Notes to Consolidated Financial Statements I-19 Financial Statement Schedule Schedule II--Consolidated Valuation and Qualifying Accounts for each of the three years ended December 31, 1999 I-38 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-9 Report of Independent Auditors II-9 Combined Statements of Operations for each of the three years ended December 31, 1999 II-10 Combined Statements of Comprehensive Income for each of the three years ended December 31, 1999 II-11 Combined Balance Sheets as of December 31, 1999 and 1998 II-12 Combined Statements of Cash Flows for each of the three years ended December 31, 1999 II-13 Notes to Combined Financial Statements II-14 Financial Statement Schedule Schedule II--Combined Valuation and Qualifying Accounts for each of the three years ended December 31, 1999 II-26 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-7 Report of Independent Auditors III-8 Combined Statements of Operations for each of the three years ended December 31, 1999 III-10 Combined Statements of Comprehensive Loss for each of the three years ended December 31, 1999 III-11 Combined Balance Sheets as of December 31, 1999 and 1998 III-12 Combined Statements of Cash Flows for each of the three years ended December 31, 1999 III-13 Notes to Combined Financial Statements III-14 Financial Statement Schedule Schedule II--Combined Valuation and Qualifying Accounts for each of the two years ended December 31, 1999 III-26
Annex I SPRINT CORPORATION Consolidated Financial Information SELECTED FINANCIAL DATA Sprint Corporation - --------------------------------------------------------------------------------
1999 1998(/1/) 1997(/1/) 1996(/1/) 1995(/1/) - -------------------------------------------------------------------------------- (millions, except per share data) Results of Operations - -------------------------------------------------------------------------------- Net operating revenues $19,928 $16,881 $14,564 $13,610 $12,482 Operating income (loss)(/2/),(/3/) (307) 190 2,451 2,267 1,834 Income (Loss) from continuing operations(/2/),(/3/),(/4/) (745) 585 1,094 1,253 946 Earnings per Share and Dividends - -------------------------------------------------------------------------------- Earnings per common share from continuing operations:(/3/),(/4/) Diluted $ NA $ NM $ 2.51 $ 2.93 $ 2.69 Basic NA NM 2.54 2.97 2.71 Dividends per common share NA 0.75 1.00 1.00 1.00 Earnings (Loss) per Share and Dividends(/5/),(/6/) - -------------------------------------------------------------------------------- Earnings (Loss) per common share from continuing operations:(/3/),(/4/) Sprint FON Group (diluted) $ 1.97 $ 1.93 $ 1.73 $ 1.61 $ 1.37 Sprint FON Group (basic) 2.01 1.96 1.76 1.63 1.38 Sprint PCS Group (diluted and basic) (2.71) (2.21) (1.98) NA NA Dividends per FON common share 0.50 0.50 0.50 0.50 0.50 Financial Position - -------------------------------------------------------------------------------- Total assets $39,250 $33,257 $18,274 $16,915 $15,074 Property, plant and equipment, net 21,969 18,983 11,494 10,464 9,716 Total debt (including short- term borrowings) 16,772 12,189 3,880 3,274 5,668 Shareholders' equity 13,560 12,448 9,025 8,520 4,643 Cash Flow Data - -------------------------------------------------------------------------------- Net cash from operating activities-- continuing operations(/7/) $ 1,952 $ 4,199 $ 3,372 $ 2,404 $ 2,610 Capital expenditures 6,114 4,231 2,863 2,434 1,857
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 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. (/3/)The FON Group recorded nonrecurring charges of $20 million in 1997 and $60 million in 1996 related to litigation within the long distance division. These charges reduced income from continuing operations by $13 million in 1997 and $36 million in 1996. In 1995, the FON Group recorded a nonrecurring charge of $88 million related to a restructuring within the local division. This reduced income from continuing operations by $55 million. (/4/)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. (/5/)In December 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. In the second quarter of 1999, 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. (/6/)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. (/7/)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-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Corporation - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with MCI WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged for $76 of MCI WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. The merger is subject to the approvals of Sprint and MCI WorldCom shareholders as well as approvals from the Federal Communications Commission, the Justice Department, various state government bodies and foreign antitrust authorities. The companies anticipate that the merger will close in the second half of 2000. In January 2000, Sprint reached a definitive agreement with France Telecom S.A. (FT) and Deutsche Telekom AG (DT) to sell its interest in Global One. In February 2000, Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. Sprint's equity share of the results of Global One has been reported as a discontinued operation 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 combined 20% voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. These operations are referred to as the PCS Group. The FON stock is intended to reflect the performance of all of Sprint's other operations. These operations are referred to as the FON Group and include the following: . Core businesses . Long distance division . Local division . Product distribution and directory publishing businesses . Activities to develop and deploy Sprint ION(SM), Integrated On-Demand Network . Other strategic ventures. FON and PCS shareholders are subject to the risks related to all of Sprint's businesses, assets and liabilities. Owning FON or PCS shares does not represent a direct legal interest in the assets and liabilities of the Groups. Rather, shareholders remain invested in Sprint and continue to vote as a single voting class for Board member elections (other than Class A directors elected by FT and DT) 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-2 - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: . the effects of vigorous competition in the markets in which Sprint operates; . the costs and business risks related to entering and expanding new markets necessary to provide seamless services and new services; . the ability of the PCS Group to continue to grow a significant market presence; . the risks related to Sprint's investments in joint ventures; . the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; . regulatory risks, including the impact of the Telecommunications Act of 1996 (Telecom Act); . unexpected results of litigation filed against Sprint; . uncertainties associated with the pending merger of Sprint and MCI WorldCom; . the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes or other external factors over which Sprint has no control; and . other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward- looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward- looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- General Overview of the Sprint FON Group - -------------------------------------------------------------------------------- Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance phone company. It operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. The division primarily provides domestic and international voice, video and data communications services. Local Division The local division consists of regulated local phone companies serving more than 8 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, sales of telecommunications equipment, and long distance services within certain regional calling areas. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. Sprint ION(SM) Sprint is developing and deploying new integrated communications services, referred to as Sprint ION. Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide new competitive local service. Other Ventures The "other ventures" segment includes the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. This segment also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. - -------------------------------------------------------------------------------- General Overview of the Sprint PCS Group - -------------------------------------------------------------------------------- The PCS Group includes Sprint's domestic wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At year-end 1999, the PCS Group, together with affiliates, operated PCS systems in over 360 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including affiliates, now reaches nearly 190 million people. The PCS Group provides nationwide service through: . operating its own digital network in major U.S. metropolitan areas, . affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, . roaming on other providers' analog cellular networks using dual- band/dual-mode handsets, and I-3 . roaming on other providers' digital PCS networks that use code division multiple access (CDMA). - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Consolidated Total net operating revenues were as follows: - --------------------------------------------------
1999 1998 1997 - -------------------------------------------------- (millions) FON Group $17,016 $15,764 $14,564 PCS Group 3,180 1,225 -- Intergroup eliminations (268) (108) -- - -------------------------------------------------- Net operating revenues $19,928 $16,881 $14,564 -------------------------------
Income (Loss) from continuing operations was as follows: - -------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------- (millions) FON Group $ 1,736 $ 1,675 $1,513 PCS Group (2,481) (1,090) (419) - ------------------------------------------------------------------- Income (Loss) from continuing operations $ (745) $ 585 $1,094 -----------------------------------------------
Sprint FON Group - --------------------------------------------------
1999 1998 1997 - -------------------------------------------------- (millions) Net operating revenues $17,016 $15,764 $14,564 Operating expenses 14,086 13,004 12,094 - -------------------------------------------------- Operating income $ 2,930 $ 2,760 $ 2,470 ------------------------------- Operating margin 17.2% 17.5% 17.0% ------------------------------- Capital expenditures $ 3,534 $ 3,159 $ 2,709 -------------------------------
Net Operating Revenues Net operating revenues increased 8% in 1999 and 1998. These increases mainly reflect growth of the FON Group's long distance and local divisions. Long Distance Division All major market segments--business, residential and wholesale--contributed to the increase in the long distance division's revenues in 1999 and 1998. The increases mainly reflect strong data services revenue growth as well as strong minute growth of 22% in 1999 and 15% in 1998, partly offset by a more competitive pricing environment and a change in the mix of products sold. Business and data market revenues increased 9% in 1999 and 15% in 1998. This primarily reflects growth in data services. Residential market revenues increased 7% in 1999 and 5% in 1998. These increases reflect strong volume growth from long distance calls, partly offset by lower rates. Growth in 1999 was also enhanced by Sprint Nickel Nights(R) as well as increased prepaid card revenues. Wholesale market revenues increased 15% in 1999 and 8% in 1998. This reflects strong minute growth mainly from international calls and increased inbound and outbound toll-free calls. Local Division Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. Sprint sold approximately 139,000 residential and business access lines in Illinois in 1997 and the remaining 81,000 access lines in Illinois in November 1998. For comparative purposes, the following discussion of local division results assumes these transfer pricing changes and sales of exchanges occurred at the beginning of 1997. Local division revenues increased 6% in 1999 and 5% in 1998, mainly reflecting customer access line growth and increased sales of network-based services such as Caller ID and Call Waiting. Customer access lines increased 5% in both 1999 and 1998. Sales of network-based services increased in 1999 due to strong demand for bundled services which combine local service, network-based features and long distance calling. The increase in 1998 revenues also reflects increased sales of equipment. Local service revenues, which grew 9% in 1999 and 10% in 1998, increased due to customer access line growth, continued demand for network-based services, growth in data products and increased revenues from maintaining customer wiring and equipment. Revenue growth in 1998 also reflects increased sales of private line services. Network access revenues increased 4% in 1999 and 1998 reflecting an 8% increase in minutes of use in 1999 and 1998 and the 1999 implementation of local number portability charges. These increases were partly offset by FCC-mandated access rate reductions. Toll service revenues decreased 11% in 1999 and 26% in 1998, mainly due to increased competition in the intraLATA long distance market, which is expected to continue. In addition, toll service areas are shrinking as certain local calling areas are expanding. However, the reduced revenues are, in part, offset by increases in local service revenues and by increases in network access revenues paid by other carriers providing intraLATA long distance services to the local division's customers. In addition, over one-third of the toll customers lost by the local division have selected Sprint's long distance division for intraLATA long distance service, which helps mitigate the erosion of these revenues. I-4 Other revenues increased 7% in 1999 and 1998 reflecting increased equipment sales of business systems and data networks as well as growth in telemarketing and commission revenues. Revenue growth in 1999 also reflects improvements in uncollectibles. The 1998 growth also reflects increased revenues from providing billing and collection services. Product Distribution & Directory Publishing Businesses Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. The following discussion assumes these transfer pricing changes occurred at the beginning of 1997. The product distribution and directory publishing businesses' revenues increased 3% in 1999 and 16% in 1998. Nonaffiliated revenues, which account for roughly 60% of revenues in 1999 and 1998, increased 12% in 1999 and 10% in 1998. Sales to affiliates decreased 10% in 1999 and increased 27% in 1998. The change in the mix of the local division's capital program to more electronics and software, which is more frequently purchased directly from manufacturers, caused the decline in affiliate sales in 1999. In 1998, the growth reflects the centralization of certain local division purchasing and warehousing functions at North Supply in 1997 resulting in affiliates purchasing more through North Supply. Other Ventures The other ventures' 1999 revenues reflect the cable TV service revenues of the broadband fixed wireless companies after their acquisition dates. Operating Expenses The FON Group's operating expenses increased 8% in 1999 and 1998 mainly to support revenue growth. Long Distance Division Long distance division operating expenses increased 8% in 1999 and 1998. Interconnection costs increased 5% in 1999 and decreased 1% in 1998. Increased calling volumes were partially offset by reductions in per-minute costs for both domestic and international access in 1999. The 1999 increase also reflects costs related to growth in non-minute driven revenues. In 1998, reductions in per minute costs more than offset the impact of increased calling volumes. The rate reductions were generally due to domestic FCC-mandated access rate reductions. Lower international per minute costs reflect continued competition. Sprint expects government deregulation and competitive pressures to add to the trend of declining unit costs for international interconnection. Operations expense increased due to growth in data services as well as increases in network equipment operating leases in both years. Selling, general and administrative (SG&A) expense increased reflecting the overall growth of the business as well as increased marketing and promotions to support products and services. Local Division The following local division discussion assumes the transfer pricing changes and sales of exchanges occurred at the beginning of 1997. See "Net Operating Revenues--Local Division" for more details. Local division operating expenses increased 5% in 1999 and 4% in 1998 reflecting increases in costs of services and products in 1999, SG&A expenses in 1998 and depreciation and amortization in both years. Costs of services and products increased in 1999 mainly due to customer access line growth and increased equipment sales. SG&A increased in 1998 mainly because of increased customer service costs related to customer access line growth and marketing costs to promote new products and services. Depreciation and amortization expense increased mainly because of increased capital expenditures in switching and transport technologies which have shorter asset lives. Product Distribution & Directory Publishing Businesses The following discussion assumes the transfer pricing changes occurred at the beginning of 1997. See "Net Operating Revenues--Product Distribution and Directory Publishing Businesses" for more details. The product distribution and directory publishing businesses' cost of services and products increased 1% in 1999 and 19% in 1998 reflecting increased equipment sales. SG&A expense increased 17% in both 1999 and 1998. The 1999 increase was the result of staffing demands related to nonaffiliated sales growth. The 1998 increase was the result of costs related to the division's acquisition of a sales force from another directory sales company in 1998. Sprint ION(SM) Operating expenses for Sprint ION in 1999 and 1998 reflect its initial development and deployment activities and include costs for network research and testing, systems and operations development, product development, and advertising to increase public awareness. Other Ventures The other ventures' 1999 expenses reflect the cable TV service operations expenses of the broadband fixed wireless companies after their acquisition dates. This segment's operating expenses in 1998 and 1997 mainly reflect activities related to offering Internet services. In June 1998, the FON Group completed the strategic alliance to combine its Internet business with I-5 EarthLink. As part of the alliance, EarthLink obtained the FON Group's Sprint Internet Passport customers and took over the day-to-day operations of those services. In exchange, Sprint acquired an equity interest in EarthLink. Sprint PCS Group - -----------------------------------------------
1999 1998 1997 - ----------------------------------------------- (millions) Net operating revenues $ 3,180 $ 1,225 $ -- Operating expenses 6,417 3,795 19 - ----------------------------------------------- Operating loss $(3,237) $(2,570) $(19) -------------------------- Capital expenditures $ 2,580 $ 1,072 $154 --------------------------
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. Before 1998, Sprint's investment in Sprint PCS was accounted for using the equity method. (See "Pro Forma Sprint PCS Group" section below for a discussion of pro forma results of operations.) Operating expenses in 1998 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. Management has continued supporting these research and development projects and believes the PCS Group has a reasonable chance of successfully completing the projects. These projects are intended to address new and emerging markets within the PCS wireless communications industry, such as the rapid adoption of the Internet and the rapid convergence of voice, data, and video. The failure of any particular individual project in-process would not materially impact the PCS Group's financial condition, results of operations or cash flows. 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 28% of net operating revenues 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 and 1997 on a pro forma basis and assumes the PCS Restructuring and the write-off of acquired in- process research and development costs occurred at the beginning of 1997. - ------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------ (millions) Net operating revenues $ 3,180 $ 1,225 $ 258 Operating expenses 6,417 3,865 2,540 - ------------------------------------------------------------------ Operating loss $(3,237) $(2,640) $(2,282) ---------------------------------------------- Capital expenditures (including capital lease obligations) $ 2,616 $ 2,904 $ 2,278 ----------------------------------------------
Net Operating Revenues The PCS Group's net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges and usage charges. The increases in the PCS Group's net operating revenues mainly reflect the launch of new markets and a growing customer base. The PCS Group ended 1999 with over 5.7 million customers in nearly 330 markets nationwide. Affiliates had approximately 200,000 customers in over 30 markets. Approximately 20% of 1999 and 1998 net operating revenues, and nearly half of 1997 revenues, were from sales of handsets and accessories. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses The PCS Group's operating expenses increased 66% in 1999 and 52% in 1998. The PCS Group's costs of services and products mainly includes handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased $1.4 billion in 1999 and $908 million in 1998 driven by the significant growth in customers and the expanded market coverage. The PCS Group's SG&A expense mainly includes marketing costs to promote products and services, as well as salary and benefit costs. SG&A expense increased $675 million in 1999 and $579 million in 1998 reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Depreciation and amortization expense for the PCS Group, which increased $485 million in 1999 and $17 million in 1998, consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. The increase in depreciation and amortization expense in 1999 reflects amortization of intangible assets acquired in the PCS Restructuring and the Cox PCS purchase as well as depreciation on an increased property base. The increase in 1998 reflects depreciation on an increased property base. I-6 - -------------------------------------------------------------------------------- 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. - ---------------------------------------------
1999 1998 1997 - --------------------------------------------- Effective interest rate on long-term debt(/1/) 7.0% 8.6% 8.0% ----------------------
(/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. In the 1998 fourth quarter, Sprint refinanced $3.3 billion of the PCS Group's debt with borrowings which have lower interest rates. The decrease also reflects additional borrowings with lower interest rates. Sprint's 1998 interest costs include an entire year of Sprint PCS' interest due to the PCS Restructuring. The increase in the 1998 effective interest rate on long-term debt was mainly due to Sprint PCS' borrowings made before the PCS Restructuring. These borrowings had higher interest rates than Sprint's borrowings. Equity in Sprint PCS Losses 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. Prior to the PCS Restructuring, Sprint's ownership interest in Sprint PCS was accounted for using the equity method. Sprint's share of losses from Sprint PCS was $660 million in 1997. Other Income, Net Other income consisted of the following: - --------------------------------------------
1999 1998 1997 - -------------------------------------------- (millions) Dividend and interest income $23 $ 93 $ 75 Other, net 52 78 66 - -------------------------------------------- Total $75 $171 $141 -------------------
Dividend and interest income for all years reflects 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. "Other, net" for 1999 mainly includes net gains on miscellaneous investment activities, partly offset by losses from certain equity method investments. For 1998 and 1997, it mainly reflects net gains on sales of local exchanges and certain other investments, partly offset by losses from certain equity method investments. Income Taxes Sprint's consolidated effective tax rates were 30.5% in 1999, 43.7% in 1998 and 37.4% in 1997. See Note 7 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 As a result of Sprint's sale of its interest in Global One to FT and DT, 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. Sprint recorded after-tax losses related to Global One totaling $130 million in 1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a $50 million tax benefit recorded to recognize tax assets related to previous losses. The realization of these assets was uncertain until the sale agreement was reached. The gain on the sale of Sprint's interest in Global One made it apparent that these tax assets would be realized. Extraordinary Items, Net 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. 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 - -------------------------------------------------------------------------------- - ----------------------------------------
1999 1998 - ---------------------------------------- (millions) Consolidated assets $39,250 $33,257 -------------------
Net property, plant and equipment increased $3.0 billion in 1999 reflecting capital expenditures to support the PCS network buildout. The increase also reflects capital I-7 expenditures to support the core long distance and local networks, Sprint ION development and expanded product and service offerings. Net intangibles increased $1.9 billion mainly reflecting goodwill resulting from the acquisition of the remaining interest in Cox PCS and the purchase of the broadband fixed wireless companies. Sprint's debt-to-capital ratio was 55.3% at year-end 1999 versus 49.5% at year-end 1998. 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. In 1997 and prior to the PCS Restructuring date in 1998, consolidated cash flows include SprintCom's cash flows and treat the investment in Sprint PCS as an equity method investment. Operating Activities - --------------------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------------------- (millions) FON Group $ 3,713 $3,915 $2,899 PCS Group (1,692) (159) 38 Intergroup eliminations (69) 443 435 - -------------------------------------------------------------------- Cash flows provided by operating activities $ 1,952 $4,199 $3,372 -----------------------------------------------
Operating cash flows decreased 54% in 1999 and increased 25% in 1998. The 1999 decrease reflects increases in working capital in both the FON Group and PCS Group and the increased operating losses of the PCS Group, partly offset by the FON Group's improved operating results. The 1998 increase mainly reflects improved operating results in the FON Group's core businesses and decreases in working capital in both the FON Group and the PCS Group. Investing Activities - ------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------ (millions) FON Group $(3,965) $(3,098) $(3,827) PCS Group (2,509) (861) (1,020) Intergroup eliminations (299) (259) 547 - ------------------------------------------------------------------------ Cash flows used by investing activities from continuing operations $(6,773) $(4,218) $(4,300) ----------------------------------------------------
The FON Group's capital expenditures totaled $3.5 billion in 1999, $3.2 billion in 1998 and $2.7 billion in 1997. Long distance capital expenditures were incurred mainly to enhance network reliability, meet increased demand for voice and data-related services and upgrade capabilities for providing new products and services. 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. Sprint ION capital expenditures were made for continuing development and hardware deployment. PCS Group capital expenditures, totaling $2.6 billion in 1999, $1.1 billion in 1998 and $154 million in 1997, were incurred to support the PCS network buildout. (See the PCS Group's MD&A for a pro forma presentation of capital expenditures.) In 1999, Sprint purchased several broadband fixed wireless companies for $618 million excluding assumed debt. Investing activities also include proceeds from sales of assets totaling $243 million in 1999, $230 million in 1998 and $292 million in 1997. In addition, in 1997, Sprint paid $460 million toward the purchase of its PCS licenses and purchased the net assets of Paranet, Inc. for $375 million. "Investments in and advances to affiliates, net" consisted of the following: - ---------------------------------------
1999 1998 1997 - --------------------------------------- (millions) Sprint PCS Capital contributions $-- $ 33 $406 Loans and advances, net -- 154 254 Capitalized interest -- -- 46 - --------------------------------------- -- 187 706 Other, net 135 236 186 - --------------------------------------- Total $135 $423 $892 --------------
Amounts for Sprint PCS in 1998 reflect contributions and advances prior to the PCS Restructuring. These amounts, as well as capital contributions and net advances to Sprint PCS prior to 1998, were used to fund capital and operating requirements. "Other, net" includes the FON Group's investments in EarthLink, Call-Net and other miscellaneous ventures. Financing Activities - ------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------ (millions) FON Group $ 308 $ (219) $ 79 PCS Group 4,044 1,193 982 Intergroup eliminations 368 (184) (982) - ------------------------------------------------------------------ Cash flows provided by financing activities $4,720 $ 790 $ 79 --------------------------------------------
Financing activities in 1999 reflect proceeds from long-term debt of $6.9 billion, partly offset by payments on long-term debt. These net proceeds were used mainly for capital investments and to fund the PCS Group's operating losses. In 1998, Sprint borrowed $5.2 billion which was mainly used to repay existing debt. In 1997, Sprint had net borrowings of $532 million, mainly to fund investments in and loans to affiliates. Sprint paid dividends of $441 million in 1999 and $430 million in 1998 and 1997. I-8 Capital Requirements Sprint's 2000 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to require cash of $6.5 to $7.0 billion. FON Group capital expenditures are expected to range between $3.9 and $4.2 billion, and PCS Group capital expenditures are expected to be between $2.4 and $2.6 billion. Investments in affiliates are expected to require cash of approximately $200 million. Additional funds will be required to fund the PCS Group's expected operating losses, working capital and debt service requirements. Dividend payments are expected to approximate $450 million 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 the PCS Group. Sprint expects the FON Group to make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses in the near future. 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 accrued current benefits under the agreement totaling $887 million in 1999 and $190 million in 1998 and received related payments from the FON Group totaling $764 million in 1999 and $20 million in 1998. The remaining $293 million will be paid by the FON Group during the first half of 2000. See Note 2 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. In 1998, Sprint replaced its previous $1.5 billion credit facility with $5.0 billion of new revolving credit facilities with syndicates of domestic and international banks. These facilities expire in 2000 and 2003. Commercial paper and certain bank notes payable are supported by Sprint's revolving credit facilities. Sprint also has a separate five-year revolving credit facility with a bank which expires in 2002. At year-end 1999, Sprint had total unused lines of credit of $3.5 billion under these facilities. In the 1999 third quarter, Sprint filed a shelf registration statement with the SEC covering $4.0 billion of senior unsecured debt securities. At year-end 1999, Sprint had issued $750 million of debt securities under the shelf. These securities have interest rates ranging from 6.4% to 6.5% and mature in 2001. In June 1999, Sprint entered into a $1.0 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 1999, Sprint had borrowed $900 million under this agreement. These borrowings had a weighted average interest rate of 6.4% and mature in 2002. Any borrowings Sprint may incur are ultimately limited by certain debt covenants. Sprint could borrow up to an additional $11.3 billion at year-end 1999 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 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 I-9 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 1999. In addition, foreign currency transaction gains and losses were not material to Sprint's 1999 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. - -------------------------------------------------------------------------------- Year 2000 Issue - -------------------------------------------------------------------------------- Sprint successfully completed its Year 2000 readiness work and passed through the January 1, 2000 rollover event while encountering no customer- affecting outages or business interruptions. Since the inception of Sprint's Year 2000 readiness program in 1996 through December 31, 1999, Sprint incurred approximately $320 million of costs associated with its Year 2000 readiness program. Sprint does not expect to incur any significant additional expenditures related to the Year 2000 issue. - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- See Note 14 of Notes to Consolidated Financial Statements for a discussion of a recently issued accounting pronouncement. I-10 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-11 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, 1999 and 1998, 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, 1999. 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 or 1997 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 assets of $2.7 billion as of December 31, 1998, and revenues of $1.2 billion for the year then ended which we did not audit. Sprint's equity in the net loss of Sprint Spectrum Holding Company, L.P. is stated at $625 million for the year ended December 31, 1997. The consolidated financial statements 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 assets and revenues and the 1997 equity in the net loss which we did not audit, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sprint at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, 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. Ernst & Young LLP Kansas City, Missouri February 1, 2000 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 balance sheets of Sprint Spectrum Holding Company, L.P. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and cash flows for the two years in the period ended December 31, 1998. Our audits also included the 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sprint Spectrum Holding Company, L.P. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the two years ended December 31,1998, in conformity with generally accepted accounting principles. Also, in our opinion, Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Kansas City, Missouri February 2, 1999 I-12 CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Corporation (millions) - -------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------- Net Operating Revenues $19,928 $16,881 $14,564 - ------------------------------------------------------------------------------- Operating Expenses Costs of services and products 10,606 8,996 7,142 Selling, general and administrative 5,977 4,806 3,258 Depreciation and amortization 3,652 2,710 1,713 Acquired in-process research and development costs -- 179 -- - ------------------------------------------------------------------------------- Total operating expenses 20,235 16,691 12,113 - ------------------------------------------------------------------------------- Operating Income (Loss) (307) 190 2,451 Interest expense (860) (718) (184) Other partners' loss in Sprint PCS -- 1,251 -- Equity in loss of Sprint PCS -- -- (660) Minority interest 20 145 -- Other income, net 75 171 141 - ------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (1,072) 1,039 1,748 Income tax (expense) benefit 327 (454) (654) - ------------------------------------------------------------------------------- Income (Loss) from Continuing Operations (745) 585 1,094 Discontinued operation, net (130) (135) (142) Extraordinary items, net (60) (36) -- - ------------------------------------------------------------------------------- Net Income (Loss) $ (935) $ 414 952 ---------------- Preferred stock dividends (1) -------- Earnings applicable to common stock $ 951 --------
See accompanying Notes to Consolidated Financial Statements. I-13 CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation (millions, except per share data) - -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998(/1/) 1997 - ----------------------------------------------------------------------------- FON COMMON STOCK Earnings applicable to common stock $ 1,574 $ 118 ------------------ Diluted Earnings per Common Share(/2/) Continuing operations $ 1.97 $ 0.18 Discontinued operation (0.15) (0.04) Extraordinary items (0.04) -- - --------------------------------------------------------------------- Total $ 1.78 $ 0.14 ------------------ Diluted weighted average common shares 887.2 869.0 ------------------ Basic Earnings per Common Share(/2/) Continuing operations $ 2.01 $ 0.18 Discontinued operation (0.15) (0.04) Extraordinary items (0.05) -- - --------------------------------------------------------------------- Total $ 1.81 $ 0.14 ------------------ Basic weighted average common shares 868.0 855.2 ------------------ PCS COMMON STOCK Loss applicable to common stock $(2,517) $ (559) ------------------ Basic and Diluted Loss per Common Share(/2/) Continuing operations $ (2.71) $(0.63) Extraordinary item (0.02) (0.04) - --------------------------------------------------------------------- Total $ (2.73) $(0.67) ------------------ Basic and diluted weighted average common shares 920.4 831.6 ------------------ SPRINT COMMON STOCK Earnings applicable to common stock $ 853 $ 951 ---------------- Diluted Earnings per Common Share Continuing operations $ 2.19 $ 2.51 Discontinued operation (0.23) (0.33) Extraordinary items (0.01) -- - ----------------------------------------------------------------------------- Total $ 1.95 $ 2.18 ---------------- Diluted weighted average common shares 438.6 436.5 ---------------- Basic Earnings per Common Share Continuing operations $ 2.23 $ 2.54 Discontinued operation (0.24) (0.33) Extraordinary items (0.01) -- - ----------------------------------------------------------------------------- Total $ 1.98 $ 2.21 ---------------- Basic weighted average common shares 430.8 430.2 ---------------- DIVIDENDS PER COMMON SHARE FON common stock(/2/) $ 0.50 $0.125 ------------------ Class A common stock $ 0.625 $ 1.00 $ 1.00 -------------------------- Sprint common stock $ 0.75 $ 1.00 ----------------
(/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 December 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. In the second quarter of 1999, Sprint effected a two-for-one stock split of its Sprint FON common stock in the form of a stock dividend. 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-14 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation (millions) - --------------------------------------------
Years Ended December 31, 1999 1998 1997 - -------------------------------------------- Net Income (Loss) $(935) $414 $952 - -------------------------------------------- Other Comprehensive Income (Loss) Unrealized holding gains on securities 54 21 12 Income tax expense (20) (8) (5) - -------------------------------------------- Net unrealized holding gains on securities during the period 34 13 7 Reclassification adjustment for gains included in net income (57) -- -- - -------------------------------------------- Total net unrealized holding gains (losses) on securities (23) 13 7 Foreign currency translation adjustments -- (2) 10 - -------------------------------------------- Total other comprehensive income (loss) (23) 11 17 - -------------------------------------------- Comprehensive Income (Loss) $(958) $425 $969 -----------------
See accompanying Notes to Consolidated Financial Statements. I-15 CONSOLIDATED BALANCE SHEETS Sprint Corporation (millions, except per share data) - -------------------------------------------------------------------------------
December 31, 1999 1998 - ------------------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 120 $ 605 Accounts receivable, net of allowance for doubtful accounts of $285 and $186 3,408 2,708 Inventories 777 477 Prepaid expenses 340 259 Income tax receivable 411 171 Investments in equity securities 317 -- Other 207 194 - ------------------------------------------------------------------------------- Total current assets 5,580 4,414 Investments in equity securities 147 489 Property, plant and equipment FON Group 27,687 25,156 PCS Group 9,411 6,988 - ------------------------------------------------------------------------------- Total property, plant and equipment 37,098 32,144 Accumulated depreciation (15,129) (13,161) - ------------------------------------------------------------------------------- Net property, plant and equipment 21,969 18,983 Investments in and advances to affiliates 452 463 Intangible assets Goodwill 5,745 3,701 PCS licenses 3,060 3,037 Other 1,453 1,137 - ------------------------------------------------------------------------------- Total intangible assets 10,258 7,875 Accumulated amortization (691) (182) - ------------------------------------------------------------------------------- Net intangible assets 9,567 7,693 Net assets of discontinued operation 394 182 Other 1,141 1,033 - ------------------------------------------------------------------------------- Total $ 39,250 $ 33,257 ------------------- Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 1,087 $ 247 Accounts payable 1,462 1,631 Construction obligations 1,039 979 Accrued interconnection costs 683 592 Accrued taxes 410 442 Advance billings 323 229 Payroll and employee benefits 638 416 Other 1,190 910 - ------------------------------------------------------------------------------- Total current liabilities 6,832 5,446 Long-term debt and capital lease obligations 15,685 11,942 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,511 1,830 Postretirement and other benefit obligations 1,064 1,064 Other 598 527 - ------------------------------------------------------------------------------- Total deferred credits and other liabilities 3,173 3,421 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, 788.0 and 350.3 shares issued and 788.0 and 344.5 shares outstanding 1,576 701 PCS, par value $1.00 per share, 2,350.0 shares authorized, 910.4 and 375.4 shares issued and 910.4 and 372.7 shares outstanding 910 375 PCS preferred stock, no par, 0.3 shares authorized, 0.2 shares issued and outstanding 247 247 Capital in excess of par or stated value 8,569 7,586 Retained earnings 1,961 3,651 Treasury stock, at cost, 0.0 and 8.5 shares (2) (426) Accumulated other comprehensive income 81 104 Other 2 (6) - ------------------------------------------------------------------------------- Total shareholders' equity 13,560 12,448 - ------------------------------------------------------------------------------- Total $ 39,250 $ 33,257 -------------------
See accompanying Notes to Consolidated Financial Statements. I-16 CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Corporation (millions) - -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- Operating Activities Net income (loss) $ (935) $ 414 $ 952 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Discontinued operation, net 130 135 142 Extraordinary items, net 60 32 -- Equity in net losses of affiliates 70 892 682 Depreciation and amortization 3,652 2,042 1,713 Acquired in-process research and development costs -- 179 -- Deferred income taxes and investment tax credits (333) 127 176 Net gains on sales of assets (183) (104) (93) Changes in assets and liabilities, excluding the PCS Restructuring in 1998: Accounts receivable, net (700) 101 (127) Inventories and other current assets (778) (189) (95) Accounts payable and other current liabilities 906 733 21 Noncurrent assets and liabilities, net (63) (126) (18) Other, net 126 (37) 19 - ----------------------------------------------------------------------------- Net cash provided by operating activities 1,952 4,199 3,372 - ----------------------------------------------------------------------------- Investing Activities Capital expenditures (6,114) (4,231) (2,863) Investments in and loans to affiliates, net (135) (423) (892) Net proceeds from sales of assets 243 230 292 Purchase of broadband fixed wireless companies, net of cash acquired (618) -- -- PCS licenses purchased -- -- (460) Paranet acquisition -- -- (375) Other, net (149) 206 (2) - ----------------------------------------------------------------------------- Net cash used by continuing operations (6,773) (4,218) (4,300) Net investing activities of discontinued operation (384) (268) (200) - ----------------------------------------------------------------------------- Net cash used by investing activities (7,157) (4,486) (4,500) - ----------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt 6,921 5,213 867 Payments on long-term debt (2,949) (3,822) (135) Net change in short-term borrowings -- -- (200) Proceeds from common stock issued 688 -- -- Proceeds from sales of shares to FT and DT 269 85 -- Proceeds from treasury stock issued 134 60 57 Dividends paid (441) (430) (430) Treasury stock purchased (48) (321) (145) Other, net 146 5 65 - ----------------------------------------------------------------------------- Net cash provided by financing activities 4,720 790 79 - ----------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents (485) 503 (1,049) Cash and Equivalents at Beginning of Year 605 102 1,151 - ----------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 120 $ 605 $ 102 --------------------------
See accompanying Notes to Consolidated Financial Statements. I-17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Sprint Corporation (in 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 1997 balance $1,092 $ -- $ -- $ 4,426 $3,222 $(262) $ 42 $ 8,520 Net income -- -- -- -- 952 -- -- 952 Common stock dividends -- -- -- -- (343) -- -- (343) Class A common stock dividends -- -- -- -- (86) -- -- (86) Treasury stock purchased -- -- -- -- -- (145) -- (145) Treasury stock issued -- -- -- -- (49) 114 -- 65 Tax benefit from stock options exercised -- -- -- 26 -- -- -- 26 Other, net -- -- -- 6 (3) -- 33 36 - ----------------------------------------------------------------------------------------------- Ending 1997 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 options exercised -- -- -- 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 options exercised -- -- -- 254 -- -- -- 254 Other, net -- -- -- 23 2 -- (15) 10 - ----------------------------------------------------------------------------------------------- Ending 1999 balance $ 216 $1,576 $1,157 $ 8,569 $1,961 $ (2) $ 83 $13,560 ------------------------------------------------------------------- Shares Outstanding - ------------------------------------------------------------------------------ Beginning 1997 balance 430.1 -- -- Treasury stock purchased (3.0) -- -- Treasury stock issued 2.9 -- -- - ------------------------------------------------------------------------------ Ending 1997 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 ------------------------------
See accompanying Notes to Consolidated Financial Statements. I-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation - -------------------------------------------------------------------------------- 1. General - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with MCI WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged for $76 of MCI WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. The merger is subject to the approvals of Sprint and MCI WorldCom shareholders as well as approvals from the Federal Communications Commission, the Justice Department, various state government bodies and foreign antitrust authorities. The companies anticipate the merger will close in the second half of 2000. 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 S.A. (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 combined 20% voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. - -------------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- 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 4). The consolidated financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current- year presentation. These reclassifications had no effect on the results of operations or shareholders' equity as previously reported. Classification of Operations Sprint FON Group Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance phone company. It operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. The division provides domestic and international voice, video and data communications services. Local Division The local division consists of regulated local phone companies serving more than 8 million access lines in 18 states. It provides local services, access by phone customers and other carriers to the local network, sales of telecommunications equipment, and long distance services within certain regional calling areas, or local I-19 access transport areas. In November 1998, Sprint sold its remaining 81,000 residential and business access lines in Illinois. 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 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 new competitive local service. Other Ventures The "other ventures" segment includes the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. This segment also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. All of the investments and ventures are accounted for on the equity basis. Sprint PCS Group The PCS Group includes Sprint's domestic wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States, with licenses to provide service nationwide using a single frequency and a single technology. At year-end 1999, the PCS Group, together with affiliates, operated PCS systems in over 360 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. 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. Revenue Recognition Sprint recognizes operating revenues as services are rendered or as products are delivered to customers. Sprint records operating revenues net of an estimate for uncollectible accounts. Sprint's directory publishing business recognizes revenues for directory services over the life of the related directory (amortization method). I-20 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 $204 million at year-end 1999 and $336 million at year-end 1998. 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. Repairs and maintenance costs are expensed as incurred. Capitalized Interest Capitalized interest totaled $151 million in 1999, $167 million in 1998 and $93 million in 1997. In 1999 and 1998, capitalized interest 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. In 1997, capitalized interest mainly reflected interest related to Sprint's investment in Sprint PCS. Sprint capitalized these costs until July 1997 when Sprint PCS emerged from the development stage. 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 $210 million at year-end 1999 and $63 million at year-end 1998. 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 $130 million at year-end 1999 and $51 million at year-end 1998. 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 was computed individually for the FON Group and PCS Group. In December 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. In the second quarter of 1999, Sprint effected a two-for-one 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. In 1999, the FON Group's convertible preferred dividends totaled $1 million and dilutive securities (mainly options) totaled 19.2 million shares. 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 because the PCS Group incurred net losses for 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 and in 1997. Dilutive securities, such as options, included in the calculation of diluted weighted average common shares totaled 7.8 million in 1998 through the Recapitalization, and 6.3 million in 1997. I-21 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," to its stock option and employee stock purchase plans. - -------------------------------------------------------------------------------- 3. 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 8). 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 preliminarily 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 (i) the markets for each product; (ii) the completion costs for projects; (iii) the expected cash flows attributable to the IPR&D projects; (iv) the risks related to achieving these cash flows; and (v) 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. Pro Forma Results The following unaudited pro forma combined results of operations assume the PCS Restructuring, Recapitalization, Top-up and the write-off of acquired I-22 IPR&D 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. Pro forma results were as follows: - ---------------------------------------------------------------
1998 1997 - --------------------------------------------------------------- (millions, except per share data) Net operating revenues $16,881 $14,822 ------------------------------------- Loss from continuing operations $ (172) $ (132) ------------------------------------- Net loss $ (343) $ (274) ------------------------------------- Basic and diluted loss per PCS common share: Loss before extraordinary item $ (2.21) $ (1.98) Extraordinary item (0.04) -- - --------------------------------------------------------------- Total $ (2.25) $ (1.98) -------------------------------------
Paranet, Inc. In September 1997, Sprint paid $375 million to purchase the net assets of Houston-based Paranet, Inc., a provider of integration, management and support services for computer networks. The transaction was accounted for using the purchase method of accounting. As a result, Sprint's financial statements reflect Sprint Paranet's results of operations beginning in October 1997. The excess of the purchase price over the tangible net assets acquired was $357 million. This excess was allocated to noncompete agreements and goodwill, and is being amortized on a straight-line basis over four to 10 years. - -------------------------------------------------------------------------------- 4. Investments - -------------------------------------------------------------------------------- Investments in Equity Securities The cost of investments in equity securities was $154 million at year-end 1999 and $105 million at year-end 1998. Gross unrealized holding gains were $310 million at year-end 1999 and $384 million at year-end 1998. At year-end 1999, $316 million of investments in equity securities are classified as current in anticipation of using the investments to retire debt instruments (see Note 8). The accumulated unrealized gains on investments in equity securities, net of income taxes and the impact of the related debt instruments, were $84 million at year-end 1999 and $107 million at year-end 1998 and are included in "Accumulated other comprehensive income" in the Sprint Consolidated Balance Sheets. 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, net" in Sprint's Consolidated Statements of Operations. Investments in and Advances to Affiliates At year-end 1999, investments accounted for using the equity method consisted of the FON Group's investments in EarthLink, Call-Net and other strategic investments. In November 1998, Sprint assumed 100% ownership of Sprint PCS; as a result, Sprint consolidated Sprint PCS' results in 1998. Prior to 1998, Sprint accounted for its investment in Sprint PCS on the equity basis. Sprint PCS' 1997 results of operations are reflected in the unaudited pro forma disclosures in Note 3. Combined, unaudited, summarized financial information (100% basis) of other entities accounted for using the equity method was as follows: - ------------------------------------------------
1999 1998 1997 - ------------------------------------------------ (millions) Results of operations Net operating revenues $1,571 $1,242 $ 724 -------------------------- Operating income (loss) $ (192) $ 67 $(246) -------------------------- Net loss $ (329) $ (145) $(287) -------------------------- Financial position Current assets $1,524 $1,038 Noncurrent assets 2,749 2,401 ---------------------------------------------- Total $4,273 $3,439 ----------------- Current liabilities $ 599 $ 538 Noncurrent liabilities 1,644 1,004 Owners' equity 2,030 1,897 ---------------------------------------------- Total $4,273 $3,439 -----------------
- -------------------------------------------------------------------------------- 5. Discontinued Operation - -------------------------------------------------------------------------------- In January 2000, Sprint reached a definitive agreement with Deutsche Telekom and France Telecom 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 investment in the net assets of the discontinued operation, including advances, totaled $394 million at year-end 1999 and $182 million at year-end 1998. Sprint recorded after-tax losses related to Global One totaling $130 million in 1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a $50 million tax benefit recorded to recognize tax assets related to previous losses. The realization of these assets was uncertain until the sale agreement was reached. The gain on the sale of Sprint's interest in Global One made it apparent that these tax assets would be realized. Sprint provided various voice, data and administrative services to Global One totaling $241 million in 1999, $277 million in 1998 and $415 million in 1997. In addition, Global One provided data and administrative services to Sprint totaling $139 million in 1999, $140 million in 1998 and $114 million in 1997. Sprint's receivable from Global One was $107 million at year- I-23 end 1999 and $187 million at year-end 1998. Sprint's payable to Global One was $36 million at year-end 1999 and $42 million at year-end 1998. - -------------------------------------------------------------------------------- 6. 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: - --------------------------------------
1999 1998 - -------------------------------------- (millions) Beginning balance $2,579 $2,241 Service cost 86 72 Interest cost 177 165 Amendments 7 9 Actuarial (gain) loss (326) 202 Benefits paid (122) (110) - -------------------------------------- Ending balance $2,401 $2,579 --------------
The following table shows the changes in plan assets: - ---------------------------------------------
1999 1998 - --------------------------------------------- (millions) Beginning balance $3,169 $2,929 Actual return on plan assets 622 350 Benefits paid (122) (110) - --------------------------------------------- Ending balance $3,669 $3,169 ------------------
At year-end, the funded status and amounts recognized in the Consolidated Balance Sheets for the plan were as follows: - -----------------------------------------------------------
1999 1998 - ----------------------------------------------------------- (millions) Plan assets in excess of the projected benefit obligation $ 1,268 $ 590 Unrecognized net gains (1,016) (375) Unrecognized prior service cost 100 104 Unamortized transition asset (72) (97) - ----------------------------------------------------------- Prepaid pension cost $ 280 $ 222 -------------------------------- Discount rate 8.25% 7.00% -------------------------------- Expected blended rate of future pay raises 5.25% 4.00% --------------------------------
The net pension cost (credit) consisted of the following: - ----------------------------------------------------------------------
1999 1998 1997 - ---------------------------------------------------------------------- (millions) Service cost-- benefits earned during the year $ 86 $ 72 $ 62 Interest on projected benefit obligation 177 165 149 Expected return on plan assets (300) (265) (194) Amortization of unrecognized transition asset (25) (25) (25) Recognition of prior service cost 12 11 9 Recognition of actuarial (gains) and losses (8) (4) 1 - ---------------------------------------------------------------------- Net pension cost (credit) $ (58) $ (46) $ 2 ---------------------------------------------- Discount rate 7.00% 7.25% 7.75% ---------------------------------------------- Expected long-term rate of return on plan assets 10.00% 10.00% 9.50% ---------------------------------------------- Expected blended rate of future pay raises 4.00% 4.25% 4.75% ----------------------------------------------
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 $83 million in 1999 and $54 million in 1998 and 1997. At year-end 1999, the plans held 33 million FON shares and 27 million PCS shares (on a post-split basis). 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. I-24 The following table shows the changes in the accumulated postretirement benefit obligation: - --------------------------------
1999 1998 - -------------------------------- (millions) Beginning balance $ 864 $ 832 Service cost 21 20 Interest cost 59 58 Actuarial gains (30) (6) Benefits paid (38) (40) - -------------------------------- Ending balance $ 876 $ 864 ------ ------
Amounts included in the Consolidated Balance Sheets at year-end were as follows: - -----------------------------------------------------
1999 1998 - ----------------------------------------------------- (millions) Accumulated postretirement benefit obligation $ 876 $ 864 Unrecognized prior service cost 53 61 Unrecognized net gains 120 124 - ----------------------------------------------------- Accrued postretirement benefits cost $1,049 $1,049 -------------------------- Discount rate 8.25% 7.00% --------------------------
The assumed 2000 annual health care cost trend rates are 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 1999 accumulated postretirement benefit obligation by an estimated $107 million. A 1% decrease would have reduced the obligation by an estimated $89 million. The net postretirement benefits cost consisted of the following: - ----------------------------------------------------------------------------
1999 1998 1997 - ---------------------------------------------------------------------------- (millions) Service cost--benefits earned during the year $ 21 $ 20 $ 21 Interest on accumulated postretirement benefit obligation 59 58 52 Recognition of prior service cost (8) (6) -- Recognition of actuarial gains (17) (21) (19) - ---------------------------------------------------------------------------- Net postretirement benefits cost $ 55 $ 51 $ 54 ---------------------------------------------------- Discount rate 7.00% 7.25% 7.75% ----------------------------------------------------
For measurement purposes, the assumed 1999 weighted average annual health care cost trend rates were 7.6% before Medicare eligibility and 8.1% after Medicare eligibility. Both rates gradually decrease to an ultimate level of 5% by 2005. A 1% increase in the rates would have increased the 1999 postretirement benefits service and interest costs by an estimated $13 million. A 1% decrease would have reduced the 1999 postretirement benefits service and interest costs by an estimated $11 million. - -------------------------------------------------------------------------------- 7. Income Taxes - -------------------------------------------------------------------------------- Income tax expense (benefit) allocated to continuing operations consists of the following: - --------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------- (millions) Current income tax expense (benefit) Federal $ (34) $283 $399 State 40 44 79 - -------------------------------------------------------- Total current 6 327 478 - -------------------------------------------------------- Deferred income tax expense (benefit) Federal (309) 120 181 State (24) 7 (5) - -------------------------------------------------------- Total deferred (333) 127 176 - -------------------------------------------------------- Total $(327) $454 $654 --------------------------------
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: - --------------------------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------------------------- (millions) Income tax expense (benefit) at the federal statutory rate $(375) $364 $611 Effect of: State income taxes, net of federal income tax effect 10 33 48 Equity in losses of foreign joint ventures 18 6 4 Write-off of in-process research and development costs -- 63 -- Goodwill amortization 34 3 -- Other, net (14) (15) (9) - -------------------------------------------------------------------------- Income tax expense (benefit) $(327) $454 $654 -------------------------------------------------- Effective income tax rate 30.5% 43.7% 37.4% --------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows: - ----------------------------------------------------------------
1999 1998 1997 - ---------------------------------------------------------------- (millions) Discontinued operation $(111) $(62) $(24) Extraordinary items (34) (23) -- Unrealized holding gains on investments(/1/) 13 8 5 Stock ownership, purchase and options arrangements(/2/) (254) (49) (26) - ----------------------------------------------------------------
(/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 I-25 give rise to the deferred income tax assets and liabilities at year-end 1999 and 1998, along with the income tax effect of each, were as follows: - -----------------------------------------------------------
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 1,189 -- Tax credit carryforwards 75 -- Other, net 177 -- - ----------------------------------------------------------- 2,012 2,973 Less valuation allowance 466 -- - ----------------------------------------------------------- Total $1,546 $2,973 ------------------------------------- - ----------------------------------------------------------- 1998 Deferred Income Tax ------------------ Assets Liabilities - ----------------------------------------------------------- (millions) Property, plant and equipment $ -- $2,048 Intangibles -- 454 Postretirement and other benefits 419 -- Reserves and allowances 171 -- Unrealized holding gains on investments -- 60 Operating loss carryforwards 302 -- Other, net 142 -- - ----------------------------------------------------------- 1,034 2,562 Less valuation allowance 249 -- - ----------------------------------------------------------- Total $ 785 $2,562 -------------------------------------
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 $217 million in 1999 and $237 million in 1998 and decreased $2 million in 1997. In 1999, Sprint acquired approximately $179 million of potential tax benefits related to net operating loss carryforwards in the acquisitions of the broadband 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 1999, Sprint had federal operating loss carryforwards of approximately $2.7 billion and state operating loss carryforwards of approximately $6.2 billion. Related to these loss carryforwards are federal tax benefits of $938 million and state tax benefits of $385 million. In addition, Sprint had available for income tax purposes federal alternative minimum tax credit carryforwards of $49 million, state alternative minimum tax credit carryforwards of $5 million, federal alternative minimum tax net operating loss carryforwards of $933 million and state alternative minimum tax net operating loss carryforwards of $359 million. The loss carryforwards expire in varying amounts through 2019. I-26 - -------------------------------------------------------------------------------- 8. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint's consolidated long-term debt and capital lease obligations at year-end was as follows: - ----------------------------------------------------------------------------------------------------
1999 1998 -------------------------------- -------------------------------- Sprint Sprint Sprint Sprint Maturing FON Group PCS Group Consolidated FON Group PCS Group Consolidated - ---------------------------------------------------------------------------------------------------- (millions) Senior notes 5.7% to 6.9%(/1/) 2001 to 2028 $1,105 $ 8,145 $ 9,250 $1,059 $3,941 $ 5,000 8.1% to 9.8% 2000 to 2003 632 -- 632 632 -- 632 11.0% to 12.5%(/2/) 2001 to 2006 -- 734 584 -- 699 565 Debentures and notes 5.8% to 9.6% 2000 to 2022 565 -- 565 565 -- 565 Notes payable and commercial paper -- 294 1,971 2,265 472 274 746 First mortgage bonds 2.0% to 9.9% 1999 to 2025 1,295 -- 1,295 1,312 -- 1,312 Capital lease obligations 5.2% to 14.0% 1999 to 2008 69 486 555 32 452 484 Revolving credit facilities Variable rates 2002 to 2006 900 -- 900 -- 1,800 1,800 Other(/2/),(/3/) 2.0% to 10.0% 1999 to 2007 573 153 726 370 1,029 1,085 - ---------------------------------------------------------------------------------------------------- 5,433 11,489 16,772 4,442 8,195 12,189 Less: current maturities(/2/) 902 185 1,087 33 348 247 - ---------------------------------------------------------------------------------------------------- Long-term debt and capital lease obligations(/2/) $4,531 $11,304 $15,685 $4,409 $7,847 $11,942 ----------------------------------------------------------------------
(/1/)These borrowings were incurred by Sprint and allocated to the applicable Group. Sprint's weighted average interest rate related to these borrowings was 6.6% at year-end 1999 and 6.4% at year-end 1998. The weighted average interest rate related to the borrowings allocated to the PCS Group was approximately 8.7% at year-end 1999 and 8.5% at year-end 1998. See Note 2 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 $150 million at year-end 1999 and $134 million at year-end 1998. In addition, the PCS Group had other long-term debt payable to the FON Group totaling $314 million at year-end 1998, including $134 million classified as current. (/3/)Includes notes with a market value of $316 million at year-end 1999 and $358 million at year-end 1998 recorded by the FON Group that may be exchanged at maturity for SBC Communications, Inc. (SBC) common shares owned by the FON Group or for cash. Based on SBC's closing price, had the notes matured at year-end 1999, they could have been exchanged for 6.5 million SBC shares. At year-end 1999, Sprint held 7.5 million SBC shares, which have been included in "Investments in equity securities" in the FON Group's Combined Balance Sheets. I-27 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) 2000 $ 902 $ 185 $1,087 2001 877 289 1,096 2002 1,339 59 1,398 2003 373 1,058 1,431 2004 144 1,042 1,186 - --------------------------
Sprint Short-term Borrowings Sprint had bank notes payable totaling $670 million at year-end 1999 and $454 million at year-end 1998. In addition, Sprint had commercial paper borrowings totaling $1.6 billion at year-end 1999 and $292 million at year-end 1998. 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, through unused credit facilities, to refinance these borrowings on a long-term basis. In 1998, Sprint replaced its previous $1.5 billion credit facility with new facilities with syndicates of domestic and international banks. The new facilities totaled $5.0 billion and expire in 2000 and 2003. Commercial paper and certain bank notes payable 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 1999, Sprint had total unused lines of credit of $3.5 billion. Bank notes outstanding had weighted average interest rates of 6.3% at year-end 1999 and 5.7% at year-end 1998. The weighted average interest rate of commercial paper was 6.4% at year-end 1999 and 5.8% at year-end 1998. Long-term Debt In the 1999 third quarter, Sprint filed a shelf registration statement with the SEC covering $4.0 billion of senior unsecured debt securities. At year-end 1999, Sprint had issued $750 million of debt securities under the shelf. These securities have interest rates ranging from 6.4% to 6.5% and mature in 2001. In August 1999, Sprint incurred other borrowings totaling $250 million which mature in 2002 and have variable interest rates. At year-end 1999, the notes had an interest rate of 6.1%. In June 1999, Sprint entered into a $1.0 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 1999, Sprint had borrowed $900 million with a weighted average interest rate of 6.4% under this agreement. These borrowings mature in 2002. In May 1999, Sprint issued $3.5 billion of senior notes registered with the SEC. These notes have maturities ranging from 5 to 20 years and interest rates ranging from 5.9% to 6.9%. In 1998, Sprint issued $5.0 billion of senior notes registered with the SEC. These notes have maturities ranging from 5 to 30 years and interest rates ranging from 5.7% to 6.9%. Sprint FON Group In 1999, the FON Group received a net allocation of $1.0 billion of debt from Sprint. This debt was mainly used for new capital investments and acquisitions. See Note 2 for a more detailed description of how Sprint allocates debt to the Groups. 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 $14.3 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 1999, Sprint allocated $5.9 billion of debt to the PCS Group. This debt was mainly used to repay debt, to fund new capital investments and to fund operating losses and working capital requirements. 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. The debt was repaid with a portion of the proceeds from Sprint's $5.0 billion debt offering in November 1998. 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 1999. I-28 - -------------------------------------------------------------------------------- 9. 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 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. 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. . 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. . Series 3 FON stock and Series 3 PCS stock To maintain their combined voting power at 20%, 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 would 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. At year-end 1999, Sprint had 22 thousand PCS treasury shares (post-split basis), which were recorded at cost. The PCS shares are held by the FON Group and represent an intergroup interest in the PCS Group which has been 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 20% of Sprint's voting power. Sprint declared and paid Class A common dividends of 62.5 cents per share in 1999 and $1.00 per share in 1998 and 1997. In February 1999, FT and DT purchased an aggregate of 6.1 million Series 3 PCS shares (pre-split basis) for $169 million in conjunction with the registered public offering of 24.4 million shares of Series 1 PCS stock (pre-split basis). During 1999, FT and DT purchased an aggregate of 1.2 million shares of Series 3 FON shares (post-split basis) and 0.8 million additional Series 3 PCS shares (pre-split basis) for $100 million to maintain their combined 20% voting power. Additionally, during 1999, FT and DT bought Series 1 FON and Series 1 PCS shares on the open market to maintain their combined 20% voting power. These shares converted into Series 3 FON and Series 3 PCS shares. 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 combined 20% voting power in Sprint by purchasing an additional 5.1 million Series 3 PCS shares (pre-split basis) for $85 million. FT and DT, as Class A common, Series 3 FON and Series 3 PCS shareholders, have the right in most cases to pro rata representation on Sprint's Board of Directors. They may also purchase additional shares of FON stock and PCS stock from Sprint to keep their ownership level at a combined 20%. 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. 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 1999, common stock reserved for future grants under stock option plans or for future issuances under various other arrangements was as follows: I-29 Sprint FON Group - -------------------------------------------------------------------
Shares - ------------------------------------------------------------------- (millions) Employees Stock Purchase Plan 12.9 Employee savings plans 6.5 Automatic Dividend Reinvestment Plan 2.3 Officer and key employees' and directors' stock options 11.6 Conversion of preferred stock and other 3.0 - ------------------------------------------------------------------- 36.3 ----
Sprint PCS Group(/1/) - -------------------------------------------------------------------
Shares - ------------------------------------------------------------------- (millions) Employees Stock Purchase Plan 0.9 Employee savings plans 3.3 Officer and key employees' and directors' stock options 15.9 Warrants issued to Cable Partners 24.9 Conversion of preferred stock and other 20.3 - ------------------------------------------------------------------- 65.3 ----
(/1/)Restated to give effect to the February 2000 two-for-one stock split. 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 (on a post-split basis): . 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 1999 or 1998. 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, $552 million of those subsidiaries' $1.5 billion total retained earnings was restricted at year-end 1999. The flow of cash in the form of advances from the subsidiaries to Sprint is generally not restricted. - -------------------------------------------------------------------------------- 10. Stock-based Compensation - -------------------------------------------------------------------------------- Recapitalization and Stock Splits 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 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. 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 1999, authorized FON shares under this plan approximated 24.1 million and authorized PCS shares approximated 14.5 million. The authorized number of shares was increased by approximately 7.1 million FON shares and 7.5 million PCS shares on January 1, 2000. 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 1999, authorized FON shares under this plan approximated 38.5 million and authorized PCS shares approximated 40.6 million. These amounts were increased by approximately 11.8 million FON shares and 12.7 million PCS shares on January 1, 2000. In 1997, Sprint granted performance-based stock options to certain key executives. The FON Group expensed $9 million in 1999 and $14 million in 1998 and the PCS Group expensed $5 million in 1999 and $1 million in 1998 related to these performance-based stock options. Employees Stock Purchase Plan Under Sprint's Employees Stock Purchase Plan (ESPP), employees may elect to purchase FON common stock or PCS common stock at a price equal to 85% of the I-30 market value on the grant or exercise date, whichever is less. At year-end 1999, authorized FON shares under this plan approximated 13.8 million and authorized PCS shares approximated 5.5 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 vest 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 have become exercisable, based on the vesting requirements of the converted units. Assuming all participants stay employed by Sprint until all replacement options and shares are vested, Sprint will issue the remaining 1.7 million PCS shares and the remaining 2.0 million PCS shares under option will become exercisable. 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 after 1994. Under this method, compensation expense is recognized over the applicable vesting periods and is based on the shares under option and their related fair values on the grant date. For 1999, the FON Group's pro forma net income was $1,434 million and pro forma diluted EPS was $1.63. 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 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. For 1999, the PCS Group's pro forma net loss was $2,578 million and pro forma diluted loss per share was $2.82. 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. Sprint's pro forma net income and earnings per share prior to the Recapitalization date were as follows: - ---------------------------------------------
1998(/1/) 1997 - --------------------------------------------- (millions, except per share data) Pro forma net income $ 785 $ 908 ----------------- Pro forma diluted earnings per share $ 1.79 $ 2.11 -----------------
(/1/)Reflects consolidated pro forma net income and earnings per share until the Recapitalization date. Fair Value Disclosures MISOP and SOP 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 - ----------------------------------------
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 - ----------------------------------------
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 - ----------------------------------------- 1997 MISOP SOP - -----------------------------------------
Fair value on grant date $9.66 $11.74 Risk-free interest rate 6.2% 6.2% Expected volatility 22.8% 22.8% Expected dividend yield 2.3% 2.3% Expected life (years) 4 6
I-31 Employees Stock Purchase Plan 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 is $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. No ESPP shares were offered in 1997. Stock Options Stock option plan activity was as follows: FON stock option plan activity has been restated to give effect to the 1999 two-for-one stock split. 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 ------------------------
PCS stock option plan activity has been restated to give effect to the February 2000 two-for-one stock split. 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 ------------------------
Sprint Common Stock - ---------------------------------------------------
Weighted Average per Share Sprint Exercise Shares Price - --------------------------------------------------- (millions) Outstanding, beginning of 1997 13.6 $29.42 Granted 9.4 46.14 Exercised (3.4) 27.17 Forfeited/Expired (0.9) 38.10 ---- Outstanding, year-end 1997 18.7 37.85 Granted 9.1 59.73 Exercised (3.4) 33.54 Forfeited/Expired (0.6) 47.28 ---- Converted in November 1998 23.8 $46.60 ----------------------------
Options exercisable at year-end 1998 were 21.2 million FON options and 11.5 million PCS options. Sprint options exercisable were 8.3 million at year-end 1997. At year-end 1998, the weighted average exercise prices for exercisable options were $18.83 for FON options and $4.41 for PCS options. The following tables summarize outstanding and exercisable options at year-end 1999: 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 0.3 1.3 $ 8.28 10.00- 19.99 12.0 6.2 16.67 20.00- 29.99 18.5 7.8 24.84 30.00- 39.99 17.9 8.8 38.59 40.00- 49.99 1.6 5.7 45.26 50.00- 59.99 0.5 5.9 52.34 60.00- 69.99 0.8 6.0 67.88 70.00- 79.99 0.4 6.4 74.00 - -----------------------------------------------
- -----------------------------------
Options Exercisable -------------------- Weighted Range of Average Exercise Number Exercise Prices Exercisable Price - ----------------------------------- (millions) $ 5.00-$ 9.99 0.3 $ 8.28 10.00- 19.99 9.6 16.23 20.00- 29.99 5.8 25.97 30.00- 39.99 8.4 38.21 - -----------------------------------
I-32 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 19.8 7.1 $ 5.36 10.00- 19.99 18.4 9.1 15.59 20.00- 29.99 0.3 6.6 27.11 30.00- 39.99 0.2 7.0 33.32 40.00- 49.99 0.2 6.5 45.95 50.00- 59.99 0.9 7.7 50.76 - -----------------------------------------------
- -----------------------------------
Options Exercisable -------------------- Weighted Range of Average Exercise Number Exercise Prices Exercisable Price - ----------------------------------- (millions) $ 2.00-$ 9.99 9.2 $ 4.74 10.00- 19.99 7.8 15.59
- -------------------------------------------------------------------------------- 11. Commitments and Contingencies - -------------------------------------------------------------------------------- Litigation, Claims and Assessments Various suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to Sprint's consolidated financial statements. Operating Leases Sprint's minimum rental commitments at year-end 1999 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) 2000 $676 2001 503 2002 346 2003 229 2004 141 Thereafter 423 - ----------------------
Sprint's gross rental expense totaled $890 million in 1999, $730 million in 1998 and $410 million in 1997. 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. - -------------------------------------------------------------------------------- 12. 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 1999 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 1999 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: - ----------------------------------------------------------------
1999 ------------------ Estimated Carrying Fair Amount Value - ---------------------------------------------------------------- (millions) Cash and equivalents $ 120 $ 120 Investments in equity securities 464 464 Long-term debt and capital lease obligations 16,772 16,126 - ---------------------------------------------------------------- - ---------------------------------------------------------------- 1998 ------------------ Estimated Carrying Fair Amount Value - ---------------------------------------------------------------- (millions) Cash and equivalents $ 605 $ 605 Investments in equity securities 489 489 Long-term debt and capital lease obligations 12,189 12,771 - ----------------------------------------------------------------
The carrying amounts of Sprint's cash and equivalents approximate fair value at year-end 1999 and 1998. 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. 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 I-33 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 $598 million outstanding at year-end 1999 and $134 million outstanding at year-end 1998. Net interest expense (income) related to interest rate swap agreements was $1 million in 1999, $0.1 million in 1998 and $(0.2) million in 1997. 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 1999, the remaining unamortized deferred loss totaled $67 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 $14 million at year-end 1999 and $18 million at year-end 1998. Sprint had outstanding open purchase option contracts to call various foreign currencies of $1 million at year-end 1999 and $10 million at year-end 1998. 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 1999 and 1998 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. Total net losses, including hedge costs, of $0.3 million in 1999, $0.6 million in 1998 and $0.1 million in 1997 were recorded related to foreign currency transactions and contracts. - -------------------------------------------------------------------------------- 13. Additional Financial Information - -------------------------------------------------------------------------------- Segment Information The FON Group operates in five business segments, based on services and products: the long distance division, the local division, the product distribution and directory publishing businesses, activities to develop and deploy Sprint ION(SM) and other ventures. See Note 12 of Sprint FON Group 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-34 Industry segment financial information was as follows: - -------------------------------------------------------------------------------
Sprint Sprint FON PCS Intergroup Group Group Eliminations(/1/) Consolidated - ------------------------------------------------------------------------------- (millions) 1999 Net operating revenues $17,016 $ 3,180 $(268) $19,928 Intergroup revenues 264 4 (268) -- Depreciation and amortization 2,129 1,523 -- 3,652 Operating expenses 14,086 6,417 (268) 20,235 Operating income (loss) 2,930 (3,237) -- (307) Operating margin 17.2% 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 $15,764 $ 1,225 $(108) $16,881 Intergroup revenues 108 -- (108) -- Depreciation and amortization 1,921 789 -- 2,710 Operating expenses 13,004 3,795 (108) 16,691 Operating income (loss) 2,760 (2,570) -- 190 Operating margin 17.5% 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 1997 Net operating revenues $14,564 $ -- $ -- $14,564 Depreciation and amortization 1,713 -- -- 1,713 Operating expenses 12,094 19 -- 12,113 Operating income (loss) 2,470 (19) -- 2,451 Operating margin 17.0% NM -- 16.8% Equity in losses of affiliates (10) (660) -- (670) Capital expenditures 2,709 154 -- 2,863 Total assets 16,581 1,703 (10) 18,274
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. Revenues from one customer of the FON Group represent approximately 4% of the FON Group's net operating revenues in 1999 and 5% in 1998 and 1997. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers represent approximately 28% of the PCS Group's net operating revenues in 1999 and 25% in 1998. I-35 Supplemental Cash Flows Information Sprint's cash paid (received) for interest and income taxes was as follows: - ------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------------ (millions) Interest (net of capitalized interest) $ 714 $ 217 $198 ------------------- Income taxes $ (131) $ 307 $366 ------------------- Sprint's noncash activities included the following: - ------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------ (millions) Common stock issued for Cox PCS acquisition $1,146 $-- $-- ------------------- Debt assumed in the broadband fixed wireless acquisitions $ 575 $ -- $-- ------------------- Tax benefit from stock options exercised $ 254 $ 49 $ 26 ------------------- Stock received for stock options exercised $ 118 $ 18 $ 7 ------------------- Noncash extinguishment of debt $ 78 $ -- $-- ------------------- Capital lease obligations $ 77 $ 460 $ 30 ------------------- Common stock issued under Sprint's ESPP $ 72 $ 95 $ 5 ------------------- 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 3 for more details about the assets and liabilities acquired in business combinations. Related Party Transactions The Cable Partners advanced PhillieCo $26 million in 1998 and $24 million in 1997. These advances were repaid in the 1999 first quarter. - -------------------------------------------------------------------------------- 14. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires all derivatives to be recorded on the balance sheet as either assets or liabilities and be measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative was used and whether it qualifies for hedge accounting. When adopted in January 2001, this statement is not expected to have a material impact on Sprint's consolidated financial statements. I-36 - -------------------------------------------------------------------------------- 15. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Quarter ------------------------------ 1999 1st 2nd 3rd 4th - ------------------------------------------------------------------------ (millions, except per share data) Net operating revenues(/1/) $4,652 $4,888 $5,068 $5,320 Operating income (loss) (90) 28 (64) (181) Loss from continuing operations(/2/) (171) (103) (196) (275) Net loss (220) (169) (256) (290) Earnings (Loss) per common share from continuing operations(/3/),(/4/) 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) - ------------------------------------------------------------------------ Quarter ------------------------------ 1998 1st 2nd 3rd 4th - ------------------------------------------------------------------------ (millions, except per share data) Net operating revenues(/1/) $4,011 $4,126 $4,273 $4,471 Operating income (loss)(/6/) 214 185 148 (357) Income (Loss) from continuing operations(/2/),(/5/),(/6/) 249 247 251 (162) Net income (loss)(/5/) 207 210 240 (243) Earnings (Loss) per common share from continuing operations(/3/),(/4/),(/7/) Sprint common stock Diluted 0.57 0.56 0.57 0.49 Basic 0.58 0.57 0.58 0.50 FON common stock Diluted NA NA NA 0.18 Basic NA NA NA 0.18 PCS common stock Diluted and Basic NA NA NA (0.63) - ------------------------------------------------------------------------
(/1/)Certain reclassifications were made from net operating revenues to operating expenses from amounts reported in 1999 reports on Form 10-Q to conform to current year presentation. These reclassifications had no impact on operating income (loss) as previously reported. (/2/)Quarterly income (loss) from continuing operations have been adjusted from amounts reported in 1999 reports on Form 10-Q to reflect the presentation of the equity investment in Global One as a discontinued operation for all periods presented. (/3/)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. (/4/)On February 4, 2000, 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. (/5/)In the 1998 fourth quarter, the FON Group recorded net nonrecurring gains of $104 million, mainly from the sale of local exchanges. This decreased loss from continuing operations by $62 million. (/6/)In the 1998 fourth quarter, the PCS Group recorded a nonrecurring charge to write off $179 million of acquired IPR&D related to the PCS Restructuring. This charge increased operating loss and loss from continuing operations by $179 million. (/7/)Fourth quarter 1998 reflects EPS for Sprint only through the date of the November 1998 Recapitalization. EPS for the FON Group and the PCS Group reflects EPS from the date of the Recapitalization through year-end 1998. NA = Not applicable - -------------------------------------------------------------------------------- 16. Subsequent Event (Unaudited) - -------------------------------------------------------------------------------- In February 2000, Sprint's Board of Directors declared dividends of 12.5 cents per share on the Sprint FON common stock and Class A common stock. Dividends will be paid March 30, 2000. I-37 SPRINT CORPORATION SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999, 1998 and 1997
Additions ------------------------------- Balance Charged Charged Balance Beginning PCS to to Other Other End of of Year Restructuring Income Accounts Deductions Year - -------------------------------------------------------------------------------------------- (millions) 1999 Allowance for doubtful accounts $186 $-- $655 $ 7 $(563)(/1/) $285 ----------------------------------------------------------------- Valuation allowance-- deferred income tax assets $249 $-- $ 47 $179(/4/) $ (9) $466 ----------------------------------------------------------------- 1998 Allowance for doubtful accounts $147 $ 8(/2/) $379 $ 3 $(351)(/1/) $186 ----------------------------------------------------------------- Valuation allowance-- deferred income tax assets $ 12 $229(/3/) $-- $ 16 $ (8) $249 ----------------------------------------------------------------- 1997 Allowance for doubtful accounts $117 $-- $389 $ 4 $(363)(/1/) $147 ----------------------------------------------------------------- Valuation allowance-- deferred income tax assets $ 14 $-- $ 3 $-- $ (5) $ 12 -----------------------------------------------------------------
(/1/)Accounts written off, net of recoveries. (/2/)As discussed in Note 3, 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-38 Annex II Sprint FON Group Combined Financial Information SELECTED FINANCIAL DATA Sprint FON Group - ------------------------------------------------------------------------------
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------ (millions, except per share data) Results of Operations - ------------------------------------------------------------------------------ Net operating revenues $17,016 $15,764 $14,564 $13,610 $12,482 Operating income(/1/) 2,930 2,760 2,470 2,268 1,834 Income from continuing operations(/1/),(/2/) 1,736 1,675 1,513 1,373 966 Earnings per Share and Dividends(/3/) - ------------------------------------------------------------------------------ Earnings per common share from continuing operations(/1/),(/2/) Diluted $ 1.97 $ 1.93 $ 1.73 $ 1.61 $ 1.37 Basic 2.01 1.96 1.76 1.63 1.38 Dividends per common share $ .50 $ .50 $ .50 $ .50 $ .50 Financial Position - ------------------------------------------------------------------------------ Total assets $21,803 $19,001 $16,581 $15,655 $14,101 Property, plant and equipment, net 14,002 12,464 11,307 10,464 9,716 Total debt (including short-term borrowings) 5,433 4,442 3,880 3,274 5,668 Group equity 10,514 9,024 7,639 7,332 3,677 Cash Flow Data - ------------------------------------------------------------------------------ Cash from operating activities(/4/) $ 3,713 $ 3,915 $ 2,899 $ 2,267 $ 2,590 Capital expenditures 3,534 3,159 2,709 2,434 1,857
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/)The FON Group recorded nonrecurring charges of $20 million in 1997 and $60 million in 1996 related to litigation within the long distance division. These charges reduced income from continuing operations by $13 million in 1997 and $36 million in 1996. In 1995, the FON Group recorded a nonrecurring charge of $88 million related to a restructuring within the local division. This reduced income from continuing operations by $55 million. (/2/)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 stock. 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 all periods presented. Pro forma earnings per share and dividends for prior periods have been restated to reflect the stock split. (/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 - ------------------------------------------------------------------------------- Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance phone company. It operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. The division primarily provides domestic and international voice, video and data communications services. Local Division The local division consists of regulated local phone companies serving more than 8 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, sales of telecommunications equipment, and long distance services within certain regional calling areas, 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. Sprint ION(SM) Sprint is developing and deploying new integrated communications services, referred to as Sprint ION. Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide new competitive local service. Other Ventures The "other ventures" segment includes the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. This segment also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. - ------------------------------------------------------------------------------- Results of Operations - ------------------------------------------------------------------------------- Total net operating revenues for 1999 were $17.0 billion, an 8% increase from $15.8 billion in 1998. Total net operating revenues for 1997 were $14.6 billion. Income from continuing operations was $1.7 billion in 1999 and 1998 and $1.5 billion in 1997. Core Businesses In 1999, the FON Group's core businesses generated improved net operating revenues and operating income from 1998. Long distance calling volumes increased 22% in 1999 and 15% in 1998. Access lines served by the local division increased 5% in 1999 and 1998, excluding sales of local exchanges. Core net income included net nonrecurring pretax gains of $104 million in 1998 and $51 million in 1997. These gains mainly consisted of sales of local exchanges and certain investments, partly offset by litigation charges in 1997. Excluding these nonrecurring items, operating income from core operations was $3.3 billion in 1999, $2.9 billion in 1998 and $2.6 billion in 1997. - ------------------------------------------------------------------------------- Segmental Results of Operations - ------------------------------------------------------------------------------- Long Distance Division - -------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------- (millions) Net operating revenues $10,567 $9,658 $8,684 - ------------------------------------------------------------------- Operating expenses Interconnection 3,804 3,608 3,640 Operations 1,507 1,453 1,257 Selling, general and administrative(/1/) 2,629 2,312 2,014 Depreciation and amortization 993 918 748 - ------------------------------------------------------------------- Total operating expenses 8,933 8,291 7,659 - ------------------------------------------------------------------- Operating income $ 1,634 $1,367 $1,025 ----------------------- Operating margin 15.5% 14.2% 11.8% ----------------------- Capital expenditures $ 1,209 $1,364 $1,223 -----------------------
(/1/)The FON Group recorded nonrecurring litigation charges of $20 million in 1997. II-2 Net Operating Revenues All major market segments--business, residential and wholesale--contributed to the increase in net operating revenues in 1999 and 1998. The increases mainly reflect strong data services revenue growth as well as strong minute growth of 22% in 1999 and 15% in 1998, partly offset by a more competitive pricing environment and a change in the mix of products sold. Business and Data Market Business and data market revenues increased 9% in 1999 and 15% in 1998. Data services showed strong growth because of continued demand and increased use of the Internet. The increases also reflect strong calling volumes partly offset by lower rates due to increased competition. Residential Market Residential market revenues increased 7% in 1999 and 5% in 1998. These increases reflect strong volume growth from long distance calls, partly offset by lower domestic and international rates. Growth was also enhanced by the Sprint Nickel Nights(SM) product which generated increased sales in 1999. Other growth factors included increased prepaid card revenues and increased sales of Sprint Solutions(SM)--bundled local and long-distance services sold through Sprint's local telephone operations. Wholesale Market Wholesale market revenues increased 15% in 1999 and 8% in 1998. This reflects strong minute growth mainly from international calls and increased inbound and outbound toll-free calls. Interconnection Costs Interconnection costs consist of amounts paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers. These costs increased 5% in 1999 and decreased 1% in 1998. Increased calling volumes were partially offset by reductions in per-minute costs for both domestic and international access in 1999. The 1999 increase in interconnection costs also reflects costs related to growth in non-minute driven revenues. In 1998, reductions in per-minute costs more than offset the impact of increased calling volumes. The rate reductions were generally due to domestic FCC-mandated access rate reductions that took effect in January and July 1998 and July 1999. Lower international per minute costs reflect continued competition. Sprint expects government deregulation and competitive pressures to add to the trend of declining unit costs for international interconnection. Interconnection costs were 36.0% of net operating revenues in 1999, 37.4% in 1998 and 41.9% in 1997. Operations Expense Operations expense includes costs to operate and maintain the long distance network and costs of equipment sales. It also includes costs to provide operator, public payphone and video teleconferencing services as well as telecommunications services for the hearing-impaired. Operations expense increased 4% in 1999 and 16% in 1998. These increases were driven by growth in data services as well as increases in network equipment operating leases in both years. The 1998 increase also reflects the service costs of Paranet, which was purchased in late 1997. Operations expense was 14.3% of net operating revenues in 1999, 15.0% in 1998 and 14.5% in 1997. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense increased 14% in 1999 and 15% in 1998. These increases mainly reflect 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 enables customers to earn frequent flyer miles when they use Sprint's services. SG&A expense was 24.8% of net operating revenues in 1999, 23.9% in 1998 and 23.2% in 1997. Depreciation and Amortization Expense Depreciation and amortization expense increased 8% in 1999 and 23% in 1998. These increases were generally due to 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. The 1998 increase was also driven by capital additions having shorter average depreciable lives. Depreciation and amortization expense was 9.4% of net operating revenues in 1999, 9.5% in 1998 and 8.6% in 1997. Local Division - -------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------- (millions) Net operating revenues $5,650 $5,372 $5,294 - ------------------------------------------------------------- Operating expenses Costs of services and products 1,971 1,853 1,892 Selling, general and administrative 1,114 1,130 1,064 Depreciation and amortization 1,065 982 946 - ------------------------------------------------------------- Total operating expenses 4,150 3,965 3,902 - ------------------------------------------------------------- Operating income $1,500 $1,407 $1,392 ---------------------- Operating margin 26.5% 26.2% 26.3% ---------------------- Capital expenditures $1,354 $1,374 $1,270 ----------------------
II-3 Beginning in July 1997, 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." Sprint sold approximately 139,000 residential and business access lines in Illinois in 1997 and the remaining 81,000 access lines in Illinois in November 1998. For comparative purposes, the following discussion of local division results assumes these transfer pricing changes and sales of exchanges occurred at the beginning of 1997. Adjusting for these transfer pricing changes and sales of exchanges, operating margins would have been 26.0% in 1998 and 25.0% in 1997. Net Operating Revenues Net operating revenues increased 6% in 1999 and 5% in 1998. These increases mainly reflect customer access line growth and increased sales of network-based services such as Caller ID and Call Waiting. Customer access lines increased 5% in both 1999 and 1998. Sales of network-based services increased in 1999 due to strong demand for bundled services which combine local service, network-based features and long distance calling. The increase in 1998 revenues also reflects increased sales of equipment. Net operating revenues were $5.7 billion in 1999, $5.3 billion in 1998 and $5.1 billion in 1997. Local Service Revenues Local service revenues, derived from local exchange services, grew 9% in 1999 and 10% in 1998 because of customer access line growth, continued demand for network-based services, growth in data products and increased revenues from maintaining customer wiring and equipment. Revenue growth in 1998 also reflects increased sales of private line services. Network Access Revenues Network access revenues, derived from long distance phone companies using the local network to complete calls, increased 4% in 1999 and in 1998. These revenues reflect an 8% increase in minutes of use in 1999 and 1998 and the 1999 implementation of local number portability charges. These increases were partly offset by access rate reductions mandated by the FCC. Access rate reductions took effect in January and July 1998 and July 1999. Toll Service Revenues Toll service revenues are mainly derived from providing long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues decreased 11% in 1999 and 26% in 1998, mainly reflecting increased competition in the intraLATA long distance market, which is expected to continue. In addition, toll service areas are shrinking as certain local calling areas are expanding. However, the reduced revenues are, in part, offset by increases in local service revenues and by increases in network access revenues paid by other carriers providing intraLATA long distance services to the local division's customers. In addition, over one- third of the toll customers lost by the local division have selected Sprint's long distance division for intraLATA long distance service, which helps mitigate the erosion of these revenues. Other Revenues Other revenues increased 7% in 1999 and 1998 reflecting increased equipment sales of business systems and data networks, as well as growth in telemarketing and commission revenues. Revenue growth in 1999 also reflects improvements in uncollectibles. The 1998 growth also reflects increased revenues from providing billing and collection services. 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 expenses increased 7% in 1999 and remained flat in 1998. 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. The 1998 cost increases from customer access line growth and increased equipment sales were offset by efficiencies from streamlining and standardizing business processes and a reduction in pension costs due to increased returns on plan assets. Costs of services and products were 34.9% of net operating revenues in 1999, 34.5% in 1998 and 36.1% in 1997. Selling, General and Administrative Expense SG&A expenses decreased 1% in 1999 and increased 8% in 1998. The 1999 decrease is due to a strong emphasis on cost control, partly offset by increased marketing costs to promote new products and services and costs related to customer access line growth. The 1998 increase was mainly due to marketing costs to promote new products and services and increased customer service costs related to customer access line growth. Also impacting SG&A for 1998 was a reduction in pension costs due to increased returns on plan assets. SG&A expense was 19.7% of net operating revenues in 1999, 21.1% in 1998 and 20.5% in 1997. Depreciation and Amortization Expense Depreciation and amortization expense increased 9% in 1999 and 5% in 1998, mainly because of increased capital expenditures in switching and transport technologies which have shorter asset lives. Depreciation and amortization expense was 18.9% of net operating revenues in 1999, 18.4% in 1998 and 18.3% in 1997. II-4 Product Distribution and Directory Publishing Businesses - -------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------- (millions) Net operating revenues $1,731 $1,683 $1,454 - ------------------------------------------------------------- Operating expenses Costs of services and products 1,345 1,330 1,173 Selling, general and administrative 127 109 93 Depreciation and amortization 17 13 9 - ------------------------------------------------------------- Total operating expenses 1,489 1,452 1,275 - ------------------------------------------------------------- Operating income $ 242 $ 231 $ 179 ---------------------- Operating margin 14.0% 13.7% 12.3% ---------------------- Capital expenditures $ 36 $ 9 $ 11 ----------------------
Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between FON Group entities to more accurately reflect market pricing. The following discussion assumes these transfer pricing changes occurred at the beginning of 1997. Adjusting for these changes, the product distribution and directory publishing businesses' operating margins would have been 15.7% in 1997. Net operating revenues increased 3% in 1999 and 16% in 1998. Nonaffiliated revenues accounted for roughly 60% of revenues in 1999 and 1998. These revenues increased 12% in 1999 and 10% in 1998. Sales to affiliates decreased 10% in 1999 and increased 27% in 1998. The change in the mix of the local division's capital program to more electronics and software, which is more frequently purchased directly from manufacturers, caused the decline in affiliate sales in 1999. In 1998, the growth reflects the centralization of certain local division purchasing and warehousing functions at North Supply in 1997 resulting in affiliates purchasing more through North Supply. Costs of services and products increased 1% in 1999 and 19% in 1998 reflecting increased equipment sales. SG&A expense increased 17% in both 1999 and 1998. The 1999 increase was the result of staffing demands related to nonaffiliated sales growth. The 1998 increase was the result of costs related to the division's acquisition of a sales force from another directory sales company in 1998. Sprint ION(SM) - ------------------------------------
1999 1998 1997 - ------------------------------------ (millions) Operating expenses $358 $143 $ 5 -------------- Capital expenditures $542 $154 $46 --------------
Operating expenses for Sprint ION in 1999 and 1998 reflect its initial development and deployment activities and include costs for network research and testing, systems and operations development, product development and advertising to increase public awareness. Depreciation and amortization totaled $38 million in 1999, $5 million in 1998 and $2 million in 1997. Other Ventures - -------------------------------------------------
1999 1998 1997 - ------------------------------------------------- (millions) Net operating revenues $ 20 $-- $-- ---------------- Operating expenses $ 68 $ 40 $ 84 ---------------- Operating loss $(48) $(40) $(84) ---------------- Equity in losses of affiliates $(89) $(51) $(10) ---------------- Capital expenditures $ 23 $-- $ 17 ----------------
This segment includes the operating results of the cable TV service operations of the broadband fixed wireless companies after their 1999 acquisition dates. Operating expenses in 1998 and 1997 and capital expenditures in 1997 mainly relate to the FON Group's offering of Internet services. In June 1998, the FON Group completed the strategic alliance to combine its Internet business with EarthLink. As part of the alliance, EarthLink obtained the FON Group's Sprint Internet Passport customers and took over the day-to-day operations of those services. In exchange, the FON Group acquired an equity interest in EarthLink. As a result, beginning in 1998, the FON Group's share of EarthLink's losses has been reflected in "Equity in losses of affiliates" above. "Equity in losses of affiliates" mainly consists of losses from EarthLink and Call-Net. - -------------------------------------------------------------------------------- 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, deferred compensation plans and customer deposits have been excluded so as not to distort the effective interest rates on long-term debt. - ---------------------------------------------------------
1999 1998 1997 - --------------------------------------------------------- Effective interest rate on long-term debt 7.8% 7.9% 8.0% --------------
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. Those 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. These reductions, which totaled $157 million in 1999 and $11 II-5 million in 1998, have also been excluded in computing the effective interest rates above. See Note 2 of Notes to Combined Financial Statements for a more detailed description of Sprint's policies about the allocation of Group financing. Other Income, Net Other income consisted of the following: - --------------------------------------------
1999 1998 1997 - -------------------------------------------- (millions) Dividend and interest income $36 $ 74 $ 99 Other, net 13 79 66 - -------------------------------------------- Total $49 $153 $165 --------------
Dividend and interest income for all years reflects 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. "Other, net" for 1999 includes net gains on miscellaneous investment activities, partly offset by losses from certain equity method investments. For 1998 and 1997, it mainly reflects net gains on sales of local exchanges and certain investments, partly offset by losses from certain equity method investments. Income Taxes The FON Group's effective tax rates were 37.9% in 1999, 37.3% in 1998 and 37.7% in 1997. See Note 7 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 As a result of Sprint's sale of its interest in Global One to Deutsche Telekom and France Telecom, Sprint's equity share of the results of Global One has been reported as a discontinued operation for all periods presented. Sprint recorded after-tax losses related to Global One totaling $130 million in 1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a $50 million tax benefit recorded to recognize tax assets related to previous losses. The realization of these assets was uncertain until the sale agreement was reached. The gain on the sale of Sprint's interest in Global One made it apparent that these tax assets would be realized. Extraordinary Items, Net 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. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- - --------------------------------
1999 1998 - -------------------------------- (millions) Combined assets $21,803 $19,001 ---------------
The increase in assets was due to capital expenditures to support the core long distance and local networks and Sprint ION development as well as the purchase of the broadband fixed wireless companies. See "Liquidity and Capital Resources" for more information about changes in the Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Operating Activities - -----------------------------------------------------------------
1999 1998 1997 - ----------------------------------------------------------------- (millions) Cash flows provided by operating activities $3,713 $3,915 $2,899 --------------------
The decrease in 1999 operating cash flows mainly reflects increases in working capital partly offset by improved operating results. The increase in 1998 operating cash flows mainly reflects improved operating results in the FON Group's core businesses and decreases in working capital. Investing Activities - ------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------ (millions) Cash flows used by investing activities from continuing operations $(3,965) $(3,098) $(3,827) -------------------------
Capital expenditures, which are the FON Group's largest investing activity, totaled $3.5 billion in 1999, $3.2 billion in 1998 and $2.7 billion in 1997. Long distance capital expenditures were incurred mainly to enhance network reliability, meet increased demand for voice and data-related services and upgrade capabilities for providing new products and services. 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. In addition, capital expenditures increased $388 million in 1999 from 1998 due to Sprint ION development and hardware deployment. In 1999, Sprint purchased the net assets of several broadband fixed wireless companies for $618 million, excluding assumed debt. In 1997, Sprint purchased the net assets of Paranet for $375 million. See Note 3 of Notes to Combined Financial Statements. II-6 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. Investing activities also include net proceeds from sales of assets totaling $90 million in 1999, $230 million in 1998 and $292 million in 1997. "Investments in and loans to other affiliates, net" includes the FON Group's investment in EarthLink, Call-Net and other miscellaneous ventures. Financing Activities - --------------------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------------------- (millions) Cash flows provided (used) by financing activities $308 $(219) $79 ----------------
Financing activities during 1999 mainly reflect long-term borrowings of $1.0 billion, partly offset by payments on long-term debt of $529 million. In 1998, financing activities mainly reflect long-term borrowings of $785 million partly offset by payments on long-term debt of $388 million. In 1997, the FON Group had net borrowings of $532 million, mainly to fund investments in and loans to affiliates. The FON Group paid dividends of $426 million in 1999 and $430 million in 1998 and 1997. The indicated annual dividend rate on FON stock is $0.50 per share. Capital Requirements The FON Group's 2000 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to require cash of $4.1 to $4.4 billion. FON Group capital expenditures are expected to range between $3.9 and $4.2 billion in 2000. The long distance and local divisions will require the majority of this total. Sprint ION is expected to require $600 to $700 million for capital expenditures in 2000. Investments in affiliates are expected to require cash of approximately $200 million. Dividend payments are expected to approximate $435 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 make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses in the near future. 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 accrued current benefits under the agreement totaling $887 million in 1999 and $190 million in 1998 and received related payments from the FON Group totaling $764 million in 1999 and $20 million in 1998. The remaining $293 million will be paid by the FON Group during the first half of 2000. See Note 2 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 phone companies, 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 incumbent local telephone carriers, and is rolling out Sprint ION in cities across the nation. Sprint is also rolling out resold and UNE based local services obtained from other local phone companies under the Telecom Act. This rollout of local services obtained from other local phone companies will occur in major areas across the nation not served by the LTD. In January 1999, the Supreme Court affirmed the FCC's authority to establish rules and prices relating to interconnection and unbundling of the incumbent local phone companies' 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. 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 a FCC ruling that the provision of in-region long distance service is in the public interest. One RBOC, Bell Atlantic, obtained FCC authorization to provide in-region long distance service in New York in December 1999; RBOCs may gain such II-7 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 switch 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; these rules were stayed by the Court of Appeals, and the FCC is currently considering an industry proposal that would streamline the process for adjudicating alleged slams. Mergers As a result of increasing competitive pressures, a number of carriers have combined or proposed to combine. Sprint and MCI WorldCom filed a merger application with the FCC (November 1999) and with the European Commission (January 2000); Sprint and MCI WorldCom are also continuing to provide the Department of Justice with information supporting the proposed merger. SBC completed its merger with Ameritech in 1999; the Bell Atlantic-GTE proposed merger remains pending before the FCC. In 1999, AT&T completed its merger with TCI, and announced its pending merger with MediaOne. AT&T is expected to use its newly acquired cable facilities to provide competitive local telephone services. Universal Services Requirements The FCC continued to address issues related to Universal Service and access charge reform. It increased the amount of money available to schools and libraries under the "e-rate" program; adopted a computer model designed to calculate "high cost" universal service subsidies (and to replace high cost subsidies implicit in interstate access charges with explicit contributions); and continued to shift certain non-traffic sensitive costs from usage-sensitive to flat-rated access charges. Sprint's long distance and local divisions both benefit from cost-based access charges. In addition, the shift in costs from usage-sensitive to flat-rated access charges has contributed to sharp decreases in long distance usage rate charges. 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 end- user revenues. The FON Group's 1999 results contained assessments for 1999. 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 from the universal service fund. 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 local 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 has published guidelines concerning what is required for it to support, at the FCC, petitions for extension of the CALEA enforcement deadlines. 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 Justice Department. 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. Sprint believes it will be in compliance with CALEA by the appropriate deadlines for local circuit-switched equipment. 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." - -------------------------------------------------------------------------------- Year 2000 Issue - -------------------------------------------------------------------------------- The FON Group successfully completed its Year 2000 readiness work and passed through the January 1, 2000 rollover event while encountering no customer- affecting outages or business interruptions. Since the inception of the FON Group's Year 2000 readiness program in 1996 through December 31, 1999, the FON Group incurred approximately $275 million of costs associated with its Year 2000 readiness program. The FON Group does not expect to incur any significant additional expenditures related to the Year 2000 issue. - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- See Note 13 of Notes to Combined Financial Statements for a discussion of a recently issued accounting pronouncement. II-8 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 2) as of December 31, 1999 and 1998, and the related combined statements of operations, comprehensive income and cash flows for each of the three years in the period ended December 31, 1999. 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Sprint FON Group at December 31, 1999 and 1998, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, 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 more fully discussed in Note 2, 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, 2000 II-9 COMBINED STATEMENTS OF OPERATIONS Sprint FON Group (millions, except per share data) - ---------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------- Net Operating Revenues $17,016 $15,764 $14,564 - --------------------------------------------------------------------------- Operating Expenses Costs of services and products 7,724 7,346 7,142 Selling, general and administrative 4,233 3,737 3,239 Depreciation and amortization 2,129 1,921 1,713 - --------------------------------------------------------------------------- Total operating expenses 14,086 13,004 12,094 - --------------------------------------------------------------------------- Operating Income 2,930 2,760 2,470 Interest expense (182) (243) (208) Other income, net 49 153 165 - --------------------------------------------------------------------------- Income from continuing operations before income taxes 2,797 2,670 2,427 Income taxes (1,061) (995) (914) - --------------------------------------------------------------------------- Income from Continuing Operations 1,736 1,675 1,513 Discontinued operation, net (130) (135) (142) Extraordinary items, net (39) (5) -- - --------------------------------------------------------------------------- Net Income 1,567 1,535 1,371 Preferred stock dividends received (paid) 7 -- (1) - --------------------------------------------------------------------------- Earnings applicable to common stock $ 1,574 $ 1,535 $ 1,370 ------------------------- Diluted Earnings per Common Share(/1/) Continuing operations $ 1.97 $ 1.93 $ 1.73 Discontinued operation (0.15) (0.16) (0.16) Extraordinary items (0.04) -- -- - --------------------------------------------------------------------------- Total $ 1.78 $ 1.77 $ 1.57 ------------------------- Diluted weighted average common shares 887.2 868.9 873.0 ------------------------- Basic Earnings per Common Share(/1/) Continuing operations $ 2.01 $ 1.96 $ 1.76 Discontinued operation (0.15) (0.16) (0.17) Extraordinary items (0.05) -- -- - --------------------------------------------------------------------------- Total $ 1.81 $ 1.80 $ 1.59 ------------------------- Basic weighted average common shares 868.0 854.0 860.5 ------------------------- 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 and 1997 are pro forma, unaudited and assume the Recapitalization occurred at the beginning of 1997. In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON common stock. As a result, 1998 and 1997 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-10 COMBINED STATEMENTS OF COMPREHENSIVE INCOME Sprint FON Group (millions) - ------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------ Net Income $1,567 $1,535 $1,371 - ------------------------------------------------------------------------------ Other Comprehensive Income (Loss) Unrealized holding gains on securities 33 28 12 Income tax expense (12) (10) (5) - ------------------------------------------------------------------------------ Net unrealized holding gains on securities during the period 21 18 7 Reclassification adjustment for gains included in net income (57) -- -- - ------------------------------------------------------------------------------ Total net unrealized holding gains (losses) on securities (36) 18 7 Foreign currency translation adjustments -- (2) 10 - ------------------------------------------------------------------------------ Total other comprehensive income (loss) (36) 16 17 - ------------------------------------------------------------------------------ Comprehensive Income $1,531 $1,551 $1,388 ----------------------
See accompanying Notes to Combined Financial Statements. II-11 COMBINED BALANCE SHEETS Sprint FON Group (millions) - -------------------------------------------------------------------------
December 31, 1999 1998 - ------------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 104 $ 432 Accounts receivable, net of allowance for doubtful accounts of $228 and $175 2,836 2,375 Inventories 441 350 Prepaid expenses 251 199 Receivables from the PCS Group 136 236 Investments in equity securities 316 -- Other 198 177 - ------------------------------------------------------------------------- Total current assets 4,282 3,769 Investments in equity securities 139 489 Property, plant and equipment Long distance division 9,824 9,241 Local division 15,828 14,858 Other 2,035 1,057 - ------------------------------------------------------------------------- Total property, plant and equipment 27,687 25,156 Accumulated depreciation (13,685) (12,692) - ------------------------------------------------------------------------- Net property, plant and equipment 14,002 12,464 Investments in and loans to the PCS Group 431 656 Investments in and advances to other affiliates 452 463 Intangible assets Goodwill 1,223 388 Other 296 56 - ------------------------------------------------------------------------- Total intangible assets 1,519 444 Accumulated amortization (140) (89) - ------------------------------------------------------------------------- Net intangible assets 1,379 355 Net assets of discontinued operation 394 182 Other assets 724 623 - ------------------------------------------------------------------------- Total $ 21,803 $ 19,001 ------------------ Liabilities and Group Equity Current liabilities Current maturities of long-term debt $ 902 $ 33 Accounts payable 1,012 1,260 Accrued interconnection costs 683 592 Accrued taxes 162 349 Advance billings 323 229 Payroll and employee benefits 557 280 Other 662 530 - ------------------------------------------------------------------------- Total current liabilities 4,301 3,273 Long-term debt 4,531 4,409 Deferred credits and other liabilities Deferred income taxes and investment tax credits 935 828 Postretirement and other benefit obligations 1,064 1,064 Other 458 403 - ------------------------------------------------------------------------- Total deferred credits and other liabilities 2,457 2,295 Group equity 10,514 9,024 - ------------------------------------------------------------------------- Total $ 21,803 $ 19,001 ------------------
See accompanying Notes to Combined Financial Statements. II-12 COMBINED STATEMENTS OF CASH FLOWS Sprint FON Group (millions) - -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- Operating Activities Net income $ 1,567 $ 1,535 $ 1,371 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operation, net 130 135 142 Extraordinary items, net 39 1 -- Equity in net losses of affiliates 70 52 22 Depreciation and amortization 2,129 1,921 1,713 Deferred income taxes and investment tax credits 220 60 -- Net gains on sales of assets (158) (104) (93) Changes in assets and liabilities: Accounts receivable, net (459) 102 (127) Inventories and other current assets (130) (19) (92) Accounts payable and other current liabilities 152 347 (37) Affiliate receivables and payables, net 88 (84) -- Noncurrent assets and liabilities, net (76) (24) (19) Other, net 141 (7) 19 - ----------------------------------------------------------------------------- Net cash provided by operating activities 3,713 3,915 2,899 - ----------------------------------------------------------------------------- Investing Activities Capital expenditures (3,534) (3,159) (2,709) Repayments from (investments in and loans to) Sprint PCS 314 (154) (300) Investments in and loans to other affiliates, net (135) (236) (186) Net proceeds from sales of assets 90 230 292 Purchase of broadband fixed wireless companies, net of cash acquired (618) -- -- Advances to the PCS Group -- (64) -- Equity transfers from (to) the PCS Group -- 340 (547) Paranet acquisition -- -- (375) Other, net (82) (55) (2) - ----------------------------------------------------------------------------- Net cash used by continuing operations (3,965) (3,098) (3,827) Net investing activities of discontinued operation (384) (268) (200) - ----------------------------------------------------------------------------- Net cash used by investing activities (4,349) (3,366) (4,027) - ----------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt 1,020 785 867 Payments on long-term debt (529) (388) (135) Net change in short-term borrowings -- -- (200) Proceeds from sales of shares to FT and DT 52 -- -- Proceeds from treasury stock issued 134 60 57 Dividends paid (426) (430) (430) Treasury stock purchased (48) (321) (145) Other, net 105 75 65 - ----------------------------------------------------------------------------- Net cash provided (used) by financing activities 308 (219) 79 - ----------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents (328) 330 (1,049) Cash and Equivalents at Beginning of Year 432 102 1,151 - ----------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 104 $ 432 $ 102 -------------------------
See accompanying Notes to Combined Financial Statements. II-13 NOTES TO COMBINED FINANCIAL STATEMENTS Sprint FON Group - ------------------------------------------------------------------------------- 1. General - ------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with MCI WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged for $76 of MCI WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. The merger is subject to the approvals of Sprint and MCI WorldCom shareholders as well as approvals from the Federal Communications Commission, the Justice Department, various state government bodies and foreign antitrust authorities. The companies anticipate that the merger will close in the second half of 2000. 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 S.A. (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 combined 20% voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. - ------------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies - ------------------------------------------------------------------------------- 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 historical balance sheets, results of operations and cash flows for each of the Groups, with all significant intragroup amounts and transactions eliminated, . an allocation of Sprint's debt, including the related effects on results of operations and cash flows, and . an allocation of corporate overhead 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 other Group's stock. Net losses of either Group, and dividends or distributions on, or repurchases of, PCS stock or FON stock will reduce Sprint funds legally available for dividends on both Groups' stock. As a result, the FON Group combined financial statements should be read along with Sprint's consolidated financial statements and the PCS Group's combined financial statements. The FON Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current- year presentation. These reclassifications had no effect on the results of operations or group equity as previously reported. II-14 Investments in entities in which the FON Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 4). Classification of Operations Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance phone company. It operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. The division provides domestic and international voice, video and data communications services. Local Division The local division consists of regulated local phone companies serving more than 8 million access lines in 18 states. It provides local services, access by phone customers and other carriers to its local network, sales of telecommunications equipment, and long distance services within certain regional calling areas, or local access transport areas. In November 1998, Sprint sold its remaining 81,000 residential and business access lines in Illinois. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. Sprint ION(SM) Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide new competitive local service. Other Ventures The "other ventures" segment includes the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. This segment also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. All of the investments and ventures are accounted for on the equity basis. 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 $887 million in 1999 and $190 million in 1998. 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 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. II-15 Revenue Recognition The FON Group recognizes operating revenues as services are rendered or as products are delivered to customers. The FON Group records operating revenues net of an estimate for uncollectible accounts. 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 $174 million at year-end 1999 and $263 million at year-end 1998. 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 $43 million in 1999, $42 million in 1998 and $23 million in 1997. In addition, Sprint capitalized interest costs related to the PCS Group's network buildout. This capitalized interest totaled $61 million for 1998 and $24 million for 1997 and was contributed to, and will be amortized by, the PCS Group. Sprint also capitalized interest costs related to its investment in Sprint PCS until July 1997 when Sprint PCS emerged from the development stage. This capitalized interest, totaling $142 million, 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 $94 million at year-end 1999 and $52 million at year-end 1998. 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. In 1999, the FON Group's convertible preferred dividends totaled $1 million and dilutive securities (mainly options) totaled 19.2 million shares. 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. The FON Group's earnings per common share 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 ------
II-16 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," to its stock option and employee stock purchase plans. Had the FON Group applied SFAS 123, pro forma net income would have been $1,434 million for 1999 and $103 million from the Recapitalization date through year-end 1998. See Note 10 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 $9 million in 1999 and $14 million in 1998 related to these performance-based stock options. - -------------------------------------------------------------------------------- 3. 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 8). 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 preliminarily allocated to goodwill, which is being amortized on a straight- line basis over 40 years. Paranet, Inc. In September 1997, Sprint paid $375 million to purchase the net assets of Houston-based Paranet, Inc., a provider of integration, management and support services for computer networks. The transaction was accounted for using the purchase method of accounting. As a result, the FON Group's combined financial statements reflect Sprint Paranet's results of operations beginning in October 1997. The excess of the purchase price over the tangible net assets acquired was $357 million. This excess was allocated to noncompete agreements and goodwill, and is being amortized on a straight-line basis over four to 10 years. - -------------------------------------------------------------------------------- 4. Investments - -------------------------------------------------------------------------------- Investments in Equity Securities The cost of investments in equity securities was $153 million at year-end 1999 and $105 million at year-end 1998. Gross unrealized holding gains were $302 million at year-end 1999 and $384 million at year-end 1998. At year-end 1999, $316 million of investments in equity securities are classified as current in anticipation of using the investments to retire debt instruments (see Note 8). 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, net" in the Combined Statements of Operations. Investments in and Advances to Other Affiliates At year-end 1999, investments accounted for using the equity method consisted of the FON Group's investments in EarthLink, Call-Net and strategic investments. Combined, unaudited, summarized financial information (100% basis) of these entities and others accounted for using the equity method was as follows: - ------------------------------------------------
1999 1998 1997 - ------------------------------------------------ (millions) Results of operations Net operating revenues $1,571 $1,242 $ 724 --------------------- Operating income (loss) $ (192) $ 67 $(246) --------------------- Net loss $ (329) $ (145) $(287) --------------------- Financial position Current assets $1,524 $1,038 Noncurrent assets 2,749 2,401 - ---------------------------------------- Total $4,273 $3,439 -------------- Current liabilities $ 599 $ 538 Noncurrent liabilities 1,644 1,004 Owners' equity 2,030 1,897 - ---------------------------------------- Total $4,273 $3,439 --------------
- -------------------------------------------------------------------------------- 5. Discontinued Operation - -------------------------------------------------------------------------------- In January 2000, Sprint reached a definitive agreement with Deutsche Telekom and France Telecom to sell its interest in Global One. In February 2000, Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. The FON Group's investment in the net assets of the discontinued operation, including advances, totaled $394 million at year-end 1999 and $182 million at year-end 1998. II-17 The Fon Group recorded after-tax losses related to Global One totaling $130 million in 1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a $50 million tax benefit recorded to recognize tax assets related to previous losses. The realization of these assets was uncertain until the sale agreement was reached. The gain on the sale of Sprint's interest in Global One made it apparent that these tax assets would be realized. The FON Group provided various voice, data and administrative services to Global One totaling $241 million in 1999, $277 million in 1998 and $415 million in 1997. In addition, Global One provided data and administrative services to the FON Group totaling $139 million in 1999, $140 million in 1998 and $114 million in 1997. The FON Group's receivable from Global One was $107 million at year-end 1999 and $187 million at year-end 1998. The FON Group's payable to Global One was $36 million at year-end 1999 and $42 million at year-end 1998. - -------------------------------------------------------------------------------- 6. 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 $285 million at year-end 1999 and $222 million at year-end 1998. 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 pension credits (costs) of $63 million in 1999, $46 million in 1998 and $(2) million in 1997. 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 $73 million in 1999 and $54 million in 1998 and 1997 for Sprint's matching contributions to the Sprint defined contribution plans. At year-end 1999, Sprint's defined contribution plans held 33 million FON shares and 27 million PCS shares (on a post-split basis). Postretirement Benefits Sprint provides postretirement benefits (principally 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 $1.0 billion in 1999 and 1998. 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 $54 million in 1999, $51 million in 1998 and $54 million in 1997. - -------------------------------------------------------------------------------- 7. Income Taxes - -------------------------------------------------------------------------------- Income tax expense allocated to continuing operations consisted of the following: - --------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------- (millions) Current income tax expense Federal $ 776 $861 $814 State 65 74 100 - -------------------------------------------------------- Total current 841 935 914 - -------------------------------------------------------- Deferred income tax expense (benefit) Federal 170 38 (7) State 50 22 7 - -------------------------------------------------------- Total deferred 220 60 -- - -------------------------------------------------------- Total $1,061 $995 $914 ----------------
II-18 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: - ------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------------ (millions) Income tax expense at the federal statutory rate $979 $935 $849 Effect of: State income taxes, net of federal income tax effect 75 62 70 Equity in losses of foreign joint ventures 18 6 4 Other, net (11) (8) (9) - ------------------------------------------------------------------------------ Income tax expense $1,061 $995 $914 ---------------------- Effective income tax rate 37.9% 37.3% 37.7% ----------------------
Income tax expense (benefit) allocated to other items was as follows: - ---------------------------------------------------------------------------
1999 1998 1997 - --------------------------------------------------------------------------- (millions) Discontinued operation $(111) $(62) $(24) Extraordinary items (23) (3) -- Unrealized holding gains on investments(/1/) 20 10 5 Stock ownership, purchase and options arrangements(/1/) (223) (49) (26) - ---------------------------------------------------------------------------
(/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 1999 and 1998, along with the income tax effect of each, were as follows: - -----------------------------------------------------------
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 183 -- Tax credit carryforwards 22 -- Other, net 161 -- - ----------------------------------------------------------- 931 1,607 Less valuation allowance 183 -- - ----------------------------------------------------------- Total $748 $1,607 -------------
- -----------------------------------------------------------
1998 Deferred Income Tax ------------------ Assets Liabilities - ----------------------------------------------------------- (millions) Property, plant and equipment $-- $1,402 Postretirement and other benefits 419 -- Reserves and allowances 149 -- Unrealized holding gains on investments -- 72 Other, net 117 -- - ----------------------------------------------------------- 685 1,474 Less valuation allowance 4 -- - ----------------------------------------------------------- Total $681 $1,474 -------------
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 $179 million in 1999 and decreased $8 million in 1998 and $2 million in 1997. In 1999, the FON Group acquired approximately $179 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 1999, the FON Group had federal operating loss carryforwards of $432 million and state operating loss carryforwards of $741 million. Related to these loss carryforwards are federal tax benefits of $151 million and state tax benefits of $49 million which expire in varying amounts through 2019. II-19 - -------------------------------------------------------------------------------- 8. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint's consolidated long-term debt and capital lease obligations at year-end was as follows: - ----------------------------------------------------------------------------------------------------
1999 1998 -------------------------------- -------------------------------- Sprint Sprint Sprint Sprint Maturing FON Group PCS Group Consolidated FON Group PCS Group Consolidated - ---------------------------------------------------------------------------------------------------- (millions) Senior notes 5.7% to 6.9%(/1/) 2001 to 2028 $1,105 $ 8,145 $ 9,250 $1,059 $3,941 $ 5,000 8.1% to 9.8% 2000 to 2003 632 -- 632 632 -- 632 11.0% to 12.5%(/2/) 2001 to 2006 -- 734 584 -- 699 565 Debentures and notes 5.8% to 9.6% 2000 to 2022 565 -- 565 565 -- 565 Notes payable and commercial paper -- 294 1,971 2,265 472 274 746 First mortgage bonds 2.0% to 9.9% 1999 to 2025 1,295 -- 1,295 1,312 -- 1,312 Capital lease obligations 5.2% to 14.0% 1999 to 2008 69 486 555 32 452 484 Revolving credit facilities Variable rates 2002 to 2006 900 -- 900 -- 1,800 1,800 Other(/2/),(/3/) 2.0% to 10.0% 1999 to 2007 573 153 726 370 1,029 1,085 - ---------------------------------------------------------------------------------------------------- 5,433 11,489 16,772 4,442 8,195 12,189 Less: current maturities(/2/) 902 185 1,087 33 348 247 - ---------------------------------------------------------------------------------------------------- Long-term debt and capital lease obligations(/2/) $4,531 $11,304 $15,685 $4,409 $7,847 $11,942 -----------------------------------------------------------------
(/1/)These borrowings were incurred by Sprint and allocated to the applicable Group. Sprint's weighted average interest rate related to these borrowings was 6.6% at year-end 1999 and 6.4% at year-end 1998. The weighted average interest rate related to the borrowings allocated to the PCS Group was approximately 8.7% at year-end 1999 and 8.5% at year-end 1998. See Note 2 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 $150 million at year-end 1999 and $134 million at year-end 1998. In addition, the PCS Group had other long-term debt payable to the FON Group totaling $314 million at year-end 1998, including $134 million classified as current. (/3/)Includes notes with a market value of $316 million at year-end 1999 and $358 million at year-end 1998 recorded by the FON Group that may be exchanged at maturity for SBC Communications, Inc. (SBC) common shares owned by the FON Group or for cash. Based on SBC's closing price, had the notes matured at year-end 1999, they could have been exchanged for 6.5 million SBC shares. At year-end 1999, Sprint held 7.5 million SBC shares, which have been included in "Investments in equity securities" in the FON Group's Combined Balance Sheets. II-20 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) 2000 $ 902 $ 185 $1,087 2001 877 289 1,096 2002 1,339 59 1,398 2003 373 1,058 1,431 2004 144 1,042 1,186 - --------------------------
Sprint Short-term Borrowings Sprint had bank notes payable totaling $670 million at year-end 1999 and $454 million at year-end 1998. In addition, Sprint had commercial paper borrowings totaling $1.6 billion at year-end 1999 and $292 million at year-end 1998. 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, through unused credit facilities, to refinance these borrowings on a long-term basis. In 1998, Sprint replaced its previous $1.5 billion credit facility with new facilities with syndicates of domestic and international banks. The new facilities totaled $5.0 billion and expire in 2000 and 2003. Commercial paper and certain bank notes payable 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 1999, Sprint had total unused lines of credit of $3.5 billion. Bank notes outstanding had weighted average interest rates of 6.3% at year-end 1999 and 5.7% at year-end 1998. The weighted average interest rate of commercial paper was 6.4% at year-end 1999 and 5.8% at year-end 1998. Long-term Debt In the 1999 third quarter, Sprint filed a shelf registration statement with the SEC covering $4.0 billion of senior unsecured debt securities. At year-end 1999, Sprint had issued $750 million of debt securities under the shelf. These securities have interest rates ranging from 6.4% to 6.5% and mature in 2001. In August 1999, Sprint incurred other borrowings totaling $250 million which mature in 2002 and have variable interest rates. At year-end 1999, the notes had an interest rate of 6.1%. In June 1999, Sprint entered into a $1.0 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 1999, Sprint had borrowed $900 million with a weighted average interest rate of 6.4% under this agreement. These borrowings mature in 2002. In May 1999, Sprint issued $3.5 billion of senior notes registered with the SEC. These notes have maturities ranging from 5 to 20 years and interest rates ranging from 5.9% to 6.9%. In 1998, Sprint issued $5.0 billion of senior notes registered with the SEC. These notes have maturities ranging from 5 to 30 years and interest rates ranging from 5.7% to 6.9%. Sprint FON Group In 1999, the FON Group received a net allocation of $1.0 billion of debt from Sprint. This debt was mainly used for new capital investments and acquisitions. See Note 2 for a more detailed description of how Sprint allocates debt to the Groups. 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 $14.3 billion was either pledged as security for first mortgage bonds and certain notes or is restricted for use as mortgaged property. Other Sprint, including the FON Group, had complied with all restrictive or financial covenants relating to its debt arrangements at year-end 1999. - -------------------------------------------------------------------------------- 9. Group Equity - -------------------------------------------------------------------------------- - ------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------ (millions) Beginning balance $ 9,024 $7,639 $7,332 Net income 1,567 1,535 1,371 Dividends (427) (431) (429) Equity issued 209 164 65 Equity repurchased (48) (321) (145) Tax benefit from stock options exercised 223 49 26 Contributions to the PCS Group -- (146) (1,052) Equity transfer from the PCS Group -- 460 435 Other comprehensive income (loss) (36) 16 17 Other, net 2 59 19 - ------------------------------------------------------------------ Ending balance $10,514 $9,024 $7,639 -----------------------
II-21 - -------------------------------------------------------------------------------- 10. 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. Various suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the FON Group's combined financial statements. Operating Leases The FON Group's minimum rental commitments at year-end 1999 for all noncancelable operating leases, consisting mainly of leases for data processing equipment and real estate, are as follows: - ----------------------
(millions) 2000 $423 2001 299 2002 202 2003 148 2004 106 Thereafter 349 - ----------------------
The FON Group's gross rental expense totaled $575 million in 1999, $474 million in 1998 and $406 million in 1997. Rental commitments for subleases, contingent rentals and executory costs were not significant. - -------------------------------------------------------------------------------- 11. 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 1999 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 1999 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: - -----------------------------------------------------------------
1999 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 104 $ 104 Investment in affiliate debt securities 169 169 Investments in equity securities 455 455 Long-term debt and capital lease obligations 5,433 5,497 - ----------------------------------------------------------------- - ----------------------------------------------------------------- 1998 ------------------- Carrying Estimated Amount Fair Value - ----------------------------------------------------------------- (millions) Cash and equivalents $ 432 $ 432 Investment in affiliate debt securities 165 165 Investment in equity securities 489 489 Long-term debt and capital lease obligations 4,442 4,834 - -----------------------------------------------------------------
The carrying amounts of the FON Group's cash and equivalents approximate fair value at year-end 1999 and 1998. 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. - -------------------------------------------------------------------------------- 12. Additional Financial Information - -------------------------------------------------------------------------------- Segment Information The FON Group operates in five business segments, based on services and products: the long distance division, the local division, the product distribution and directory publishing businesses, activities to develop and deploy Sprint ION(SM) and other ventures. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value. II-22 Industry segment financial information was as follows: - ---------------------------------------------------------------------------------------------------------
Product Long Distribution Sprint Distance Local & Directory Sprint Other Corporate and FON Division Division Publishing ION(SM) Ventures(/1/) ElimInations(/2/) Group - --------------------------------------------------------------------------------------------------------- (millions) 1999 Net operating revenues $10,567 $5,650 $1,731 $-- $ 20 $ (952) $17,016 Intercompany revenues 256 319 641 -- -- (952) 264 Depreciation and amortization 993 1,065 17 38 18 (2) 2,129 Operating expenses 8,933 4,150 1,489 358 68 (912) 14,086 Operating income (loss) 1,634 1,500 242 (358) (48) (40) 2,930 Operating margin 15.5% 26.5% 14.0% NM NM -- 17.2% Capital expenditures 1,209 1,354 36 542 23 370 3,534 Total assets 13,523 8,072 726 909 1,936 (3,363) 21,803 1998 Net operating revenues $ 9,658 $5,372 $1,683 $-- $ -- $ (949) $15,764 Intercompany revenues 137 208 712 -- -- (949) 108 Depreciation and amortization 918 982 13 5 7 (4) 1,921 Operating expenses 8,291 3,965 1,452 143 40 (887) 13,004 Operating income (loss) 1,367 1,407 231 (143) (40) (62) 2,760 Operating margin 14.2% 26.2% 13.7% NM NM -- 17.5% Capital expenditures 1,364 1,374 9 154 -- 258 3,159 Total assets 6,445 7,044 727 199 628 3,958 19,001 1997 Net operating revenues $ 8,684 $5,294 $1,454 $-- $ -- $ (868) $14,564 Intercompany revenues 3 294 571 -- -- (868) -- Depreciation and amortization 748 946 9 2 9 (1) 1,713 Operating expenses 7,659 3,902 1,275 5 84 (831) 12,094 Operating income (loss) 1,025 1,392 179 (5) (84) (37) 2,470 Operating margin 11.8% 26.3% 12.3% NM NM -- 17.0% Capital expenditures 1,223 1,270 11 46 17 142 2,709 Total assets 6,828 7,933 601 50 228 941 16,581
NM = Not meaningful (/1/)The "other ventures" segment's equity in losses of affiliates totaled $89 million in 1999, $51 million in 1998 and $10 million in 1997. (/2/)Significant intercompany eliminations consist of local access charged to the long distance division, equipment purchases from the product distribution business and interexchange services provided to the local division. More than 95% of the FON Group's s revenues are from domestic customers located within the United States. Revenues of one customer represents approximately 4% of the FON Group's net operating revenues in 1999 and 5% in 1998 and 1997. II-23 Supplemental Cash Flows Information The FON Group's cash paid for interest and income taxes was as follows: - ------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------ (millions) Interest (net of capitalized interest) $ 82 $217 $198 -------------- Income taxes $633 $327 $366 --------------
Noncash activities for the FON Group included the following: - -------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------- (millions) Debt assumed in the broadband fixed wireless acquisitions $575 $-- $-- -------------- Tax benefit from stock options exercised $223 $ 49 $ 26 -------------- Stock received for stock options exercised $ 78 $ 18 $ 7 -------------- Noncash extinguishment of debt $ 78 $-- $-- -------------- Common stock issued under Sprint's ESPP $ 72 $ 95 $ 5 -------------- Capital lease obligations $ 41 $-- $ 30 --------------
Intergroup Investments and Transactions Sprint FON Group Investments in the Sprint PCS Group The following table reflects the FON Group's noncurrent investments in the PCS Group, which have been eliminated in Sprint's consolidated financial statements: - -----------------------------------------------------
1999 1998 - ----------------------------------------------------- (millions) Common and preferred intergroup interest $ 262 $ 311 Long-term loans -- 180 Investment in debt securities 169 165 - ----------------------------------------------------- Total $ 431 $ 656 -----------
Common Intergroup Interest The FON Group received a 1% intergroup interest in the PCS Group at the time of the PCS Restructuring and Recapitalization. This interest represented 4.5 million PCS shares and included 2.7 million shares held in treasury by the FON Group. During 1999, PCS shares were issued to FON Group employees, reducing the FON Group's interest in the PCS Group. 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. 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 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 FON Group earned intergroup interest income of $16 million in 1999, $15 million in 1998 and $24 million in 1997 related to the FON Group's investment in PCS Group debt securities and advances to the PCS Group. These amounts are included in "Other income, net" in the Sprint FON Group Combined Statements of Operations. The difference between Sprint's actual interest costs and the interest costs charged to the PCS Group on allocated debt totaled $157 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 2 for a more detailed description of how Sprint allocates interest expense to each of the Groups. Intergroup Transactions The PCS Group is using the long distance division as its interexchange carrier and purchasing wholesale long distance for resale to its customers. Additionally, the FON Group provided the PCS Group with telemarketing services and various other goods and services. Charges to the PCS Group for these items totaled $280 million in 1999 and $21 million from the PCS Restructuring date to year-end 1998. The FON Group provided management, printing, mailing and warehousing services to the PCS Group. Charges to the PCS Group for these services totaled $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 division as its interexchange carrier. II-24 Charges to Sprint PCS for these services totaled $104 million in 1998 and $61 million in 1997. Sprint provided management, printing, mailing and warehousing services to Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in 1998 and $11 million in 1997. 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 and $21 million in 1997, which was repaid in the 1999 first quarter. - -------------------------------------------------------------------------------- 13. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires all derivatives to be recorded on the balance sheet as either assets or liabilities and be measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative was used and whether it qualifies for hedge accounting. When adopted in January 2001, this statement is not expected to have a material impact on the FON Group's combined financial statements. - -------------------------------------------------------------------------------- 14. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Quarter --------------------------- 1999 1st 2nd 3rd 4th - ------------------------------------------------------------------------- (millions, except per share data) Net operating revenues(/1/) $4,107 $4,204 $4,298 $4,407 Operating income 737 736 726 731 Income from continuing operations(/2/) 434 452 419 431 Net income 406 386 359 416 Earnings per common share from continuing operations(/3/) Diluted 0.49 0.51 0.48 0.49 Basic 0.50 0.52 0.49 0.50 - ------------------------------------------------------------------------- Quarter --------------------------- 1998 1st 2nd 3rd 4th - ------------------------------------------------------------------------- (millions, except per share data) Net operating revenues(/1/) $3,827 $3,882 $3,977 $4,078 Operating income 683 692 713 672 Income from continuing operations(/2/),(/4/) 394 401 426 454 Net income(/4/) 352 364 415 404 Pro forma earnings per common share from continuing operations(/3/),(/5/) Diluted 0.45 0.45 0.48 0.52 Basic 0.46 0.46 0.49 0.53 - -------------------------------------------------------------------------
(/1/)Certain reclassifications were made from net operating revenues to operating expenses from amounts reported in 1999 reports on Form 10-Q to conform to current year presentation. These reclassifications had no impact on operating income as previously reported. (/2/)Quarterly income from continuing operations has been adjusted from amounts reported in 1999 reports on Form 10-Q to reflect the presentation of the equity investment in Global One as a discontinued operation for all periods presented. (/3/)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. (/4/)In the 1998 fourth quarter, 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. (/5/)Pro forma earnings per share assumes the FON shares created in the Recapitalization existed for all periods presented. - -------------------------------------------------------------------------------- 15. Subsequent Events (Unaudited) - -------------------------------------------------------------------------------- In February 2000, Sprint's Board of Directors declared dividends of 12.5 cents per share on the Sprint FON common stock and Class A common stock. Dividends will be paid March 30, 2000. II-25 SPRINT FON GROUP SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999, 1998 and 1997 - ----------------------------------------------------------------------------
Additions ---------------- Balance Charged Charged Balance Beginning to to Other Other End of of Year Income Accounts Deductions Year - ---------------------------------------------------------------------------- (millions) 1999 Allowance for doubtful accounts $175 $383 $ 3 $(333)(/1/) $228 ---------------------------------------------------- Valuation allowance-- deferred income tax assets $ 4 $-- $179(/2/) $ -- $183 ---------------------------------------------------- 1998 Allowance for doubtful accounts $147 $365 $ 3 $(340)(/1/) $175 ---------------------------------------------------- Valuation allowance-- deferred income tax assets $ 12 $-- $-- $ (8) $ 4 ---------------------------------------------------- 1997 Allowance for doubtful accounts $117 $389 $ 4 $(363)(/1/) $147 ---------------------------------------------------- Valuation allowance-- deferred income tax assets $ 14 $ 3 $-- $ (5) $ 12 ----------------------------------------------------
(/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-26 [LOGO OF SPRINT] Annex III Sprint PCS Group Combined Financial Information SELECTED FINANCIAL DATA Sprint PCS Group - ------------------------------------------------------------------------------
1999 1998(/1/) 1997(/1/) 1996(/1/) 1995(/1/) - ------------------------------------------------------------------------------ (millions, except per share data) Results of Operations - ------------------------------------------------------------------------------ Net operating revenues $ 3,180 $ 1,225 $ -- $ -- $-- Operating loss(/2/) (3,237) (2,570) (19) (1) -- Other partners' loss in Sprint PCS -- 1,251 -- -- -- Equity in loss of Sprint PCS -- -- (660) (192) (31) Loss before extraordinary items(/2/) (2,481) (1,090) (419) (120) (20) Net loss(/2/) (2,502) (1,121) (419) (120) (20) Loss per Share(/3/),(/4/) - ------------------------------------------------------------------------------ Diluted and basic loss per common share before extraordinary items $ (2.71) $ (2.21) $(1.98) NA NA Financial Position - ------------------------------------------------------------------------------ Total assets $17,924 $15,165 $1,703 $1,260 $974 Property, plant and equipment, net 7,996 6,535 187 -- -- Investment in Sprint PCS -- -- 784 1,176 974 Total debt 11,489 8,195 -- -- -- Group equity 3,320 3,755 1,386 1,188 966 Cash Flow Data - ------------------------------------------------------------------------------ Net cash provided (used) by operating activities $(1,692) $ (159) $ 38 $ (1) $-- Capital expenditures 2,580 1,072 154 -- -- PCS license purchases -- -- 460 84 -- Investments in Sprint PCS -- 33 406 298 911
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 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 December 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. As a result, diluted and basic loss per common share have been restated for periods before this stock split. (/4/)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 domestic 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 1999, the PCS Group, together with affiliates, operated PCS systems in over 360 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches nearly 190 million people. The PCS Group provides nationwide service through: . operating its own digital network in major U.S. metropolitan areas, . affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, . roaming on other providers' analog cellular networks using dual- band/dual-mode handsets, and . roaming on other providers' digital PCS networks that use code division multiple access. The wireless industry typically generates a significantly higher number of subscriber additions and handset sales in the fourth quarter of each year versus 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 - -------------------------------------------------------------------------------- - -----------------------------------------------
1999 1998 1997 - ----------------------------------------------- (millions) Net operating revenues $ 3,180 $ 1,225 $-- Operating expenses 6,417 3,795 19 - ----------------------------------------------- Operating loss $(3,237) $(2,570) $(19) --------------------------
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. Before 1998, Sprint's investment in Sprint PCS was accounted for using the equity method. Operating expenses in 1998 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. Management has continued supporting these research and development projects and believes the PCS Group has a reasonable chance of successfully completing the projects. These projects are intended to address new and emerging markets within the PCS wireless communications industry, such as the rapid adoption of the Internet and the rapid convergence of voice, data, and video. The failure of any particular individual project in-process would not materially impact the PCS Group's financial condition, results of operations or cash flows. 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 28% of net operating revenues 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 and 1997 on a pro forma basis and assumes the PCS Restructuring and the write-off of acquired in- process research and development costs occurred at the beginning of 1997. - -------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------------- (millions) Net operating revenues $ 3,180 $ 1,225 $ 258 Operating expenses Costs of services and products 3,150 1,758 850 Selling, general and administrative 1,744 1,069 490 Depreciation and amortization 1,523 1,038 1,021 Acquired in-process research and development costs -- -- 179 - ------------------------------------------------------------------------------- Total operating expenses 6,417 3,865 2,540 - ------------------------------------------------------------------------------- Operating loss $(3,237) $(2,640) $(2,282) ----------------------------------------------------------- Capital expenditures (including capital lease obligations) $ 2,616 $ 2,904 $ 2,278 -----------------------------------------------------------
III-2 Net Operating Revenues - --------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------- Customers at year-end (millions) 5.7 2.6 0.9 ------------------------------- Average monthly service revenue per user $ 54 $ 56 $ 49 -------------------------------
Net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges and usage charges. The PCS Group's net operating revenues were $3.2 billion in 1999, $1.2 billion in 1998 and $258 million in 1997. The 1999 increase mainly reflects the launch of nearly 60 new markets and the addition of 3.1 million customers. The 1998 increase reflects the launch of nearly 90 new markets and the addition of 1.7 million customers. Average monthly service revenue per user (ARPU) has decreased from 1998 due to a wider acceptance of lower-priced, bundled minute rate plans. Approximately 20% of 1999 and 1998 net operating revenues, and nearly half of 1997 revenues, were from sales of handsets and accessories. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Average monthly customer churn rates have remained consistent during 1999 and 1998 in the mid 3% range. 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 $1.4 billion in 1999 and $908 million in 1998 driven by the significant growth in customers and the expanded market coverage. 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 $675 million in 1999 and $579 million in 1998 reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Acquisition costs per gross customer addition, including equipment subsidies and marketing costs, have improved from the high-$500 range in 1998 to the low- $400 range 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 decreased 36% in 1999 compared to 1998. The improvements reflect good expense management and scale benefits resulting from the increased customer base. Depreciation and amortization expense, which increased $485 million in 1999 and $17 million in 1998, consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. The increase in depreciation and amortization expense in 1999 reflects amortization of intangible assets acquired in the PCS Restructuring and the Cox PCS purchase as well as depreciation on an increased property base. The increase in 1998 reflects depreciation on an increased property base. - -------------------------------------------------------------------------------- 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 and intergroup borrowings have been excluded so as not to distort the PCS Group's effective interest rates on long-term debt. - --------------------------------------------------------------
1999 1998 - -------------------------------------------------------------- Effective interest rate on long-term debt (/1/) 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. The decrease in the PCS Group's effective interest rate 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 $157 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 included in the effective interest rates above. Equity in Sprint PCS Losses 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. Prior to the PCS Restructuring, the PCS Group's ownership interest in Sprint PCS was accounted for using the equity method. The PCS Group's share of losses from Sprint PCS was $660 million in 1997. Other Income, Net Other income for 1999 mainly includes a gain on the sale of property totaling $25 million and $13 million from the FON Group's interest in the PCS Group's loss. III-3 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 35.9% in 1999, 33.2% in 1998 and 38.3% in 1997. See Note 5 of Notes to Combined Financial Statements for the differences that caused the effective income tax rates to vary from the statutory federal rate. Extraordinary Items, Net 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 - -------------------------------------------------------------------------------- - --------------------------------
1999 1998 - -------------------------------- (millions) Combined assets $17,924 $15,165 ---------------
Net property, plant and equipment increased $1.5 billion in 1999 reflecting capital expenditures to support the PCS network buildout, partly offset by 1999 depreciation. Net intangibles increased $850 million mainly reflecting goodwill resulting from the 1999 acquisition of the remaining interest in Cox PCS, partly offset by 1999 amortization. See "Liquidity and Capital Reserves" 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. In 1997 and prior to the PCS Restructuring date in 1998, the PCS Group's cash flows include SprintCom's cash flows and treat the investment in Sprint PCS as an equity method investment. Operating Activities - ------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------ (millions) Cash flows provided (used) by operating activities $(1,692) $(159) $38 --------------------------------------------------
Cash flows used by operating activities increased $1.5 billion in 1999 and $197 million in 1998. The 1999 increase mainly reflects increased operating losses for the PCS Group and an increase in working capital. The 1998 increase mainly reflects increased operating losses, partly offset by a decrease in working capital. Investing Activities - -----------------------------------------------------------------
1999 1998 1997 - ----------------------------------------------------------------- (millions) Cash flows used by investing activities $(2,509) $(861) $(1,020) --------------------------------------------
The PCS Group's main use of cash in 1999 and 1998 was to fund capital expenditures for the PCS network buildout. In 1997, the PCS Group used cash to acquire PCS licenses and to fund the initial operating losses of Sprint PCS. Capital expenditures for the PCS Group totaled $2.6 billion in 1999, $1.1 billion in 1998 and $154 million in 1997. Financing Activities - ---------------------------------------------------------------
1999 1998 1997 - --------------------------------------------------------------- (millions) Cash flows provided by financing activities $4,044 $1,193 $982 -----------------------------------------
In 1999, the PCS Group received $5.9 billion of proceeds from long-term debt allocated from Sprint and $905 million of proceeds from stock issuances. These proceeds were mainly used to repay existing debt and to fund the PCS Group's capital expenditures and operating losses. In 1998, the PCS Group used their allocated portion of the proceeds from Sprint's $5.0 billion debt offering mainly to repay existing debt and to fund capital expenditures. In 1997, the PCS Group used capital provided by the FON Group mainly to fund its investing activities. 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 make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses in the near future. 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 accrued current benefits under the agreement totaling $887 million in 1999 and $190 million in 1998 and received related payments from the FON Group totaling $764 million in 1999 and $20 million in 1998. The remaining $293 million will be paid by the FON Group during the first half of 2000. See Note 2 of Notes to Combined Financial Statements, "Allocation of Federal and State Income Taxes," for more details. Capital Requirements The PCS Group's 2000 investing activities, mainly consisting of capital expenditures, are expected to be III-4 between $2.4 and $2.6 billion. Additional funds will be required to fund expected operating losses, working capital and debt service requirements of the PCS Group. PCS preferred stock dividend payments are expected to total $15 million, including payments to the FON Group for its preferred intergroup interest. See Note 10 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, a recent FCC order 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 licensees must build networks offering coverage to 1/3 of the population within five years and 2/3 within 10 years. 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. 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 and/or file competing 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 phone companies must program their networks to allow customers to change service providers without changing phone numbers. 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, CMRS providers must be able to offer their own customers number portability in their switches in the 100 largest metropolitan areas. They must also be able to support nationwide roaming. 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 to be completed in phases by October 2001. 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 carriers to meet certain "assistance capability requirements" by the end of June 2000. In 1997, telecommunications industry standard-setting organizations agreed to a joint standard to implement CALEA's capability requirements. The PCS Group believes it will be in compliance with CALEA requirements. 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, certain FCC environmental regulations may cause certain cell site locations to come under National Environmental Policy Act (NEPA) regulation. NEPA requires carriers to meet certain land use and radio frequency standards. III-5 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. The PCS Group's 1999 results contained assessments for 1999. 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." - -------------------------------------------------------------------------------- Year 2000 Issue - -------------------------------------------------------------------------------- The PCS Group successfully completed its Year 2000 readiness work and passed through the January 1, 2000 rollover event while encountering no customer- affecting outages or business interruptions. Since the inception of the PCS Group's Year 2000 readiness program through December 31, 1999, the PCS Group incurred approximately $45 million of costs associated with its Year 2000 readiness program. The PCS Group does not expect to incur any significant additional expenditures related to the Year 2000 issue. - -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- See Note 11 of Notes to Combined Financial Statements for a discussion of a recently issued accounting pronouncement. III-6 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-7 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 2) as of December 31, 1999 and 1998, and the related combined statements of operations, comprehensive loss and cash flows for each of the three years in the period ended December 31, 1999. 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 or 1997 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 assets of $2.7 billion as of December 31, 1998 and revenues of $1.2 billion for the year then ended which we did not audit. The PCS Group's equity in the net loss of Sprint Spectrum Holding Company, L.P. is stated at $625 million for the year ended December 31, 1997. 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 assets and revenues and the 1997 equity in the net loss which we did not audit, 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Sprint PCS Group at December 31, 1999 and 1998, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, 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 more fully discussed in Note 2, 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, 2000 III-8 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 balance sheets of Sprint Spectrum Holding Company, L.P. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and cash flows for the two years in the period ended December 31, 1998. Our audits also included the 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sprint Spectrum Holding Company, L.P. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the two years ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. Deloitte & Touche LLP Kansas City, Missouri February 2, 1999 III-9 COMBINED STATEMENTS OF OPERATIONS Sprint PCS Group (millions) - ------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------ Net Operating Revenues $ 3,180 $ 1,225 $ -- - ------------------------------------------------------------------------------ Operating Expenses Costs of services and products 3,150 1,758 -- Selling, general and administrative 1,744 1,069 19 Depreciation and amortization 1,523 789 -- Acquired in-process research and development costs -- 179 -- - ------------------------------------------------------------------------------ Total operating expenses 6,417 3,795 19 - ------------------------------------------------------------------------------ Operating Loss (3,237) (2,570) (19) Interest expense (698) (491) -- Other partners' loss in Sprint PCS -- 1,251 -- Equity in loss of Sprint PCS -- -- (660) Minority interest 20 145 -- Other income, net 46 34 -- - ------------------------------------------------------------------------------ Loss before income tax benefit and extraordinary items (3,869) (1,631) (679) Income tax benefit 1,388 541 260 - ------------------------------------------------------------------------------ Loss before Extraordinary Items (2,481) (1,090) (419) Extraordinary items, net (21) (31) -- - ------------------------------------------------------------------------------ Net Loss (2,502) (1,121) (419) Preferred stock dividends paid (15) (2) -- - ------------------------------------------------------------------------------ Loss applicable to common stock $(2,517) $(1,123) $ (419) ------------------------- Basic and Diluted Loss per Common Share(/1/),(/2/) Continuing operations $ (2.71) $ (2.21) $(1.98) Extraordinary items (0.02) (0.04) -- - ------------------------------------------------------------------------------ Total $ (2.73) $ (2.25) $(1.98) ------------------------- Basic and diluted weighted average common shares 920.4 831.6 831.6 -------------------------
(/1/)Basic and diluted loss per common share and weighted average common shares for 1998 and 1997 are 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 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. (/2/)In February 2000, 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-10 COMBINED STATEMENTS OF COMPREHENSIVE LOSS Sprint PCS Group (millions) - --------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------- Net Loss $(2,502) $(1,121) $(419) - -------------------------------------------------------------------- Other Comprehensive Income Unrealized holding gains on securities 8 -- -- Income tax expense (3) -- -- - -------------------------------------------------------------------- Net unrealized holding gains on securities 5 -- -- - -------------------------------------------------------------------- Total other comprehensive income 5 -- -- - -------------------------------------------------------------------- Comprehensive Loss $(2,497) $(1,121) $(419) ------------------------
See accompanying Notes to Combined Financial Statements. III-11 COMBINED BALANCE SHEETS Sprint PCS Group (millions) - -----------------------------------------------------------------------
December 31, 1999 1998 - ----------------------------------------------------------------------- Assets Current assets Cash and equivalents $ 16 $ 173 Accounts receivable, net of allowance for doubtful accounts of $57 and $11 572 333 Inventories 336 127 Prepaid expenses 89 60 Current tax benefit receivable from the FON Group 293 170 Other 9 19 - ----------------------------------------------------------------------- Total current assets 1,315 882 Property, plant and equipment Network equipment 5,817 3,999 Construction work in progress 1,692 1,607 Buildings and leasehold improvements 1,235 1,026 Other 667 356 - ----------------------------------------------------------------------- Total property, plant and equipment 9,411 6,988 Accumulated depreciation (1,415) (453) - ----------------------------------------------------------------------- Net property, plant and equipment 7,996 6,535 Intangible assets Goodwill 4,522 3,313 PCS licenses 3,060 3,037 Customer base 726 681 Microwave relocation costs 377 355 Other 54 45 - ----------------------------------------------------------------------- Total intangible assets 8,739 7,431 Accumulated amortization (551) (93) - ----------------------------------------------------------------------- Net intangible assets 8,188 7,338 Other assets 425 410 - ----------------------------------------------------------------------- Total $17,924 $15,165 ----------------- Liabilities and Group Equity Current liabilities Current maturities of long-term debt $ 185 $ 348 Accounts payable 450 371 Construction obligations 1,039 979 Accrued taxes 130 93 Payables to the FON Group 136 101 Other 638 534 - ----------------------------------------------------------------------- Total current liabilities 2,578 2,426 Long-term debt and capital lease obligations 11,304 7,847 Deferred credits and other liabilities Deferred income taxes 582 1,013 Other 140 124 - ----------------------------------------------------------------------- Total deferred credits and other liabilities 722 1,137 Group equity 3,320 3,755 - ----------------------------------------------------------------------- Total $17,924 $15,165 -----------------
See accompanying Notes to Combined Financial Statements. III-12 COMBINED STATEMENTS OF CASH FLOWS Sprint PCS Group (in millions) - -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- Operating Activities Net loss $(2,502) $(1,121) $ (419) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Extraordinary items, net 21 31 -- Equity in net losses of affiliates -- 840 660 Acquired in-process research and development costs -- 179 -- Depreciation and amortization 1,523 121 -- Deferred income taxes (553) 68 176 Current tax benefit used by the FON Group -- (460) (436) Net gains on sales of assets (25) -- -- Changes in assets and liabilities, excluding the PCS Restructuring: Accounts receivable, net (241) (1) -- Inventories and other current assets (237) -- (3) Accounts payable and other current liabilities 363 386 58 Current tax benefit receivable from the FON Group (123) (170) -- Affiliate receivables and payables, net 35 101 -- Noncurrent assets and liabilities, net 13 (102) 1 Other, net 34 (31) 1 - ----------------------------------------------------------------------------- Net cash provided (used) by operating activities (1,692) (159) 38 - ----------------------------------------------------------------------------- Investing Activities Capital expenditures (2,580) (1,072) (154) Proceeds from sales of assets 153 -- -- Cash acquired in the PCS Restructuring -- 244 -- Investments in Sprint PCS -- (33) (406) PCS licenses purchased -- -- (460) Other, net (82) -- -- - ----------------------------------------------------------------------------- Net cash used by investing activities (2,509) (861) (1,020) - ----------------------------------------------------------------------------- Financing Activities Proceeds from long-term debt 5,901 4,428 -- Payments on long-term debt (2,734) (3,434) -- Proceeds from common stock issued 688 -- -- Proceeds from sales of shares to FT and DT 217 85 -- Dividends paid (15) -- -- Advances from the FON Group -- 64 -- Equity transfer (to) from the FON Group -- (340) 547 Current tax benefit used by the FON Group -- 460 435 Other, net (13) (70) -- - ----------------------------------------------------------------------------- Net cash provided by financing activities 4,044 1,193 982 - ----------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents (157) 173 -- Cash and Equivalents at Beginning of Year 173 -- -- - ----------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 16 $ 173 $ -- --------------------------
See accompanying Notes to Combined Financial Statements. III-13 NOTES TO COMBINED FINANCIAL STATEMENTS Sprint PCS Group - -------------------------------------------------------------------------------- 1. General - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with MCI WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged for $76 of MCI WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. The merger is subject to the approvals of Sprint and MCI WorldCom shareholders as well as approvals from the Federal Communications Commission, the Justice Department, various state government bodies and foreign antitrust authorities. The companies anticipate that the merger will close in the second half of 2000. 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 S.A. (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 combined 20% voting power in Sprint (Top-up). The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. - -------------------------------------------------------------------------------- 2. Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- 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 historical balance sheets, results of operations and cash flows for each of the Groups, with all significant intragroup amounts and transactions eliminated, . an allocation of Sprint's debt, including the related effects on results of operations and cash flows, and . an allocation of corporate overhead 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 other Group's stock. Net losses of either Group, and dividends or distributions on, or repurchases of, PCS stock or FON stock will reduce Sprint funds legally available for dividends on both Groups' stock. As a result, the PCS Group combined financial statements should be read along with Sprint's consolidated financial statements and the FON Group's combined financial statements. 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. III-14 The PCS Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current- year presentation. These reclassifications had no effect on the results of operations or group equity as previously reported. Classification of Operations The PCS Group includes Sprint's domestic wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide nationwide service using a single frequency and a single technology. At year-end 1999, the PCS Group, together with affiliates, operated PCS systems in over 360 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 $887 million in 1999 and $190 million in 1998. 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. The PCS Group records operating revenues net of an estimate for uncollectible accounts. 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 for the PCS Group were included in accounts payable. These amounts totaled $30 million at year-end 1999 and $73 million at year-end 1998. 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 III-15 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 $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 $24 million for 1997 and was contributed to, and will be amortized by, the PCS Group. Sprint also capitalized interest costs related to its investment in Sprint PCS until July 1997 when Sprint PCS emerged from the development stage. This capitalized interest, totaling $142 million, 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 $116 million at year-end 1999 and $11 million at year-end 1998. 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 $130 million at year-end 1999 and $51 million at year-end 1998. 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 $277 million at year-end 1999 and $23 million at year-end 1998. 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 $15 million at year-end 1999 and $6 million at year-end 1998. 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. 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. 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 1999 and 1998. As a result, diluted loss per share equaled basic loss per share. The PCS Group's basic and diluted loss per common share 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," to its stock option and employee stock purchase plans. Had the PCS Group applied SFAS 123, pro forma net loss would have been $2,578 million in III-16 1999 and would not have changed materially from the Recapitalization date through year-end 1998. See Note 10 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 $5 million in 1999 and $1 million in 1998 related to these performance-based stock options. - -------------------------------------------------------------------------------- 3. 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. 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 (i) the markets for each product; (ii) the completion costs for projects; (iii) the expected cash flows attributable to the IPR&D projects; (iv) the risks related to achieving these cash flows; and (v) 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. III-17 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 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. Pro forma results were as follows: - --------------------------------------------------------------------------------
1998 1997 - --------------------------------------------------- (millions, except per share data) Net operating revenues $ 1,225 $ 258 ---------------- Loss before extraordinary items $(1,847) $(1,645) ---------------- Net loss $(1,878) $(1,645) ---------------- Basic and diluted loss per common share: Loss before extraordinary items $ (2.21) $ (1.98) Extraordinary items (0.04) -- - --------------------------------------------------- Total $ (2.25) $ (1.98) ----------------
- -------------------------------------------------------------------------------- 4. 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 $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 $5 million in 1999. 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 $10 million of expense in 1999 for Sprint's matching contributions to the Sprint defined contribution plans. At year-end 1999, Sprint's defined contribution plans held 33 million FON shares and 27 million PCS shares (on a post-split basis). 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 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 $1 million in 1999. - -------------------------------------------------------------------------------- 5. Income Taxes - -------------------------------------------------------------------------------- Income tax benefits allocated to continuing operations consisted of the following: - --------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------- (millions) Current income tax benefit Federal $ (810) $(579) $(415) State (25) (30) (21) - ------------------------------------------------------------- Total current (835) (609) (436) - ------------------------------------------------------------- Deferred income tax expense (benefit) Federal (479) 83 188 State (74) (15) (12) - ------------------------------------------------------------- Total deferred (553) 68 176 - ------------------------------------------------------------- Total $(1,388) $(541) $(260) ---------------------------------------
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: - --------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------------- (millions) Income tax benefit at the statutory rate $ (1,354) $ (571) $ (238) Effect of: State income taxes, net of federal income tax effect (64) (29) (21) Write-off of in-process research and development costs -- 63 -- Goodwill amortization 34 3 -- Other, net (4) (7) (1) - ------------------------------------------------------------------------------- Income tax benefit $ (1,388) $ (541) $ (260) ---------------------------------------------------------- Effective income tax rate 35.9% 33.2% 38.3% ----------------------------------------------------------
III-18 Income tax expense (benefit) allocated to other items was as follows: - --------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------- (millions) Extraordinary items $(11) $(20) $-- Unrealized holding gains on investments(/1/) 3 -- -- Stock ownership, purchase and options arrangements(/1/) (31) -- -- - -------------------------------------------------------------------------
(/1/)These amounts have been recorded directly to "Group equity." 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 1999 and 1998, along with the income tax effect of each, were as follows: - --------------------------------------------------------------------------------
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 ----------------------
- --------------------------------------------------------------------------------
1998 Deferred Income Tax ---------------------- Assets Liabilities - ------------------------------------------------- (millions) Property, plant and equipment $-- $ 542 Intangibles -- 454 Capitalized interest -- 103 Reserves and allowances 22 -- Operating loss carryforwards 295 -- Tax credit carryforwards 27 -- Other, net 5 -- - ------------------------------------------------- 349 1,099 Less valuation allowance 245 -- - ------------------------------------------------- Total $104 $1,099 ----------------------
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 $38 million in 1999. 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 1999, the PCS Group had federal operating loss carryforwards of approximately $2.3 billion and state operating loss carryforwards of approximately $5.5 billion. Related to these loss carryforwards are federal tax benefits of $787 million and state tax benefits of $336 million. In addition, the PCS Group had available for income tax purposes federal alternative minimum tax credit carryforwards of $49 million, state alternative minimum tax credit carryforwards of $5 million, federal alternative minimum tax net operating loss carryforwards of $933 million, and state alternative minimum tax net operating loss carryforwards of $359 million. The loss carryforwards expire in varying amounts through 2019. III-19 - -------------------------------------------------------------------------------- 6. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint's consolidated long-term debt and capital lease obligations at year-end was as follows: - --------------------------------------------------------------------------------
1999 1998 ----------------------------- --------------------------- Sprint Sprint Sprint Sprint FON PCS FON PCS Maturing Group Group Consolidated Group Group Consolidated - -------------------------------------------------------------------------------------------- (millions) Senior notes 5.7% to 6.9%(/1/) 2001 to 2028 $ 1,105 $ 8,145 $ 9,250 $1,059 $ 3,941 $ 5,000 8.1% to 9.8% 2000 to 2003 632 -- 632 632 -- 632 11.0% to 12.5%(/2/) 2001 to 2006 -- 734 584 -- 699 565 Debentures and notes 5.8% to 9.6% 2000 to 2022 565 -- 565 565 -- 565 Notes payable and commercial paper -- 294 1,971 2,265 472 274 746 First mortgage bonds 2.0% to 9.9% 1999 to 2025 1,295 -- 1,295 1,312 -- 1,312 Capital lease obligations 5.2% to 14.0% 1999 to 2008 69 486 555 32 452 484 Revolving credit facilities Variable rates 2002 to 2006 900 -- 900 -- 1,800 1,800 Other(/2/),(/3/) 2.0% to 10.0% 1999 to 2007 573 153 726 370 1,029 1,085 - -------------------------------------------------------------------------------------------- 5,433 11,489 16,772 4,442 8,195 12,189 Less: current maturities(/2/) 902 185 1,087 33 348 247 - -------------------------------------------------------------------------------------------- Long-term debt and capital lease obligations(/2/) $ 4,531 $ 11,304 $15,685 $4,409 $ 7,847 $11,942 ---------------------------------------------------------
(/1/)These borrowings were incurred by Sprint and allocated to the applicable Group. Sprint's weighted average interest rate related to these borrowings was 6.6% at year-end 1999 and 6.4% at year-end 1998. The weighted average interest rate related to the borrowings allocated to the PCS Group was approximately 8.7% at year-end 1999 and 8.5% at year-end 1998. See Note 2 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 $150 million at year-end 1999 and $134 million at year-end 1998. In addition, the PCS Group had other long-term debt payable to the FON Group totaling $314 million at year-end 1998, including $134 million classified as current. (/3/)Includes notes with a market value of $316 million at year-end 1999 and $358 million at year-end 1998 recorded by the FON Group that may be exchanged at maturity for SBC Communications, Inc. (SBC) common shares owned by the FON Group or for cash. Based on SBC's closing price, had the notes matured at year-end 1999, they could have been exchanged for 6.5 million SBC shares. At year-end 1999, Sprint held 7.5 million SBC shares, which have been included in "Investments in equity securities" in the FON Group's Combined Balance Sheets. III-20 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) 2000 $ 902 $ 185 $1,087 2001 877 289 1,096 2002 1,339 59 1,398 2003 373 1,058 1,431 2004 144 1,042 1,186 - --------------------------
Sprint Short-term Borrowings Sprint had bank notes payable totaling $670 million at year-end 1999 and $454 million at year-end 1998. In addition, Sprint had commercial paper borrowings totaling $1.6 billion at year-end 1999 and $292 million at year-end 1998. 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, through unused credit facilities, to refinance these borrowings on a long-term basis. In 1998, Sprint replaced its previous $1.5 billion credit facility with new facilities with syndicates of domestic and international banks. The new facilities totaled $5.0 billion and expire in 2000 and 2003. Commercial paper and certain bank notes payable 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 1999, Sprint had total unused lines of credit of $3.5 billion. Bank notes outstanding had weighted average interest rates of 6.3% at year-end 1999 and 5.7% at year-end 1998. The weighted average interest rate of commercial paper was 6.4% at year-end 1999 and 5.8% at year-end 1998. Long-term Debt In the 1999 third quarter, Sprint filed a shelf registration statement with the SEC covering $4.0 billion of senior unsecured debt securities. At year-end 1999, Sprint had issued $750 million of debt securities under the shelf. These securities have interest rates ranging from 6.4% to 6.5% and mature in 2001. In August 1999, Sprint incurred other borrowings totaling $250 million which mature in 2002 and have variable interest rates. At year-end 1999, the notes had an interest rate of 6.1%. In June 1999, Sprint entered into a $1.0 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 1999, Sprint had borrowed $900 million with a weighted average interest rate of 6.4% under this agreement. These borrowings mature in 2002. In May 1999, Sprint issued $3.5 billion of senior notes registered with the SEC. These notes have maturities ranging from 5 to 20 years and interest rates ranging from 5.9% to 6.9%. In 1998, Sprint issued $5.0 billion of senior notes registered with the SEC. These notes have maturities ranging from 5 to 30 years and interest rates ranging from 5.7% to 6.9%. Sprint PCS Group In 1999, Sprint allocated $5.9 billion of debt to the PCS Group. This debt was mainly used to repay debt, to fund new capital investments and to fund operating losses and working capital requirements. See Note 2 for a more detailed description of how Sprint allocates debt to the Groups. 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. The debt was repaid with a portion of the proceeds from Sprint's $5.0 billion debt offering in November 1998. Other Sprint, including the PCS Group, had complied with all restrictive or financial covenants relating to its debt arrangements at year-end 1999. - -------------------------------------------------------------------------------- 7. Group Equity - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1999 1998 1997 - ------------------------------------------------------------------- (millions) Beginning balance $ 3,755 $ 1,386 $1,188 Net loss (2,502) (1,121) (419) Dividends (15) (2) -- Common stock issued 2,064 3,285 -- Tax benefit from stock options exercised 31 -- -- Preferred stock issued -- 247 -- Preferred intergroup interest -- 279 -- Contributions from the FON Group -- 146 1,052 Equity transfers to the FON Group -- (460) (435) Other, net (13) (5) -- - ------------------------------------------------------------------- Ending balance $ 3,320 $ 3,755 $1,386 ------------------------
III-21 - -------------------------------------------------------------------------------- 8. 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. Various suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the PCS Group combined financial statements. Operating Leases The PCS Group's minimum rental commitments at year-end 1999 for all noncancelable operating leases, consisting mainly of leases for cell and switch sites and office space, are as follows: - --------------------------------------------------------------------------------
(millions) 2000 $253 2001 204 2002 144 2003 81 2004 35 Thereafter 74 - ----------------------
The PCS Group's gross rental expense totaled $315 million in 1999, $256 million in 1998 and $4 million in 1997. 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. - -------------------------------------------------------------------------------- 9. 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 1999 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 1999 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: - --------------------------------------------------------------------------------
1999 ------------------ Estimated Carrying Fair Amount Value - ---------------------------------------------------------------- (millions) Cash and equivalents $ 16 $ 16 Investments in equity securities 9 9 Long-term debt and capital lease obligations 11,489 11,054 - ----------------------------------------------------------------
- --------------------------------------------------------------------------------
1998 ------------------ Estimated Carrying Fair Amount Value - ---------------------------------------------------------------- (millions) Cash and equivalents $ 173 $ 173 Long-term debt and capital lease obligations 8,195 8,385 - ----------------------------------------------------------------
The carrying amounts of the PCS Group's cash and equivalents approximate fair value at year-end 1999 and 1998. 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 1999, the remaining unamortized deferred loss totaled $67 million. - -------------------------------------------------------------------------------- 10. Additional Financial Information - -------------------------------------------------------------------------------- Supplemental Cash Flows Information The PCS Group received cash from the FON Group of $764 million in 1999 and $20 million in 1998 related to income taxes. The PCS Group paid $632 million for interest (net of capitalized interest) in 1999. Noncash activities for the PCS Group included the following: - --------------------------------------------------------------------------------
1999 1998 - ------------------------------------------------------------------------------- (millions) Common stock issued for Cox PCS acquisition $1,146 $ -- ------------- Stock received for stock options exercised $ 40 $ -- ------------- Capital lease obligations $ 36 $ 460 ------------- Tax benefit from stock options exercised $ 31 $ -- ------------- Common stock issued to the Cable Partners to purchase Sprint PCS $ -- $3,200 ------------- Conversion of interim financing to preferred intergroup interest $ -- $ 279 ------------- Preferred stock issued to the Cable Partners in exchange for interim financing $ -- $ 247 -------------
III-22 See Note 3 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 noncurrent investments in the PCS Group, which have been eliminated in Sprint's consolidated financial statements: - --------------------------------------------------------------------------------
1999 1998 - ----------------------------------------------------- (millions) Common and preferred intergroup interest $ 262 $ 311 Long-term loans -- 180 Investment in debt securities 169 165 - ----------------------------------------------------- Total $ 431 $ 656 -----------
Common Intergroup Interest The FON Group received a 1% intergroup interest in the PCS Group at the time of the PCS Restructuring and Recapitalization. This interest represented 4.5 million PCS shares, and included 2.7 million shares held in treasury by the FON Group. During 1999, PCS shares were issued to FON Group employees, reducing the FON Group's interest in the PCS Group. 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 PCS Group Combined Statements of Operations. 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 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 PCS Group incurred intergroup interest expense of $16 million in 1999, $15 million in 1998 and $24 million in 1997 related to the FON Group's investment in PCS Group debt securities and advances from the FON Group. The difference between Sprint's actual interest costs and the interest costs charged to the PCS Group on allocated debt totaled $157 million in 1999 and $11 million in 1998. These amounts are included in "Interest expense" in the Sprint PCS Group Combined Statements of Operations. See Note 2 for a more detailed description of how Sprint allocates interest expense to each of the Groups. Intergroup Transactions The PCS Group is using the long distance division as its interexchange carrier and purchasing wholesale long distance for resale to its customers. Additionally, the FON Group provided the PCS Group with telemarketing services and various other goods and services. Charges to the PCS Group for these items totaled $280 million in 1999 and $21 million from the PCS Restructuring date to year-end 1998. The FON Group provided management, printing, mailing and warehousing services to the PCS Group. Charges to the PCS Group for these services totaled $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 and $24 million in 1997. 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 division as its interexchange carrier. Charges to Sprint PCS for these services totaled $104 million in 1998 and $61 million in 1997. Sprint provided management, printing, mailing and warehousing services to Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in 1998 and $11 million in 1997. 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 and $21 million in 1997, 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 28% of net operating revenues in 1999 and 25% in 1998. III-23 - -------------------------------------------------------------------------------- 11. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires all derivatives to be recorded on the balance sheet as either assets or liabilities and be measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative was used and whether it qualified for hedge accounting. When adopted in January 2001, this statement is not expected to have a material impact on the PCS Group's combined financial statements. III-24 - -------------------------------------------------------------------------------- 12. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Quarter -------------------------------------- 1999 1st 2nd 3rd 4th - ------------------------------------------------------------------------------- (millions, except per share data) Net operating revenues $ 604 $ 736 $ 844 $ 996 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(/3/) (0.71) (0.61) (0.65) (0.75) Quarter -------------------------------------- 1998 1st 2nd 3rd 4th - ------------------------------------------------------------------------------- (millions, except per share data) Net operating revenues $ 203 $ 265 $ 320 $ 437 Operating loss(/1/) (469) (507) (565) (1,029) Loss before extraordinary items(/1/) (145) (154) (175) (616) Net loss(/1/) (145) (154) (175) (647) Pro forma diluted and basic loss per common share before extraordinary items(/2/),(/3/) (0.48) (0.49) (0.52) (0.72)
(/1/)In the 1998 fourth quarter, the PCS Group recorded a nonrecurring charge to write off $179 million of acquired IPR&D costs related to the PCS Restructuring. This charge increased operating loss and loss before extraordinary items by $179 million. (/2/)Pro forma loss per share assumes the PCS Restructuring, Recapitalization, Top-up and the PCS Group's write-off of $179 million of acquired IPR&D 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. (/3/)On February 4, 2000, 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. III-25 SPRINT PCS GROUP SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999 and 1998
Additions ------------------------------- Balance Charged Charged Balance Beginning PCS to to Other Other End of of Year Restructuring Income Accounts Deductions Year - ----------------------------------------------------------------------------------------- (millions) 1999 Allowance for doubtful accounts $ 11 $-- $272 $ 4 $(230)(/3/) $ 57 ---------------------------------------------------------------- Valuation allowance-- deferred income tax assets $245 $-- $ 47 $-- $ (9) $283 ---------------------------------------------------------------- 1998 Allowance for doubtful accounts $-- $ 8(/1/) $ 14 $-- $ (11)(/3/) $ 11 ---------------------------------------------------------------- Valuation allowance-- deferred income tax assets $-- $229(/2/) $-- $ 16 $ -- $245 ----------------------------------------------------------------
There was no activity in the valuation and qualifying accounts for 1997. (/1/)As discussed in Note 3 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-26 EX-10.G 2 1990 STOCK OPTION PLAN 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 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 . . . . . 11 9.04 Manner of Withholding . . . . . . . . . . . . . . 11 10 Issuance of Shares on Exercise 12 10.01 Generally . . . . . . . . . . . . . . . . . . . 12 10.02 Elective Issuance of Restricted Shares . . . . 12 i 10.03 Mandatory Issuance of Restricted Shares............................ 12 10.04 Issuance of Restricted Shares Not Available to Transferred Options................................................ 13 10.05 Terms of Restricted Shares Issued on Exercise...................... 13 11 Reload Rights......................................................... 15 11.01 Grant of Reload Rights on Outstanding Non-Qualified Options.............................................. 15 11.02 Terms of Reload Options............................................ 15 11.03 Variant Reload Rights.............................................. 17 12 Change in Stock, Adjustments, Etc..................................... 17 13 Amendment and Termination............................................. 18 14 Effective Date and Duration of the Plan............................... 18 15 Definitions........................................................... 18 15.01 1989 Program....................................................... 18 15.02 1997 Program....................................................... 18 15.03 Affiliate.......................................................... 18 15.04 Authorized Officer................................................. 18 15.05 Board.............................................................. 18 15.06 Change in Control.................................................. 18 15.07 Code............................................................... 19 15.08 Code Section....................................................... 19 15.09 Committee.......................................................... 19 15.10 Common Stock....................................................... 19 15.11 Company............................................................ 19 15.12 Corporate Secretary................................................ 20 15.13 Director........................................................... 20 15.14 Employee........................................................... 20 15.15 Equity Security.................................................... 20 15.16 Exchange Act....................................................... 20 15.17 Exchange Act Section 16............................................ 20 15.18 Executive Officer.................................................. 20 15.19 Exercise Date...................................................... 20 15.20 Exercise Price..................................................... 20 15.21 Expiration Date.................................................... 20
ii 15.22 Fair Market Value.................................................. 20 15.23 FON Stock.......................................................... 21 15.24 Foreign Reload Option.............................................. 21 15.25 Grant Date......................................................... 21 15.26 Grantee............................................................ 21 15.27 Incentive Stock Option............................................. 21 15.28 Minimum Withholding Amount......................................... 21 15.29 Non-Qualified Option............................................... 21 15.30 Normal Retirement.................................................. 21 15.31 Notice of Exercise................................................. 21 15.32 Option............................................................. 22 15.33 Option Class....................................................... 22 15.34 Optionee........................................................... 22 15.35 Payroll Tax........................................................ 22 15.36 Payroll Taxpayer................................................... 22 15.37 PCS Stock.......................................................... 22 15.38 Person............................................................. 22 15.39 Program Adoption Date.............................................. 22 15.40 Plan............................................................... 22 15.41 Qualified Transferee............................................... 22 15.42 Qualified Trust.................................................... 22 15.43 Reload Option...................................................... 23 15.44 Restricted Shares.................................................. 23 15.45 Retirement......................................................... 23 15.46 Seasoned Shares.................................................... 23 15.47 Securities Act..................................................... 23 15.48 Strike Price....................................................... 23 15.49 Subsidiary......................................................... 23 15.50 Tax Date........................................................... 24 15.51 Termination Date................................................... 24 15.52 Termination for Cause.............................................. 24 15.53 Total Disability................................................... 24 15.54 Underlying Option.................................................. 24 15.55 Vesting Period..................................................... 25 15.56 Withholding Amount................................................. 25 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 1 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. 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 70,200,000 shares of FON Stock or 64,400,000 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 expires or is forfeited 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 3 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 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. 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. 4 (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 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. (i) Acceleration on Termination of Employment for Certain Reasons. 5 (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 Date was 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. 6 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, 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. 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. 7 (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 beneficiary 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 NonQualified 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. 8 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; (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; (vii) if the Optionee is delivering or attesting to ownership of Restricted Shares in payment of the Exercise Price and desires to elect a more extended Vesting Period pursuant to Section 10.03, a statement of the extended 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 9 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 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. 10 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 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 11 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). 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. Mandatory Issuance of Restricted Shares. Certain Optionees, as determined by the Committee, may in the exercise of an Option deliver or attest to ownership of Restricted Shares of the Option Class of Common Stock in payment of the Exercise Price, notwithstanding restrictions 12 on transferability to which such shares are subject. If an Optionee elects to so pay the Exercise Price of an Option, the Company shall issue to the Optionee (i) a number of shares of the Option Class equal to the number of Restricted Shares used to pay the Exercise Price as Restricted Shares having a Vesting Period identical to the Vesting Period of the shares so used in payment of the Exercise Price and (ii) all other shares of the Option Class issuable pursuant to the exercise of the Options as Restricted Shares having a Vesting Period identical to the Vesting Period of the shares so used to pay the Exercise Price, or if the Optionee elects in the Notice of Exercise, a Vesting Period extending beyond the end of the Vesting Period of the shares so used. 10.04. 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. 10.05. 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) to the Company in payment of the exercise price of a stock option issued by the Company under any director or employee stock option plan adopted by the Company that provides for payment of the exercise price in the form of restricted stock or (ii) to a trust that is a Qualified Trust upon the following terms: (A) 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 13 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 (B) 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 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, but in no event may the Optionee elect a Vesting Period ending before the end of the Vesting Period of any Restricted Shares used to pay the Exercise Price of the Option pursuant to Section 10.03. 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 Mandatorily. Unless the Committee determines otherwise, Restricted Shares issued mandatorily pursuant to the exercise of an Option under Section 10.03 shall inherit the vesting conditions of the Restricted Shares used to pay the Exercise Price. If the Restricted Shares used to pay the Exercise Price would be forfeited upon the Grantee's termination of service or employment before the 14 end of the Vesting Period, the Restricted Shares issued pursuant to such exercise shall be forfeited; if the Restricted Shares used to pay the Exercise Price would be vested upon the Grantee's termination of service or employment before the end of the Vesting Period, the Restricted Shares issued pursuant to such exercise shall vest and the Company shall issue a certificate representing the shares to the registered owner thereof. Likewise, Restricted Shares issued under the Plan shall be forfeited or shall vest upon the occurrence of any other event that would cause the forfeiture or vesting of the Restricted Shares used to pay the Exercise Price under Section 10.03. (3) 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. 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 NonQualified Options issued under any stock option plan of the Company, whether originally granted with Reload Rights or not. 15 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. (d) Expiration Date. Each Reload Option shall have the same Expiration Date as the Underlying Option. 16 (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 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. 17 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 18 (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; (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) the Company's shareholders approve 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. 19 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. 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 20 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. "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. 21 "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. "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. Person. "Person" means any individual, corporation, partnership, limited liability company, business trust, or other entity. 15.39. Program Adoption Date. "Program Adoption Date" means April 15, 1997. 15.40. Plan. "Plan" means the 1990 Stock Option Plan, the terms of which are set forth in this document. 15.41. Qualified Transferee. "Qualified Transferee" means a Qualified Trust. 15.42. Qualified Trust. "Qualified Trust" means a trust. 22 (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. 15.43. 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 15.44. Restricted Shares. "Restricted Shares" means shares of Common Stock subject to restrictions on transfer and the possibility of forfeiture for any period of time. 15.45. 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 accordance 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. 15.46. Seasoned Shares. "Seasoned Shares" means, with respect to any Person, shares of Common Stock (i) acquired by such Person from the Company and owned by such Person for a period of at least six months; or (ii) acquired by such Person other than from the Company. 15.47. 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. 15.48. 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. 15.49. 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. 23 15.50. 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. 15.51. 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. 15.52. 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; (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. 15.53. 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. 15.54. Underlying Option. 24 "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. 15.55. Vesting Period. "Vesting Period" means, with respect to any Restricted Shares, the period of time during which the Restricted Shares (i) are subject to limitations on transfer and (ii) may be divested from the owner upon failure to meet any applicable conditions to vesting. 15.56. Withholding Amount. "Withholding Amount" has the meaning specified in Section 9.02. 25 EX-10.H 3 1990 RESTRICTED STOCK PLAN Exhibit (10)(h) 1990 RESTRICTED STOCK PLAN Section 1. Establishment. Pursuant to the Sprint Long-Term Stock Incentive Program (the "Program"), Sprint Corporation, a Kansas corporation (the "Company"), hereby establishes a restricted stock plan to be named the 1990 Restricted Stock Plan (the "Plan"). Section 2. Purpose. The purpose of the Plan is to aid the Company and its subsidiaries in competing with other enterprises for the services of new key personnel needed to help ensure their continued development. The Plan will also help the Company and its subsidiaries retain key personnel. Section 3. Administration. The Plan shall be administered by the Organization and Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company. Members of the Compensation Committee shall be Disinterested Persons as defined in the Program. The Compensation Committee shall hold its meetings at such times and places as it may determine. A majority of the Compensation Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Compensation Committee, shall be deemed the acts of the Compensation Committee. The Compensation Committee may delegate to the Chief Executive Officer of the Company (the "CEO") the right to grant awards of restricted stock to employees of the Company and its subsidiaries who are not officers or directors of the Company and to cancel or suspend such awards. The CEO may not make awards of restricted stock to any one individual in excess of 30,000 shares of FON Stock nor 15,000 shares of PCS Stock and may not make awards of restricted stock aggregating in excess of 100,000 shares of FON Stock nor 50,000 shares of PCS Stock between meetings of the Compensation Committee. The awards made by the CEO shall be reported to the Compensation Committee at each of its meetings. The Company shall issue shares of restricted stock under the Plan in accordance with determinations made by the Compensation Committee or the CEO pursuant to the provisions of the Plan and the Program. The Compensation 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 and the Program, as it shall deem proper. Except as set forth in Section 6(a) hereof, the Compensation Committee may accelerate the time or times at which restrictions lapse and may waive any forfeiture of restricted stock. The interpretation and construction of any provisions of the Plan by the Compensation 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 Compensation Committee shall be liable for any action or determination made in good faith with respect to the Plan or any grant under it. Section 4. Total Number of Shares Subject to Grant. The maximum number of shares of FON Stock that may be issued under the Plan shall not exceed 713,276, and the maximum number of shares of PCS Stock that may be issued under the Plan shall not exceed 356,638, in both cases subject to adjustment as provided in Section 7 hereof. The shares issued under the Plan may be either treasury shares or authorized but unissued shares, as the Board of Directors from time to time may determine. The maximum number of shares of common stock which may be issued in any calendar year, together with shares of common stock subject to other awards under the Program, shall not exceed the limits set forth in Section 4(a) of the Program. In the event that any outstanding shares of restricted stock under the Plan are forfeited for any reason, such shares of common stock may again be subject to grant under the Plan. Section 5. Eligibility. Restricted stock shall be granted only to key employees of the Company or its subsidiaries, including new hires. No grants shall be made by the CEO to any individual who is an officer or director of the Company or who will be proposed to be elected as an officer or director at the next meeting of the Board of Directors or Stockholders of the Company. The Compensation Committee or the CEO will, in its discretion, determine the key employees to be granted restricted stock, the time or times at which restricted stock shall be granted, the number of shares to be granted and the duration of restrictions on the shares granted. In making such determination, the Compensation Committee and the CEO may take into consideration the value of the services rendered or to be rendered by the respective individuals, their present and potential contributions to the success of the Company and its affiliates and such other factors which the Compensation Committee or the CEO may deem relevant in accomplishing the purposes of the Plan. No restricted stock may be granted to any individual who immediately after the 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. No person shall be eligible to receive a larger number of shares of restricted stock than is recommended for such individual by the Compensation Committee or the CEO. [FN] These numbers reflect the number of shares authorized for issuance under the Plan immediately after the recapitalization of Sprint's Common Stock into FON Stock and PCS Stock on November 23, 1998. The number of shares of FON Stock has also been doubled to reflect the 2-1 split of FON Stock on May 13, 1999, and the number of shares of PCS Stock has been doubled to reflect 2-1 stock split of PCS Stock on January 14, 2000. These numbers should be increased by the number of shares of FON Stock and PCS Stock that were awarded before the recapitlization that become forfeited. 2 Section 6. Terms and Conditions of Grants. Each grant under the Plan shall be evidenced by an Agreement in such form not inconsistent with the Plan as the Compensation Committee or the CEO shall determine; provided that the substance of the following terms and conditions be included therein: (a) Duration of Restrictions. The restrictions on restricted stock shall lapse at such time or times as determined by the Compensation Committee or the CEO; provided, however, that no restricted stock shall become free of restrictions prior to the first anniversary date of the granting of the restricted stock. 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 period of restriction on all but not a portion of such shares by six months or any multiple of six months. Unless the Compensation Committee specifies otherwise with respect to a particular grant of restricted stock, restrictions on restricted stock outstanding at least one year shall lapse upon a Change in Control (as defined in the 1990 Stock Option Plan or any successor plan). (b) Nontransferable. The employee who receives restricted stock (the "Grantee") 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: (i) to the Company in payment of the exercise price of a stock option issued by the Company under any employee stock option plan adopted by the Company that provides for payment of the exercise price in the form of restricted stock, provided that such payment is made in accordance with the terms of such plan; or (ii) to a trust of which the Grantee, the Grantee's spouse, or descendants 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 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 3 (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) Termination of Employment. If, before the restrictions on shares of restricted stock lapse, the Grantee ceases to be employed by the Company or a subsidiary of the Company for any reason (other than death, disability, or involuntary termination without cause), the shares of restricted stock that continue to be restricted shall be forfeited and the Grantee or his representative shall sign any document and take any other action required to assign said restricted shares back to the Company. If the Grantee ceases to be employed by reason of the grantee's death, total disability, or involuntary termination without cause, restrictions on the restricted stock shall lapse as of the grantee's termination date and the Company shall release restrictions on the restricted shares as soon as practicable thereafter. For purposes of this Plan, unless the Committee determines otherwise at the time of grant, an employee who becomes employed by Global One. (together with its 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 employed by the Company or its subsidiaries. (d) Consideration. Each Grantee shall, as consideration for the grant of restricted stock, agree in writing to remain in the employ of the Company or of one of its subsidiaries, at the pleasure of the Company or of such subsidiary, for the period of time until the restrictions on the restricted stock lapse. Nothing contained in the Plan or in any Agreement shall confer upon any Grantee any right with respect to continuance of employment by the Company or its subsidiaries, nor interfere in any way with the right of the Company or its subsidiaries to terminate the Grantee's employment or change the Grantee's compensation at any time. (e) Interest in Competitor. In the event that any Grantee, without the consent of the Compensation Committee, renders services to, or owns any interest in (other than any nonsubstantial interest, as determined by the Compensation Committee) any business that is in competition with the Company or with any business in which the Company has a substantial interest, as determined by the Compensation Committee, any restricted stock shall automatically be forfeited. The decision of the Compensation Committee on any such matters shall be final and binding upon all concerned. 4 (f) Rights as Stockholder. Except as set forth in the Plan, a Grantee will have all rights of a stockholder with respect to shares of restricted stock, including the right to vote the shares of stock and the right to dividends on the stock. 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 evidencing unrestricted shares of common stock shall be issued to the Grantee promptly after the restrictions lapse on any restricted shares. (g) Stock Withholding Election. When taxes are withheld upon the lapse of restrictions on restricted stock (the date on which such restrictions lapse hereinafter referred to as the "Tax Date"), the Grantee may elect to make payment for the withholding of federal, state and local taxes, including Social Security and Medicare ("FICA") taxes, up to the Grantee'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 as the restricted shares (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; or (ii) requesting the Company to withhold from those shares that would otherwise be received 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 is limited to the minimum amount of taxes, including FICA taxes, required to be withheld under federal, state and local law. 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. Section 7. Change in Stock, Adjustments, Etc. In the event that the outstanding shares of common stock of the Company are hereafter 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 corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or a dividend payable in capital stock, outstanding shares of restricted stock shall be treated the same as other outstanding shares of common stock and appropriate adjustment shall be made by the Compensation Committee in the number 5 and kind of shares that may be granted under the Plan and that may be granted by the CEO under the Plan. The grant of restricted stock 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 sell or transfer all or any part of its business or assets. Section 8. Duration, Amendment and Termination. The Board of Directors of the Company may at any time terminate the Plan or make such amendments thereof as it shall deem advisable and in the best interests of the Company; provided, however, that no such termination or amendment shall, without the consent of the individual to whom any restricted stock shall theretofore have been granted, affect or impair the rights of such individual with respect to such restricted stock; and provided further, that any such amendment shall be consistent with the provisions of the Program, as it may be amended from time to time. No restricted stock shall be granted under the Plan after April 15, 2007. Section 9. Effectiveness of Plan. This Plan shall be effective as of February 17, 1990. Section 10. Date of Granting of Restricted Stock. The granting of restricted stock pursuant to the Plan shall take place on the date the Compensation Committee or the CEO decides to grant the restricted stock. As soon as practicable but no later than twenty (20) days after the granting of the restricted stock, the Company shall notify the employee of the grant and, within sixty (60) days of the granting of the restricted stock, the Company shall submit to the employee an Agreement duly executed by and on behalf of the Company, and a stock power or powers with respect to the restricted stock, with the request that the employee execute the Agreement and stock powers within sixty (60) days after the mailing by the Company of the notice to the employee. The employee shall execute the written Agreement and stock powers within said 60-day period. EX-10.I 4 EXECUTIVE DEFERRED COMPENSATION PLAN Exhibit (10)(i) Executive Deferred Compensation Plan ARTICLE I PURPOSE The purpose of the Sprint Corporation Executive Deferred Compensation Plan (hereinafter referred to as the "Plan") is to provide funds for retirement or death for executive employees (and their Beneficiaries) of Sprint Corporation and its subsidiaries. It is intended that the Plan will aid in retaining and attracting employees of exceptional ability by providing such employees with a means to supplement their standard of living at retirement. ARTICLE II DEFINITIONS For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: 2.1 Account Transfer Request. "Account Transfer Request" means a written notice, in a form prescribed by the Company, by a Participant to transfer all or any portion of one Deferred Benefit Account to another Deferred Benefit Account as provided for in paragraph 6.7. 2.2 Amendment of Payment Election Form. "Amendment of Payment Election Form" means a written notice, in a form prescribed by the Company, filed with the Company by a Participant to change the manner in which such Participant's Deferral Benefits are to be paid. 2.3 Beneficiary. "Beneficiary" means the person, persons or entity designated by the Participant, or as provided in Article VIII, to receive any benefits payable under the Plan. Any Participant Beneficiary Designation shall be made in a written instrument filed with the Company and shall become effective only when received, accepted and acknowledged in writing by the Company. 2.4 Board. "Board" means the Board of Directors of the Company. 2.5 Committee. "Committee" means the Deferred Compensation Committee appointed to review the Plan decisions pursuant to Article III. 2.6 Company. "Company" means Sprint Corporation, or any successor thereto. 2.7 Compensation. "Compensation" means the Base Salary, Annual Incentive Compensation and Long-Term Incentive Compensation payable to a Participant during a Plan Year other than a distribution under this Plan. (a) Base Salary. "Base Salary" means all regular cash remuneration for services, other than such items as Annual Incentive Compensation, payable by the Employer to a Participant in cash during a Plan Year, but before reduction for amounts deferred pursuant to this Plan or any other Plan of the Employer. (b) Annual Incentive Compensation. "Annual Incentive Compensation" means any annual cash incentive compensation payable by the Employer to a Participant in a Plan Year. (c) Long-Term Incentive Compensation. "Long-Term Incentive Compensation" means cash incentive compensation, if any, earned over a period of at least two years and paid to a Participant in a Plan Year. 2.8 Deferral Benefit. "Deferral Benefit" means the benefit payable to a Participant or the Participant's Beneficiary on the Participant's retirement, death, disability, or termination of employment as calculated in Article VII hereof. 2.9 Deferred Benefit Account. "Deferred Benefit Account" means the accounts maintained on the books of account of the Employer for each Participant pursuant to Article VI. Separate Deferred Benefit Accounts shall be maintained for each Participant. More than one Deferred Benefit Account shall be maintained for each Participant to reflect (a) Termination and Retirement Interest Yields, (b) separate deferral elections, and (c) Account A, Account B, Account D, Account AA, Account BB, and Account DD elections. For Account AA two sub-accounts (a Retirement Deferred Benefit Account and a Termination Deferred Benefit Account) shall be maintained to reflect the difference in Interest Yields as provided in Article VI, paragraph 6.4. 2 For Account BB two sub-accounts (a Retirement Deferred Benefit Account and a Termination Deferred Benefit Account) shall be maintained to reflect, in the event of a transfer from Account AA or Account DD to Account BB pursuant to paragraph 6.7, the difference in values of the two sub-accounts of Account AA or Account DD transferred to Account BB. For Account DD two sub-accounts (a Retirement Deferred Benefit Account and a Termination Deferred Benefit Account) shall be maintained to reflect the crediting of PCS Share Units corresponding to the respective sub- accounts of Account BB pursuant to Section 6.3(b) and to reflect, in the event of a transfer from Account AA or Account BB to Account DD pursuant to paragraph 6.7, the difference in values of the two sub-accounts of Account AA or Account BB transferred to Account DD. A Participant's Deferred Benefit Accounts shall be used solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. A Participant's Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind. Unless the context requires otherwise, "Deferred Benefit Account" shall mean the aggregate balance of all accounts of a Participant. 2.10 Determination Date. "Determination Date" means the date on which the amount of a Participant's Deferred Benefit Account is determined as provided in Article VI hereof. The last day of each calendar month shall be a Determination Date. 2.11 Disability. "Disability" or "Disabled Participant" means a physical or mental condition of a Participant resulting in a determination of disability for purposes of receiving benefits under the Employer Long-Term Disability Insurance Plan. 2.12 Early Retirement Date. "Early Retirement Date" means the date on which the Participant actually terminates employment following the first day of the month coincidental with or next following a Participant's attainment of age fifty-five (55), but before his Normal Retirement Date. 2.13 Employer. "Employer" means Sprint Corporation, any successor to the business thereof or any affiliate or subsidiary designated by the Board. 3 2.14 FON Share Unit. "FON Share Unit" means a measure of participation under the Plan having a value based on the market value of one share of FON Common Stock, Series 1, of the Company. 2.15 Internal Revenue Code. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended or supplemented from time to time. References to any section of the Internal Revenue Code shall be to that section as it is renumbered, amended, supplemented or re-enacted. 2.16 Interest Yield. "Interest Yield" means with respect to any calendar month the Termination Interest Yield or the Retirement Interest Yield as defined below: (a) Termination Interest Yield. The "Termination Interest Yield" means (1) in the case of balances in Account AA, the composite yield on Moody's Seasoned Corporate Bond Yield Index for the preceding calendar month as determined from Moody's Bond Record published by Moody's Investors Services, Inc. (or any successor thereto) or, if such monthly yield is no longer published, a substantially similar average selected by the Company, and (2) in the case of balances in Account A, the greater of (i) the prime rate in effect at Citibank, N.A. at the opening of business on the first business day of the month, or if said bank, for any reason, no longer publishes its prime rate, the prime rate similarly determined of another major bank selected by the Company and (ii) six percent per annum. (b) Retirement Interest Yield. The "Retirement Interest Yield" means (1) in the case of balances in Account AA, three percentage points over the Termination Interest Yield, and (2) in the case of balances in Account A, the Termination Interest Yield. 2.17 Normal Retirement Age. "Normal Retirement Age" means the time at which a Participant attains age sixty-five (65). 2.18 Normal Retirement Date. "Normal Retirement Date" means the first day of the month coincidental with or next following a Participant's Normal Retirement Age. 4 2.19 Participant. "Participant" means any individual who is designated by the Company in accordance with paragraph 4.1 to participate in this Plan and who elects to participate by filing a Participation Agreement as provided in Article IV. 2.20 Participation Agreement. "Participation Agreement" means the agreement, in a form prescribed by the Company, filed with the Company by a Participant before the beginning of the period in which the Participant's Compensation is to be deferred pursuant to the Plan and the Participation Agreement. A new Participation Agreement shall be filed by the Participant for each separate Base Salary deferral election and for each Annual Incentive Compensation deferral election and, if applicable, each Long-Term Incentive Compensation deferral election not accompanying a Base Salary deferral election. 2.21 PCS Share Unit. "PCS Share Unit" means a measure of participation under the Plan having a value based on the market value of a share of PCS Common Stock, Series 1, of the Company. 2.22 Plan. "Plan" means the Sprint Corporation Executive Deferred Compensation Plan as set forth in this document. This Plan is the successor to, and comprises an amendment and revision of, the United Telecommunications, Inc. 1985 Executive Deferred Compensation Plan adopted February 12, 1985. 2.23 Plan Administrator. "Plan Administrator" means the person appointed by the Company to represent the Company in the administration of this Plan. 2.24 Plan Year. "Plan Year" means a twelve month period commencing May 1st and ending the following April 30th. The first Plan Year commenced May 1, 1985. 2.25 Recapitalization Date. "Recapitalization Date" means November 23, 1998. 2.26 Retirement Plan. "Retirement Plan" means the Sprint Retirement Pension Plan, as amended from time to time. 5 2.27 Share Units. "Share Units" means the Share Units credited to Accounts B and BB prior to the recapitalization of the Company's Common Stock on the Recapitalization Date. 2.28 Spouse. "Spouse" means a Participant's wife or husband who was lawfully married to the Participant upon the Participant's retirement, death or severance from service. 2.29 Sprint Insider. "Sprint Insider" means, as of any time when the determination thereof is relevant, any Participant subject to liability under Section 16 of the Securities Exchange Act of 1934 with respect to trading in the equity securities of the Company. 2.30 Transition Date. "Transition Date" means May 1, 1990. ARTICLE III ADMINISTRATION 3.1 Plan Administrator; Company and Committee; Duties. This Plan shall be administered by the Committee. The Committee shall consist of not more than five persons appointed by the Board. The Committee may be a consolidated Committee administering other benefit plans of the Company in addition to this Plan. The Committee shall have the authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretations of this Plan, as may arise in connection with the Plan. The Committee may appoint a Benefit Administrative Committee and a Plan Administrator. The Committee may delegate its duties for the day-to-day operations of the Plan to the Plan Administrator and other duties to the Benefit Administrative Committee. Members of the Committee, the Benefit Administrative Committee and the Plan Administrator may be Participants under this Plan. 3.2 Claim for Benefits. Any claim for benefits under this Plan shall be made in writing to the Plan Administrator. If a claim for benefits is wholly or partially denied, the Plan Administrator shall so notify the Participant or Beneficiary within 90 days after receipt of the claim. The notice of denial shall be written in a manner calculated to be understood by the Participant or Beneficiary and shall contain (a) the specific reason or reasons for denial of the claim, (b) specific references to the pertinent Plan provisions 6 upon which the denial is based, (c) a description of any additional material or information necessary to perfect the claim together with an explanation of why such material or information is necessary and (d) an explanation of the claims review procedure. The decision or action of the Plan Administrator shall be final, conclusive and binding on all persons having any interest in the Plan, unless a written appeal is filed as provided in Section 3.3. 3.3 Review of Claim. Within 60 days after the receipt by the Participant or Beneficiary of notice of denial of a claim, the Participant or Beneficiary may (a) file a request with the Benefit Administrative Committee that it conduct a full and fair review of the denial of the claim, (b) review pertinent documents and (c) submit questions and comments to the Committee in writing. 3.4 Decision After Review. Within 60 days after the receipt of a request for review under Section 3.3, the Committee shall deliver to the Participant or Beneficiary a written decision with respect to the claim, except that if there are special circumstances (such as the need to hold a hearing) which require more time for processing, the 60-day period shall be extended to 120 days upon notice to the Participant or Beneficiary to that effect. The decision shall be written in a manner calculated to be understood by the Participant or Beneficiary and shall (a) include the specific reason or reasons for the decision and (b) contain a specific reference to the pertinent Plan provisions upon which the decision is based. ARTICLE IV PARTICIPATION 4.1 Participation. Participation in the Plan shall be limited to executives having a job grade level of E14 or above, or any other employees designated by the Committee, who elect to participate in the Plan by filing a Participation Agreement with the Company. Participation Agreements must be filed no later than the March 31st immediately preceding the Plan Year in which the Participant Agreement is to take effect, and the election to participate shall be effective on the first day of the Plan Year following receipt by the Company of a properly completed and executed Participation Agreement; provided, however, that if March 31st falls on a Saturday, Sunday or holiday, the filing date for the 7 Participation Agreement shall be no later than the next business day after March 31st. 4.2 Minimum and Maximum Deferral and Length of Participation. A Participant may elect in any Participation Agreement to defer a portion of the Participant's Compensation. The minimum and maximum amounts that may be deferred under any single Participation Agreement shall be in $100 units and shall be as follows: Minimum Maximum Deferral Deferral With respect to $300 per 50% of Base Base Salary month Salary Deferrals With respect to 25% of Annual 100% of Annual Incentive Annual Incentive Compensation Incentive Compensation Compensation With respect to 25% of Long- 100% of Long- Long-Term Term Incentive Term Incentive Incentive Compensation Compensation (a) With respect to Base Salary deferrals, the dollar amount of deferral elected in each Participation Agreement shall be the amount of Base Salary that will be deferred in each month subject to the Participation Agreement. Each Participation Agreement shall apply to the Participant's Base Salary payable in the Plan Year immediately following the Plan Year in which the Participation Agreement is filed (or until the Participant's retirement, whichever occurs first). The fixed dollar amount of Base Salary deferral applicable over a deferral period shall not be changed by virtue of a change in Base Salary alone. (b) With respect to Annual Incentive Compensation or Long-Term Incentive Compensation deferrals, the deferral percentage selected in each Participation Agreement shall apply only to the Participant's Annual Incentive Compensation or Long-Term Incentive Compensation paid in the Plan Year immediately following receipt of the Participation Agreement. 8 (c) From time to time, the Company may increase or decrease the minimum and maximum deferrals set forth above as well as the period for which the deferrals are effective by giving reasonable written notice to the affected Participants. Such changes shall be effective for all Participation Agreements filed thereafter. (d) A Participant's election to defer Compensation shall be irrevocable upon the filing of the respective Participation Agreement; provided, however, that the deferral of Compensation under any Participation Agreement may be suspended or amended as provided in paragraphs 7.5 or 9.1. ARTICLE V DEFERRED COMPENSATION 5.1 Elective Deferred Compensation. The amount of Compensation that a Participant elects to defer in the Participation Agreement executed by the Participant, with respect to each Plan Year of participation in the Plan, shall be credited by the Company to the Participant's Deferred Benefit Account throughout each Plan Year as the Participant is paid the non-deferred portion of Compensation for such Plan Year. The amount credited to a Participant's Deferred Benefit Account shall equal the amount deferred. To the extent that the Employer is required to withhold any taxes or other amounts relating to the employees' deferred wages pursuant to any state, federal or local law, such amounts shall be taken out of the portion of the Participant's Compensation which is not deferred under this Plan. 5.2 Additional Amounts Under Savings Plan and Retirement Plan. (a) Savings Plan. Except for Participants who are Sprint Insiders, to the extent a Participant's deferral of Compensation under this Plan causes a reduction in the Company's contribution for the Participant under the Sprint Retirement Savings Plan, the Company shall credit the amount of any such reduction to the Participant's Deferred Benefit Accounts B and D in the ratio determined pursuant to guidelines adopted by the Committee or the Board. For Sprint Insiders, such reduction shall be credited to Account A. 9 (b) Retirement Plan. A Participant shall receive a Pension Make-Up Benefit from the Supplemental Executive Retirement Plan if the deferral of compensation under this Plan causes a reduction in the Participant's benefit under the Retirement Plan. 5.3 Additional Payments. The Company also intends that supplemental payments shall be made at death, disability or termination of employment, as the case may be, for any reduction in benefits due to deferrals of Compensation under this Plan in respect of any of the Employer's life insurance or disability plans or Employees Stock Purchase Plan now in existence or adopted after the effective date of this Plan. 5.4 Vesting of Deferred Benefit Account. A Participant shall be 100% vested in the Participant's Deferred Benefit Account. ARTICLE VI DEFERRED BENEFIT ACCOUNT 6.1 Determination of Account. Each Participant's Deferred Benefit Account, as of each Determination Date, shall consist of the balance of the Participant's Deferred Benefit Account as of the immediately preceding Determination Date, plus the Participant's elective deferred compensation withheld since the immediately preceding Determination Date pursuant to paragraph 5.1 and plus amounts credited to the Participant's Deferred Benefit Account pursuant to paragraphs 6.4 and 6.5. The Deferred Benefit Account of each Participant shall be reduced by the amount of all distributions, if any, made from such Deferred Benefit Account since the preceding Determination Date. 6.2 Type of Deferral. A Participant may elect to have any portion of the amount deferred credited to Account A (fixed income return), to Account B (FON Share Units) or to Account D (PCS Share Units). The election shall be made by a properly executed Participation Agreement. Deferrals in a Plan Year shall be credited in accordance with the election of the applicable Participation Agreement. 6.3 Creation of Accounts AA, BB, D, and DD. (a) Accounts AA and BB. As of the start of business on the Transition Date, all amounts standing to the credit of each 10 Participant in Account A were transferred to an Account AA. As of the start of business on the Transition Date, amounts standing to the credit of each Participant in Account B that were attributable to prior transfers from Account A into Account B were transferred to an Account BB. The amount of such transfers was an amount equal to the sum of the dollar amount of all transfers from Account A to Account B during the period beginning on the effective date of the Participation Agreement and ending on the Transition Date. For all purposes of this Plan, except as otherwise noted in this Plan, Account AA shall be treated in the same manner as Account A, and Account BB shall be treated in the same manner as Account B. (b) Accounts D and DD. As of the Recapitalization Date, there was credited to Accounts D and DD, created for each Participant having a positive balance in an Account B or BB with respect to any Plan Year, a number of PCS Share Units determined as follows: (1) one-half of a PCS Share Unit in Account D for each Share Unit in Account B for such Participant for such Plan Year as of the Recapitalization Date; and (2) one-half of a PCS Share Unit in the Retirement Deferred Benefit Account of Account DD for each Share Unit in the Retirement Deferred Benefit Account of Account BB for such Participant for such Plan Year as of the Recapitalization Date; and (3) one-half of a PCS Share Unit in the Termination Deferred Benefit Account of Account DD for each Share Unit in the Termination Deferred Benefit Account of Account BB for such Participant for such Plan Year as of the Recapitalization Date. For all purposes of this Plan except as otherwise noted in this Plan, Account DD shall be treated in the same manner as Account D. 6.4 Maintenance of Accounts A and AA. As of each Determination Date, the Participant's Deferred Benefit Accounts A and AA shall be increased by the amount of interest earned since the preceding Determination Date. Interest on Accounts A and AA shall be based upon the Interest Yield. For Account AA, a Retirement Deferred Benefit 11 Account shall be maintained and increased at the rate specified by the Retirement Interest Yield and a Termination Deferred Benefit Account shall be maintained and increased at the rate specified by the Termination Interest Yield. Interest shall be credited on the mean average of the balances of the Deferred Benefit Account on the Determination Date (before crediting the interest) and on the last preceding Determination Date, but after the Deferred Benefit Account has been adjusted for any contributions or distributions to be credited or deducted for each such day. 6.5 Maintenance of Share Unit Accounts. Accounts B and BB and Accounts D and DD shall maintain balances in FON Share Units and PCS Share Units, respectively. (a) Maintenance of Accounts B and BB. (1) Conversion of Share Units into FON Share Units. As of the Recapitalization Date, each Share Unit in Accounts B and BB was converted into a FON Share Unit. (2) Conversion between Dollar Amounts and FON Share Units in Accounts B and BB. When an amount is to be added to a Participant's Deferred Benefit Accounts B or BB, it shall be converted into FON Share Units, or fractions thereof, by dividing the amount to be credited by the closing price of the FON Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. When a number of FON Share Units is to be subtracted from a Participant's Deferred Benefit Accounts B or BB, such number of FON Share Units shall be converted into a dollar amount by multiplying such number of Share Units by the closing price of the FON Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. (3) Sub-accounts to be Maintained for Purposes of Computing Retirement and Termination Benefits. Two sub-accounts shall be maintained for Account BB: (i) a Retirement Deferred Benefit Account which shall include the transfer from Account B into Account BB described in paragraph 6.3(a), plus amounts transferred from the 12 Account AA Retirement Deferred Benefit Account, if any, plus amounts transferred from the Account DD Retirement Benefit Account, if any, plus other additions pursuant to this paragraph 6.5(a); and (ii) a Termination Deferred Benefit Account which shall include the transfer from Account B into Account BB described in paragraph 6.3(a) plus amounts transferred from the Account AA Termination Deferred Benefit Account, if any, plus amounts transferred from the Account DD Termination Deferred Benefit Account, if any, plus other additions pursuant to this paragraph 6.5(a). (4) Dividends. When a dividend is declared and paid by the Company on its FON Common Stock, Series 1, an amount shall be credited to the Participant's Accounts B and BB as though the same dividend had been paid on the FON Share Units in such accounts as of the Determination Date immediately preceding the record date for the dividend, and such amount shall be converted to FON Share Units. Such amount shall be valued as of the Determination Date immediately following the payment of the dividend. (5) Effect of Recapitalization. In the event of a stock dividend, stock split, or other corporate reorganization involving the FON Common Stock, Series 1, the Company shall make equitable adjustment to the number of FON Share Units credited to a Participant's Accounts B and BB as may be necessary to give effect to such change in the Company's capital structure. (6) Conversion of Share Units to Dollars on Distribution. FON Share Units in Accounts B and BB shall be converted to an equivalent dollar amount before any distribution thereof to a Participant pursuant to Article VII. For purposes of distribution, the value of a FON Share Unit shall be the average closing price of the FON Common Stock, Series 1, on the New York Stock Exchange on the last trading day of each of (i) the 12 calendar months immediately preceding the date of distribution or (ii) the smaller number of calendar months (including part of a month) elapsed from the Recapitalization Date to such distribution. If a Participant elects payment in other than a lump sum, FON Share Units 13 shall be so converted to a dollar amount with respect to each payment made in the distribution. During the period of distribution, dividends and other equitable adjustments shall be credited to the Participant's Accounts B and BB in accordance with paragraphs 6.5(a)(4) and 6.5(a)(5). For such purposes, a Participant that is a Sprint Insider immediately before the event that entitles the Participant to distribution shall be deemed a Sprint Insider during the period of distribution. (b) Maintenance of Accounts D and DD. (1) Conversion between Dollar Amounts and PCS Share Units in Accounts D and DD. When an amount is to be added to a Participant's Deferred Benefit Accounts D or DD, it shall be converted into PCS Share Units, or fractions thereof, by dividing the amount to be credited by the closing price of the PCS Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. When a number of PCS Share Units is to be subtracted from a Participant's Deferred Benefit Accounts D or DD, such number of PCS Share Units shall be converted into a dollar amount by multiplying such number of PCS Share Units by the closing price of PCS Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. (2) Sub-accounts to be Maintained for Purposes of Computing Retirement and Termination Benefits. Two sub-accounts shall be maintained for Account DD: (i) a Retirement Deferred Benefit Account which shall include the value of the PCS Share Units credited pursuant to paragraph 6.3(b)(2), plus amounts transferred from the Account AA Retirement Benefit Account, if any, plus amounts transferred from the Account BB Retirement Benefit Account, if any, plus other additions pursuant to this paragraph 6.5(b) and (ii) a Termination Deferred Benefit Account which shall include the value of the PCS Share Units credited pursuant to paragraph 6.3(b)(3), plus amounts transferred from the Account AA Termination Benefit 14 Account, if any, plus amounts transferred from the Account BB Termination Benefit Account, if any, plus other additions pursuant to this paragraph 6.5(b). (3) Dividends. When a dividend is declared and paid by the Company on its PCS Common Stock, Series 1, an amount shall be credited to the Participant's Accounts D and DD as though the same dividend had been paid on the PCS Share Units in such accounts as of the Determination Date immediately preceding the record date for the dividend, and such amount shall be converted to PCS Share Units. Such amount shall be valued as of the Determination Date immediately following the payment of the dividend. (4) Effect of Recapitalization. In the event of a stock dividend, stock split or other corporate reorganization involving PCS Common Stock, Series 1, the Company shall make equitable adjustment to the number of PCS Share Units credited to a Participant's Accounts D and DD as may be necessary to give effect to such change in the Company's capital structure. (5) Conversion of PCS Share Units to Dollars on Distribution. PCS Share Units in Accounts D and DD shall be converted to an equivalent dollar amount before any distribution thereof to a Participant pursuant to Article VII. For purposes of distribution, the value of a PCS Share Unit shall be the average closing price of PCS Common Stock, Series 1, on the New York Stock Exchange on the last trading day for each of (i) the 12 calendar months immediately preceding the date of such distribution or (ii) the smaller number of calendar months (including part of a month) elapsed from the Recapitalization Date to such distribution. If a Participant elects payment in other than a lump sum, PCS Share Units shall be so converted to a dollar amount with respect to each payment made in the distribution. During the period of distribution, dividends and other equitable adjustments shall be credited to the Participant's Accounts D and DD in accordance with paragraphs 6.5(b)(3) and 6.5(b)(4). For such purposes, a Participant that is a Sprint Insider immediately before the 15 event that entitles the Participant to distribution shall be deemed a Sprint Insider during the period of distribution. 6.6 Statement of Accounts. The Company shall submit to each Participant, within 120 days after the close of each Plan Year, a statement in such form as the Company deems desirable, setting forth the balance to the credit of such Participant in the Participant's Deferred Benefit Accounts A, B, and D and in the Participant's Deferred Benefit Accounts AA, BB, and DD (showing separate calculations for each Interest Yield), in each case, as of the last day of the preceding Plan Year. 6.7 Transfers Between Accounts. Within the limitations of this paragraph 6.7, a Participant may elect, by executing an Account Transfer Request: (1) to transfer all or any portion of the Participant's Account A to Account B or Account D, (2) to transfer all or any portion of the Participant's Account B to Account A or Account D, (3) to transfer all or any portion of the Participant's Account D to Account A or Account B, (4) to transfer all or any portion of the Participant's Account AA to Account BB or Account DD, (5) to transfer all or any portion of the Participant's Account BB to Account AA or Account DD, and (6) to transfer all or any portion of the Participant's Account DD to Account AA or Account BB. Such election shall be effective on the last day of the calendar month in which the Plan Administrator timely receives the Participant's executed Account Transfer Request. Transfers may not be made more than four times in any Plan Year, and no such transfer may be made unless a period of at least three months shall have elapsed from the effective date of the most recent such transfer (whether it occurred in the current Plan Year or not) to the effective date of the current transfer. ARTICLE VII BENEFITS 7.1 Benefit for Normal or Early Retirement and Termination After Age 55. Subject to paragraph 7.6 below, upon a Participant's (i) retirement after reaching the Normal Retirement Date, or (ii) retirement after reaching the Early Retirement Date, or (iii) termination of employment after attaining age 55, the Participant shall be entitled to a Deferral Benefit equal to the amount of the Participant's Retirement Deferred Benefit Account determined under paragraph 6.1 as of the Determination Date coincident with or immediately following such event. 16 7.2 Termination of Employment Before Age 55. Upon any termination of service of the Participant before age 55 for reasons other than death or Disability, the Employer shall pay to the Participant, as compensation earned for services rendered before the Participant's termination of service, a Deferral Benefit equal to the amount of the Participant's Termination Deferred Benefit Account determined under paragraph 6.1. The Termination Deferred Benefit Account of a Participant whose employment has terminated shall be paid in a single sum to the terminated Participant within 30 days following termination of employment if the aggregate balance of the Deferred Benefit Account(s) of such Participant is $20,000 or less. If such aggregate balance of a Participant's Deferred Benefit Account(s) is more than $20,000, payment shall commence pursuant to the Participant's election in the Participation Agreement or in the Amendment of Payment Election Form. 7.3 Death. If a Participant dies after the commencement of payments of the Participant's Deferral Benefit, the Participant's Beneficiary shall continue to receive the remaining installments of the Participant's Deferred Benefit Account in accordance with the Participant's election pursuant to paragraph 7.6. If a Participant dies before any payments of a Deferral Benefit, the amounts to which the Participant's Beneficiary is entitled shall be determined as follows: (a) In the case of deferrals pursuant to a Participation Agreement first effective before the Transition Date: (1) Deferrals of Incentive Compensation shall be the Retirement Deferred Benefit Account value thereof. (2) Deferrals of Base Salary pursuant to Participation Agreements that required a total deferral of less than $15,000 per year allocated to Accounts A and AA during the last Plan Year of deferrals pursuant to such Participation Agreement shall be the greater of (i) the Retirement Deferred Benefit Account value thereof or (ii) ten times the amount of the elected annual Base Salary deferral. (3) Deferrals of Base Salary pursuant to Participation Agreements that required a total deferral of $15,000 or 17 more per year allocated to Accounts A and AA during the last Plan Year of deferrals pursuant to such Participation Agreement shall be determined as follows: (i) that portion of the deferral which totals $15,000 per year shall be the greater of (x) the Retirement Deferred Benefit Account value thereof and (y) ten times the amount of the elected annual Base Salary deferral, and (ii) the portion of such deferral which is in excess of $15,000 per year shall be the Retirement Deferred Benefit Account value of such excess. (4) Deferrals allocated to Accounts B and BB shall be the Retirement Deferred Benefit Account value thereof. (5) Deferrals allocated to Accounts D and DD shall be the Retirement Deferred Benefit Account value thereof. (b) In the case of deferrals pursuant to a Participation Agreement first effective on or after the Transition Date, the aggregate amount of all deferrals shall be the Retirement Deferred Benefit Account value of Accounts A, B and D. The Deferral Benefit shall be payable as provided for in paragraph 7.6. The Deferral Benefit provided above shall be in lieu of all other benefits under this Plan. 7.4 Disability. In the event of Disability while employed by the Employer before the completion of all deferrals provided for under a Participation Agreement, the Employer shall credit to the disabled Participant's Deferred Benefit Account an amount equal to the amount deferred by the Participant under the Participation Agreement during such period of Disability, but not beyond the end of the Plan Year to which the Participation Agreement applies. In the event of Disability before termination of employment or the Normal Retirement Date, the disabled Participant, unless the Participant otherwise elects under this paragraph, shall be entitled to the amount in the Participant's Retirement Deferred Benefit Account (rather than the Participant's Termination Deferred Benefit Account) determined under paragraph 6.1 as of the Determination Date next following such Disability, with payments to commence upon attainment of the Participant's Normal Retirement Date in the form specified in paragraph 7.6(a)(2) and/or 7.6(a)(3) over a 15 year period. Before payments commence under the preceding sentence, a Disabled Participant may elect, subject to 18 Committee approval upon good cause shown: (i) to accelerate commencement of the payments to any earlier date, but not sooner than 60 days after the onset of Disability and/or (ii) to change the form of payment permitted under paragraph 7.6(a). 7.5 Suspension of Participation; Failure to Continue Participation. The Committee, in its sole discretion, may suspend the deferral of a Participant's Compensation upon the advanced written request of a Participant on account of financial hardship suffered by that Participant. A Participant must file any request for such suspension on or before the 15th day preceding the regular payment date on which the suspension is to take effect. The Committee, in its sole discretion, shall determine the amount, if any, that will not be deferred by the Participant as a result of the financial hardship. The suspension of any deferrals under this paragraph shall not affect amounts deferred with respect to periods before the effective date of the suspension. A Participant whose deferrals are suspended may not execute a subsequent Participation Agreement that would take effect before the beginning of the third Plan Year following the close of the Plan Year in which the suspension first took effect. In the event the Participant ceases to remain a member of the class of employees who are eligible to participate in this Plan, the Participant may elect to suspend the amount of any remaining deferral commitment in the same manner as described for other suspensions in this paragraph, except that Committee approval shall not be required. 7.6 Form of Benefit Payment. (a) Upon the happening of an event described in paragraphs 7.1, 7.2, 7.3 or 7.4 above, the Employer shall pay to the Participant or the Participant's Beneficiary the amount (at a time designated by the Participant in the Participation Agreement, but commencing no later than the Participant's Normal Retirement Date) specified in one of the following forms as elected by the Participant, either in the Participation Agreement or the Amendment of Payment Election Form filed by the Participant: (1) a lump sum payment. 19 (2) with respect to balances in Accounts A and AA, an annual payment of a fixed amount that shall amortize the Deferred Benefit Account balance in equal annual payments of principal and interest over a period from 2 to 20 years. For purposes of determining the amount of the annual payment, the assumed rate of interest on Accounts A and AA shall be the average of the applicable Interest Yield as of each Determination Date for the 60 months preceding the initial annual installment payment. (3) with respect to balances in Accounts B and BB, an annual payment over a period from 2 to 20 years, each such payment having a value, as determined pursuant to paragraph 6.5(a)(6), of the number of FON Share Units equal to (i) the number of FON Share Units in the accounts on the Determination Date immediately following the event described in paragraph 7.1, 7.2, 7.3 or 7.4, divided by (ii) the number of annual installments elected. During the period that a Participant is receiving a distribution from Account B or BB, FON Share Unit dividends will be added to the Accounts in accordance with subparagraph 6.5(a)(4). Such FON Share Unit dividends shall be valued in the same manner as previously described, and all such FON Share Units accruing after a distribution from Accounts B or BB is made shall be paid to the Participant with the next distribution from the account. (4) with respect to balances in Accounts D and DD, an annual payment over a period from 2 to 20 years, each such payment having a value, as determined pursuant to paragraph 6.5(b)(5), of the number of PCS Share Units equal to (i) the number of PCS Share Units in the accounts on the Determination Date immediately following the event described in paragraph 7.1, 7.2, 7.3 or 7.4, divided by (ii) the number of annual installments elected. During the period that a Participant is receiving a distribution from Account D or DD, PCS Share Unit dividends will be added to the Accounts in accordance with subparagraph 6.5(b)(3). Such PCS Share Unit dividends shall be valued in the same manner as previously described, and all such PCS Share Units accruing after a distribution from Accounts D or DD is 20 made shall be paid to the Participant with the next distribution from the account. (b) A Participant may change the form in which such Participant's benefits shall be paid by filing an Amendment of Payment Election Form indicating such change at least 13 months before the date upon which the payments to be made are determined. No such Amendment of Payment Election Form shall change the amount elected to be deferred in the Participation Agreement to which it relates, nor the time elected for commencement of benefit payments. (c) In the absence of a Participant's election under subparagraph 7.6(a), benefits shall be paid in the form specified in subparagraph 7.6(a)(2), 7.6(a)(3), and 7.6(a)(4) over a 15 year period, except as provided in paragraph 7.2. In the event of a Disabled Participant, payment shall be in the form described in paragraph 7.4. (d) If a Participant's Beneficiary dies before payment of the Participant's Deferred Benefits are complete, payments will continue to be made to the estate of the Beneficiary in accordance with the Participant's election pursuant to this paragraph 7.6. 7.7 Withholding; Payroll Taxes. To the extent required by the law in effect at the time payments are made, the Employer shall withhold from payments made hereunder any taxes required to be withheld from an employee's wages for the federal or any state or local government. 7.8 Commencement of Payments. Unless otherwise provided, payments under this Plan shall begin within 60 days following receipt of notice by the Plan Administrator of an event which entitles a Participant (or a Beneficiary) to payments under this Plan, or at such earlier date as may be determined by the Company pursuant to the terms of the Plan. All payments shall be made as of the first day of the month. ARTICLE VIII BENEFICIARY DESIGNATION 8.1 Beneficiary Designation. Each Participant shall have the right, at any time, to designate any person or persons as the Participant's Beneficiary or Beneficiaries (both principal as well as contingent) to whom 21 payment under this Plan shall be paid in the event of the Participant's death before complete distribution to the Participant of the benefits due the Participant under the Plan. 8.2 Amendments. Any Beneficiary Designation may be changed by a Participant by the written filing of such change on a form prescribed by the Company. The filing of a new Beneficiary Designation form will cancel all Beneficiary Designations previously filed. 8.3 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, then the Participant's designated Beneficiary shall be deemed to be the person or persons surviving the Participant in the first of the following classes in which there is a survivor, share and share alike: (a) The surviving Spouse; (b) The Participant's children, except that if any of the children predecease the Participant but leave issue surviving, then such issue shall take by right of representation the share their parent would have taken if living; (c) The Participant's personal representative (executor or administrator). 8.4 Effect of Payment. The payment to the Beneficiary or the Beneficiary's estate shall completely discharge the Employer's obligations relating to the Participant under this Plan. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 Amendment. The Board may at any time amend the Plan in whole or in part; provided, however, that no amendment shall be effective to decrease or restrict any Deferred Benefit Account at the time of such amendment. 9.2 Right to Terminate. The Board may at any time terminate the Plan with respect to new elections to defer if, in its judgment, the continuance of the Plan, the tax, accounting, or other effects thereof, or 22 potential payments thereunder would not be in the best interests of the Company. The Board may also terminate the Plan in its entirety at any time, and upon any such termination, each Participant (a) who is then receiving a Deferral Benefit shall be paid in a lump sum, or over such period of time as determined by the Company, the then remaining balance in the Participant's Deferred Benefit Account, and (b) who has not received a Deferral Benefit shall be paid in a lump sum, or over such period of time as determined by the Company, the balance in the Participant's Deferred Benefit Account. ARTICLE X MISCELLANEOUS 10.1 Unsecured General Creditor. Participants and their Beneficiaries shall have no legal or equitable rights, interest or claims in any property or assets of the Employer, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Employer ('Policies'). Such Policies or other assets of the Employer shall not be held under any trust for the benefit of Participants or their Beneficiaries or held in any way as collateral security for the fulfilling of the obligations of the Employer under this Plan. Any and all of the Employer's assets and Policies shall be, and remain, the general, unpledged, unrestricted assets of the Employer. The Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Employer to pay money in the future. 10.2 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, before actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 23 10.3 Not a Contract of Service. The terms and conditions of this Plan shall not be deemed to constitute a contract of service between the Employer and the Participant, and the Participant (or the Participant's Beneficiary) shall have no rights against the Employer except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Employer or to interfere with the right of the Employer to discipline or discharge the Participant at any time. 10.4 Protective Provisions. A Participant will cooperate with the Employer by furnishing any and all information requested by the Employer, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Employer may deem necessary and taking such other action as may be requested by the Employer. 10.5 Applicable Law. The Plan, and any Participation Agreement related thereto, shall be governed by the laws of the State of Kansas, without regard to the principles of conflicts of law. 10.6 Affiliated Entities. For purposes of this Plan, a Participant who becomes employed by Global One (an "Affiliated Entity") shall not be considered to have terminated employment with the Company or a subsidiary of the Company until the Participant's employment is terminated with all Affiliated Entities without becoming employed by the Company or its subsidiaries. 24 EX-10.J 5 MANAGEMENT INCENTIVE STOCK OPTION PLAN 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 terminated without having been exercised in full, the unpurchased or forfeited shares shall become available for grant to other employees. 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 cash payout under the MIPs. 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 each year, subject to the total number of shares available under the Plan for such year, and the amount or the method of determining the amount of annual incentive compensation 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 subject to options granted to any individual employee during any calendar year shall not exceed a total 2 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). 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. 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 on the date the option is granted. 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 (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 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 3 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. Certain optionees may use restricted stock as payment for the exercise price in accordance with Section 6 hereof. 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 shares held for a period of at least six months to pay the exercise price. 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 automatically terminate. "Good cause" means conduct by the grantee that reflects adversely on the grantee's honesty, trustworthiness or 4 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 deliver restricted shares or 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, provided that the number of shares subject to any option shall always be a whole number. 5 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. Such grantees may also elect to deliver restricted shares of the Company's common stock in payment of the exercise price notwithstanding restrictions on transferability to which such shares are subject. 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, but in no event may a grantee elect a vesting period shorter than the period provided in paragraph (d) of this Section 6. 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: (i) to the Company in payment of the exercise price of a stock option issued by the Company under any employee stock option plan adopted by the Company that provides for payment of the exercise price in the form of restricted stock, provided that such payment is made in accordance with the terms of such plan; or (ii) 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 6 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 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. Restricted common stock received in such an exercise or from other plans of the Company may be used for payment of the exercise price of a stock option to purchase shares of the same class, so long as all the shares received as a result of such an exercise are restricted for a period at least as long as, and shall have other terms consistent with the terms of, the restricted common stock used in payment. e. 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; provided, however, that in no event shall restrictions lapse if the restrictions on shares used to pay for the exercise price pursuant to Section 6(d) would not have lapsed under the same conditions. 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. 7 f. 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 evidencing unrestricted shares of common stock shall be issued to the grantee promptly after the restrictions lapse on any restricted shares. g. The Plan Administrator shall have the discretion and authority to establish any rules in connection with the use of 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 8 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. 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. 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 9 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; (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 other than pursuant to Section 6(d), 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 10 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 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.K 6 1997 LONG-TERM STOCK INCENTIVE PROGRAM Exhibit (10)(k) 1997 LONG-TERM STOCK INCENTIVE PROGRAM Section 1. Purpose. The purposes of the Sprint 1997 Long-Term Stock Incentive Program (the "Plan") are to encourage Directors of Sprint Corporation (the "Company") and officers and selected key employees of the Company and its Affiliates to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of stockholders, and to enhance the ability of the Company and its Affiliates to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. Section 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Restricted Stock Award, Performance Share, Performance Unit, Dividend Equivalent, Other Stock Unit Award, or any other right, interest, or option relating to Shares granted pursuant to the provisions of the Plan. (c) "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award granted hereunder and signed by both the Company and the Participant or by both the Company and an Outside Director. (d) "Board" shall mean the Board of Directors of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the Organization, Compensation, and Nominating Committee of the Board, composed of not less than two directors each of whom is a Non-Employee Director. (g) "Company" shall mean Sprint Corporation. (h) "Non-Employee Director" shall have the meaning provided for in Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, 17 CFR Section 240.16b-3(b)(3), as amended. (i) "Dividend Equivalent" shall mean any right granted pursuant to Section 14(h) hereof. (j) "Employee" shall mean any employee of the Company or of any Affiliate. (k) "Fair Market Value" shall mean, with respect to any property, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee; except that the "Fair Market Value" of a share of common stock of the Company for purposes of Section 10 and Section 11 shall mean the average of the high and low prices of the common stock for composite transactions, as published by major newspapers, for the date in question or, if no trade of the common stock shall have been made on that date, the next preceding date on which there was a trade of common stock. (l) "Incentive Stock Option" shall mean an Option granted under Section 6 hereof that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (m) "Nonstatutory Stock Option" shall mean an Option granted to a Participant under Section 6 hereof, and an Option granted to an Outside Director pursuant to Section 10 hereof, that is not intended to be an Incentive Stock Option. (n) "Option" shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine. "Option" shall also mean the right granted to an Outside Director under Section 10 hereof allowing such Outside Director to purchase shares of the common stock of the Company on the terms set forth in Section 10. (o) "Other Stock Unit Award" shall mean any right granted to a Participant by the Committee pursuant to Section 9 hereof. (p) "Outside Director" shall mean a member of the Board who is not an Employee of the Company or of any Affiliate. (q) "Participant" shall mean an Employee or Outside Director who is selected to receive an Award under the Plan. (r) "Performance Award" shall mean any Award of Performance Shares or Performance Units pursuant to Section 8 hereof. (s) "Performance Period" shall mean that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured. (t) "Performance Share" shall mean any grant pursuant to Section 8 hereof of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (u) "Performance Unit" shall mean any grant pursuant to Section 8 hereof of a unit valued by reference to a designated amount of property other than Shares, which 2 value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, Shares, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter. (v) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. (w) "Restricted Stock" shall mean any Share issued with restrictions on the holder's right to sell, transfer, pledge, or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Share, and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. (x) "Restricted Stock Award" shall mean an award of Restricted Stock under Section 7 hereof. (y) "Senior Officer" shall mean any employee of the Company holding the office of Vice President or higher. (z) "Shares" shall mean shares of any class of common stock of the Company publicly traded on an established securities market, including but not limited to FON Stock and Series 1 PCS Stock (the "PCS Stock") and such other securities of the Company as the Committee may from time to time determine. (aa) "Stockholders Meeting" shall mean the annual meeting of stockholders of the Company in each year. (bb) "1989 Plan" shall mean the Long-Term Stock Incentive Program adopted by the Company's stockholders in 1989, as amended. (cc) "total outstanding Shares" means, with respect to the FON Stock the total shares outstanding of FON Stock and, with respect to the PCS Stock, the total outstanding shares of Series 1 PCS Stock and Series 2 PCS Stock. Section 3. Administration. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (i) select the Participants to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Awards to be granted to each Participant hereunder; (iii) determine the number of Shares to be covered by each Award granted hereunder; provided, however, that Shares subject to Options granted to any individual Participant during any calendar year shall not exceed a total of 6,000,000 shares of FON Stock nor 3,000,000 shares of PCS Stock; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder; (v) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property, or canceled or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares and other property and other amounts payable with respect to an Award under this Plan shall be deferred 3 either automatically or at the election of the Participant; (vii) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (viii) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all persons, including the Company, any Participant, any stockholder, and any employee of the Company or of any Affiliate. The Committee shall appoint an administrator of the Plan for purposes of interpreting and administering the provisions of Section 11 of the Plan. Section 4. Shares Subject to the Plan. (a) Subject to adjustment as provided in Section 4(b), the total number of Shares available for grant under the Plan in a calendar year shall be nine tenths of one percent (0.9%) of the total outstanding Shares as of the first day of calendar year 1997, plus a number of Shares equal to the number of Shares available for grant under the 1989 Plan as of the close of business on the date of the 1997 Stockholders Meeting, for calendar year 1997, and one and one-half percent (1.5%) of the total outstanding Shares as of the first day of each such year for which the Plan is in effect beginning with calendar year 1998 plus 20,000,000 shares of PCS Stock; provided that such number shall be increased in any year by the number of Shares available for grant hereunder in previous years but not covered by Awards granted hereunder in such years; and provided further, that no more than four million (8,000,000) shares of FON Stock and no more than two million shares of PCS Stock (4,000,000) shall be cumulatively available for the grant of Incentive Stock Options under the Plan. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for grants under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any Shares subject to any Award granted hereunder are forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan. (b) 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 which 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, in the number, class and option price of Shares subject to outstanding Options granted under the Plan, and in the value of, or number or class of Shares subject to, Awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of Shares subject to any Award shall always be a whole number. Section 5. Eligibility. Any Employee or Outside Director shall be eligible to be selected as a Participant. Section 6. Stock Options. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Any Option granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to 4 the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: (a) Exercise Price. The exercise price per Share purchasable under an Option shall be determined by the Committee in its sole discretion; provided that such exercise price shall not be less than the Fair Market Value of the Share on the date of the grant of the Option. (b) Option Period. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Incentive Stock Option shall be exercisable after the expiration of ten years from the date the Option is granted. (c) Exercisability. Options shall be exercisable at such time or times as determined by the Committee at or subsequent to grant. Unless otherwise determined by the Committee at or subsequent to grant, no Incentive Stock Option shall be exercisable until the first anniversary date of the granting of the Incentive Stock Option. (d) Method of Exercise. Subject to the other provisions of the Plan and any applicable Award Agreement, any Option may be exercised by the Participant in whole or in part at such time or times, and the Participant may pay the exercise price in such form or forms, including, without limitation, payment by delivery of cash, Shares or other consideration (including, where permitted by law and the Committee, Awards) having a Fair Market Value on the exercise date equal to the total exercise price, or by any combination of cash, Shares and other consideration, as the Committee may permit. (e) Incentive Stock Options. In accordance with rules and procedures established by the Committee, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options held by any Participant that are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or of any parent or subsidiary corporation of the Company) shall not exceed $100,000 or, if different, the maximum limitation in effect at the time of grant under Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. (f) Form of Settlement. In its sole discretion, the Committee may provide, at the time of grant, that the shares to be issued upon an Option's exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant, or the Committee may provide that the Participant may elect to receive Restricted Stock upon an Option's exercise. Section 7. Restricted Stock. (a) Issuance. Restricted Stock Awards may be issued hereunder to Participants, for such consideration as the Committee may determine, not less than the minimum consideration required by applicable law, either alone or in addition to other Awards granted under the Plan. The provisions of Restricted Stock Awards need not be the same with respect to each recipient. 5 (b) Registration. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book- entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award or shall be held in escrow by the Company until all restrictions on the Restricted Stock have lapsed. (c) Forfeiture. Except as otherwise determined by the Committee at the time of grant, upon termination of employment for any reason during the restriction period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company; provided that in the event of a Participant's retirement, permanent disability, other termination of employment or death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such Participant's shares of Restricted Stock. Section 8. Performance Awards. Performance Awards may be issued hereunder to Participants, for such consideration as the Committee may determine, not less than the minimum consideration required by applicable law, either alone or in addition to other Awards granted under the Plan. The performance criteria to be achieved during any Performance Period and the length of the Performance Period shall be determined by the Committee upon the grant of each Performance Award. Except as provided in Section 12, Performance Awards will be paid only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. The performance levels to be achieved for each Performance Period and the amount of the Award to be distributed shall be conclusively determined by the Committee. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis. Section 9. Other Stock Unit Awards. (a) Stock and Administration. Other Awards of Shares and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other property ("Other Stock Unit Awards") may be granted hereunder to Participants, either alone or in addition to other Awards granted under the Plan. Other Stock Unit Awards may be paid in Shares, cash or any other form of property as the Committee shall determine. Subject to the provisions of the Plan, the Committee shall, subject to Section 3, have sole and complete authority to determine the Employees or Outside Directors to whom and the time or times at which such Awards shall be made, the number of Shares to be granted pursuant to such Awards, and all other conditions of the Awards. The provisions of Other Stock Unit Awards need not be the same with respect to each recipient. (b) Terms and Conditions. Subject to the provisions of this Plan and any applicable Award Agreement, Shares subject to Awards made under this Section 9 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on 6 which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. Shares granted under this Section 9 may be issued for such consideration as the Committee may determine, not less than the minimum consideration required by applicable law. Shares purchased pursuant to a purchase right awarded under this Section 9 shall be purchased for such consideration as the Committee shall in its sole discretion determine, which shall not be less than the Fair Market Value of such Shares as of the date such purchase right is awarded. Section 10. [Deleted] Section 11. Outside Directors' Shares Outside Directors may elect, on an annual basis, to purchase shares of any class of common stock of the Company from the Company in lieu of receiving all or part (in 10% increments) of their annual retainer, meeting fees and committee meeting fees in cash. The purchase price of such shares shall be the Fair Market Value of the stock for the last trading day of the month in which the retainer, meeting fees, and committee meeting fees are earned. Commencing May 1, 1997, the annual retainer, meeting fees and committee meeting fees payable to each Outside Director for service on the Board may, at the election of the Outside Director (the "Annual Election"), be payable to a trust in shares of any class of common stock of the Company. The Annual Election: (i) shall be irrevocable in respect of the one-year period to which it pertains (the "Plan Year") and shall specify the applicable percentage (in increments of 10%) of such annual retainer and meeting fees that such Outside Director wishes to direct to the trust; (ii) must be received in writing by the administrator of the Plan by the established enrollment deadline of any year in which this Plan is in effect in order to cause the next succeeding Plan Year's annual retainer and fees to be subject to the provisions of this Plan; and (iii) must specify whether the ultimate distribution of the shares of common stock to the Outside Directors will be paid, following the Outside Director's death or termination of Board service, in a lump sum or in equal annual payments over a period of two to twenty years. The shares shall be purchased from the Company at the Fair Market Value of the stock for the last trading day of the month in which the fees are earned and shall be credited by the trustee to the account of the Outside Director. The certificates for common stock shall be issued in the name of the trustee of the trust and shall be held by such trustee in trust for the benefit of the Outside Directors; provided, however, that each Outside Director shall be entitled to vote the shares. The trustee shall retain all dividends (which shall be reinvested in shares of the same class of common stock) and other distributions paid or made with respect thereto in the trust. The shares credited to the account of an Outside Director shall remain subject to the claims of the Company's creditors, and the interests of the Outside Director in the trust may not be sold, hypothecated or transferred (including, without limitation, transferred by gift or donation) while such shares are held in the trust. If the Outside Director elects to receive a lump sum distribution, the trustee of the trust shall distribute such shares of common stock free of restrictions within 60 days after the Outside Director's termination date or a later date elected by the Outside Director (no later than the mandatory retirement age of the Outside Director). If the 7 Outside Director elects to receive a lump sum distribution, the Outside Director may, by delivering notice in writing to the administrator of the Plan no later than December 31 of the year prior to the year in which the Outside Director terminates service as a Director, elect to receive any portion or all of the common stock in the form of cash determined by reference to the Fair Market Value of the common stock as of the termination date. Any such notice to the administrator must specify whether the distribution will be entirely in cash or whether the distribution will be in a combination of common stock and cash (in which case the applicable percentage must be specified). In the case of termination of the Outside Director's service as a result of his death, payment of the Outside Director's account shall be in shares of common stock and not in cash. If an Outside Director elects to receive payments in installments, the distribution will commence within 60 days after the Outside Director's termination date and will be made in shares of common stock and not in cash. Notwithstanding anything to the contrary contained herein, any fractional shares of common stock shall be distributed in cash to the Outside Director. Section 12. Change in Control. (a) In order to maintain the Participants' rights in the event of any Change in Control of the Company, as hereinafter defined, the Committee may, in its sole discretion, as to any Award, either at the time an Award is made hereunder or any time thereafter, take any one or more of the following actions: (i) provide for the acceleration of any time periods relating to the exercise or realization of any such Award so that such Award may be exercised or realized in full on or before a date fixed by the Committee; (ii) provide for the purchase of any such Award, upon the Participant's request, for an amount of cash equal to the excess of the Fair Market Value of the property that could have been received upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable over the amount which would have been paid, if any, by the Participant for such property; (iii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iv) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after such Change in Control. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it deems equitable and in the best interests of the Company. (b) Unless the Committee determines otherwise with respect to any Award, a "Change in Control" shall be deemed to have occurred if (i) any person (as defined in Section 13(d) of the Securities Exchange Act of 1934 and the rules thereunder) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, and other than the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new Director (other than a Director designated by a person who has entered into an agreement with the Company to effect a transaction described in (i) above) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at 8 the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof. Section 13. Amendments and Termination. The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of a Participant under an Award theretofore granted, without the Participant's consent, or that without the approval of the Stockholders would, except as is provided in Section 4(b) of the Plan, increase the total number of Shares reserved for the purposes of the Plan. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without his consent. The Committee may also substitute new Awards for Awards previously granted to Participants, including without limitation previously granted Options having higher option prices. Section 14. General Provisions. (a) No Award shall be assignable or transferable by a Participant otherwise than by will or by the laws of descent and distribution, except that Restricted Stock may be used in payment of the exercise price of a stock option issued by the Company and may be otherwise transferred in a manner that protects the interests of the Company as the Committee may determine; provided that, if so determined by the Committee, each Participant or Outside Director may, in the manner established by the Committee, designate a beneficiary to exercise the rights of the Participant or Outside Director with respect to any Award upon the death of the Participant or Outside Director and to receive the Shares or other property issued upon such exercise. (b) The term of each Award shall be for such period from the date of its grant as may be determined by the Committee; provided that in no event shall the term of any Incentive Stock Option exceed a period of ten (10) years from the date of its grant. (c) No Participant shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Participants under the Plan. (d) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a fully executed copy thereof to the Company, and otherwise complied with the then applicable terms and conditions. (e) The Committee shall be authorized to make adjustments in performance award criteria or in the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another 9 corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. (f) The Committee shall have full power and authority to determine whether, to what extent and under what circumstances any Award shall be canceled or suspended. In particular, but without limitation, all outstanding Awards to any Participant shall be canceled if the Participant, without the consent of the Committee, while employed by the Company or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in (other than any nonsubstantial interest, as determined by the Committee), any business that is in competition with the Company or with any business in which the Company has a substantial interest as determined by the Committee or any one or more Senior Officers or committee of Senior Officers to whom the authority to make such determination is delegated by the Committee. (g) All certificates for Shares delivered under the Plan pursuant to any Award 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 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. (h) Subject to the provisions of this Plan and any Award Agreement, the recipient of an Award may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, interest or dividends, or interest or dividend equivalents, with respect to the number of shares covered by the Award, as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (i) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, recipients of Awards under the Plan shall not be required to make any payment or provide consideration other than the rendering of services. (j) The Committee may delegate to one or more Senior Officers or a committee of Senior Officers the right to grant Awards to Employees who are not officers or Directors of the Company and to cancel or suspend Awards to Employees who are not officers or Directors of the Company. (k) The Company shall be authorized to withhold from any Award granted or payment due under the Plan the amount of withholding taxes due with respect to an Award or payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Company shall also be authorized to accept the delivery of Shares by a Participant in payment for the withholding of taxes. (l) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 10 (m) The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Kansas and applicable Federal law. (n) If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. Section 15. Effective Date of Plan. The Plan shall be effective as of April 15, 1997. Section 16. Term of Plan. No Award shall be granted pursuant to the Plan after April 15, 2007, but any Award granted on or before such date may extend beyond that date. 11 EX-10.M 7 AMENDED AND RESTATED CENTEL DIRECTORS DEFERRED COM Exhibit (10)(m) CENTEL DIRECTORS DEFERRED COMPENSATION PLAN Amended and Restated SECTION 1. Plan. Centel Corporation, a Kansas corporation, hereby establishes this "Centel Directors Deferred Compensation Plan". SECTION 2. Definitions. The following words have the respective meanings stated below unless a different meaning is plainly required by the context: (a) "Beneficiary" means any person other than a Director who is entitled to receive distributions under this Plan pursuant to Section 5. (b) "Board" means the Board of Directors of the Company. (c) "Committee" means the committee which administers this Plan as provided in Section 8. (d) "Common Stock account" means the account that was credited with Units prior to the reclassification of Sprint Common Stock into FON Common Stock and PCS Common Stock on November 23, 1998. (e) "Company" means Centel Corporation, a Kansas corporation, and its successors. (f) Prior to March 9, 1993, "Director" means an individual who is (1) serving as a member of a Board or who has been nominated to serve as a member of a Board and (2) receives compensation for such service other 2 than as employee of the Company or a Subsidiary. Beginning March 9, 1993, "Director" means an individual serving as a member of the Board of Directors of Sprint who was a Director of the Company on March 8, 1993. (g) "FON Common Stock" means shares of FON Common Stock, Series 1, of Sprint, par value $2.00 per share. (h) "FON Unit" means the equivalent under this Plan of one share of FON Common Stock. (i) "Market Value" of FON Common Stock or PCS Common Stock on any date means the closing price of the FON Common Stock or PCS Common Stock, as the case may be, on that day on the Composite Transactions Tape, as subsequently reported in The Wall Street Journal, or, if no sale of such stock shall have been made on that date, such closing price on the next preceding date on which there was a sale. (j) "PCS Common Stock" means shares of PCS Common Stock, Series 1, of Sprint, par value $1.00 per share. (k) "PCS Unit" means the equivalent under this Plan of one share of PCS Common Stock. (l) "Plan" means the plan set forth in this instrument, and known as the "Centel Directors Deferred Compensation Plan". (m) "Sprint" means Sprint Corporation, a Kansas corporation, and its successors. (n) "Sprint Common Stock" means the common stock of Sprint, par value $2.50 per share, prior to its 3 recapitalization into FON Common Stock and PCS Common Stock on November 23, 1998. Each share of Sprint Common Stock was reclassified into one share of FON Common Stock and one-half of a share of PCS Common Stock. (o) "Subsidiary" means any corporation fifty percent or more of the voting stock of which is owned, directly or indirectly, by the Company. (p) "Unit" means the equivalent under this Plan of one share of Sprint Common Stock, prior to the reclassification of such common stock into FON Common Stock and PCS Common Stock on November 23, 1998. (q) "Value" of a FON Unit on any date means the Market Value on such date of one share of FON Common Stock. "Value" of a PCS Unit on any date means the Market Value on such date of one share of PCS Common Stock. (r) "360 Common Stock account" means the account that was credited with units representing the common stock of Alltel Corporation before the remaining balance was transferred into the FON Tracking Stock Account and the PCS Tracking Stock account on November 30, 1999. The percentage of the 360 Common Stock account transferred to each account was based on the relative prices and trading volumes of FON Common Stock and PCS Common Stock for a period of time following the reclassification of the Sprint Common Stock. 4 SECTION 3. Participation. Beginning March 9, 1993, no new deferrals of compensation may be made under this Plan. All amounts deferred and accrued under this Plan will be unsecured liabilities of the Company or a Subsidiary and will not be funded with any specific assets of the Company or any Subsidiary. SECTION 4. Accounts. (a) Prime rate account. Interest equivalents will be credited on the balance in a Director's prime rate account at the end of each calendar quarter that ends before the commencement of distribution of the Director's prime rate account pursuant to Section 5(b), Section 5(c), Section 5(d) or Section 5(f), whichever occurs first, and (1) at the end of the month in which the Director's termination of service as a Director ("Termination") occurs if such month is not the last month in a quarter and if distribution is made following such Termination pursuant to Section 5(c), or (2) as of the Common Distribution Date (as defined in Section 5(b)) if distribution does not commence until after the Common Distribution Date. For the purpose of crediting interest, (1) interest will be computed at the prime rate of interest in effect at Citicorp, N.A., New York, New York during such period, and (2) the balance accrued in a Director's prime rate account during any period will be the average of the balances 5 in the Director's account at the beginning of each month during the period. (b) FON Tracking Stock account. FON Units were credited to each Director's FON Tracking Stock account at the rate of one FON Unit for each Unit credited to such Director's Common Stock account at the close of business on November 23, 1998, to reflect the reclassification of the Sprint Common Stock. FON Units were credited to each Director's FON Tracking Stock account as of November 30, 1998, in an amount representing 90.17144% of the balance in such Director's 360 Common Stock account as of that date. The FON Units credited to each Director's FON Tracking Stock Account were doubled to reflect the two-for-one stock split of the FON Common Stock in the 1999 second quarter. On each record date for determination of shareowners entitled to receive a dividend on the outstanding shares of FON Common Stock, there will be credited to each FON Tracking Stock account that number of additional FON Units equal to the number of shares (and fraction of a share to the nearest one-hundredth) of FON Common Stock which could have been purchased at the Market Value of FON Common Stock on that date with the amount, if paid in cash, or the value, if paid in property (other than shares of FON Common Stock), of the dividend to be paid on a number (to the nearest one-hundredth) of shares of FON Common Stock equal to 6 the number of FON Units (to the nearest one-hundredth) in that account on such record date. Upon Termination, the Director's FON Tracking Stock account will be transferred into the Director's prime rate account as follows: (1) the FON Tracking Stock account will be valued (the "FON Account Value") at the Market Value of the FON Common Stock on the last day of business in the month that the Termination occurs; (2) an amount equal to the FON Account Value will be credited to the prime rate account; and (3) interest equivalents will be credited on the balance in the prime rate account pursuant to the terms specified in Section 4(a). (c) PCS Tracking Stock account. PCS Units were credited to each Director's PCS Tracking Stock account at the rate of one-half of a PCS Unit for each Unit credited to such Director's Common Stock account at the close of business on November 23, 1998, to reflect the reclassification of Sprint Common Stock. PCS Units were credited to each Director's PCS Tracking Stock account as of November 30, 1998, in an amount representing 9.82856% of the balance in such Director's 360 Common Stock account as of that date. The PCS Units credited to each Director's PCS Tracking Stock account were doubled to reflect the two-for-one stock split of the PCS Common Stock in the 2000 first quarter. On each record date for determination of shareowners entitled to receive a dividend on the 7 outstanding shares of PCS Common Stock, there will be credited to each PCS Tracking Stock account that number of additional PCS Units equal to the number of shares (and fraction of a share to the nearest one-hundredth) of PCS Common Stock which could have been purchased at the Market Value of PCS Common Stock on that date with the amount, if paid in cash, or the value, if paid in property (other than shares of PCS Common Stock), of the dividend to be paid on a number (to the nearest one-hundredth) of shares of PCS Common Stock equal to the number of PCS Units (to the nearest one- hundredth) in that account on such record date. Upon Termination, the Director's PCS Tracking Stock account will be transferred into the Director's prime rate account as follows: (1) the PCS Tracking Stock account will be valued (the "PCS Account Value") at the Market Value of PCS Common Stock on the last day of business in the month that the Termination occurs; (2) an amount equal to the PCS Account Value will be credited to the prime rate account; and (3) interest equivalents will be credited on the balance in the prime rate account pursuant to the terms specified in Section 4(a). (d) Transfers between Accounts. Within the limitations of this Section 4(d), a Director may elect, by executing and filing with the Company an Account Transfer Request, to (1) transfer all or any portion of his or her PCS Tracking Stock account to his or her 8 prime rate account or to his or her FON Tracking Stock account, (2) transfer all or any portion of his or her FON Tracking Stock account to his or her prime rate account or to his or her PCS Tracking Stock account, or (3) transfer all or any portion of his or her prime rate account to his or her FON Tracking Stock account or to his or her PCS Tracking Stock account. Such election shall be effective on the last day of the calendar month in which the Company receives the executed Account Transfer Request. The value of FON Units or PCS Units being transferred shall be determined by multiplying the number of FON Units or PCS Units being transferred (to the nearest one-hundredth) by the Market Value of one share of FON Common Stock or PCS Tracking Stock, as the case may be, on the effective date of the transfer. If the transfer is being made from the FON Tracking Stock account or the prime rate account to the PCS Tracking Stock account, the value of the FON Units being transferred as above determined or the amount being transferred from the prime rate account will be divided by the Market Value of one share of the PCS Common Stock on the effective date of transfer to determine the number of PCS Units (to the nearest one-hundredth) to be credited to the PCS Tracking Stock account. If the transfer is being made from the PCS Tracking Stock account or the prime rate account to the FON Tracking 9 Stock account, the value of the PCS Units being transferred as above determined or the amount being transferred from the prime rate account will be divided by the Market Value of one share of the FON Common Stock on the effective date of transfer to determine the number of FON Units (to the nearest one-hundredth) to be credited to the FON Tracking Stock account. SECTION 5. Distributions. (a) Except as provided in Section 5(b), the timing and manner of each distribution to a Director under the Plan shall be made pursuant to such Director's Valid Election, as defined in the following sentence. A "Valid Election" means an election by the Director which (i) is irrevocable except as provided in Section 5(g), (ii) is made in writing pursuant to such rules as the Committee may determine, and (iii) provides for a distribution pursuant to paragraphs (c) or (d). (b) If a Director does not submit a Valid Election, upon the Director's Termination, the amount accrued in the Director's prime rate account will be distributed to the Director in a lump sum as soon as practicable after January 31 of the calendar year following the calendar year in which the Director's 10 Termination occurs (such January 31 is referred to herein as the "Common Distribution Date"). (c) If the Director submits a Valid Election prior to the first day of the calendar year in which such Director's Termination occurs, distributions shall be paid under the Plan commencing after the date of the Director's Termination as follows: (i) in a lump sum either as soon as practicable after the Director's Termination or as soon as practicable after the Common Distribution Date, as specified in the Valid Election; or (ii) in equal annual installment payments over a period from two (2) to twenty (20) years commencing as soon as practicable after the Director's Termination or as soon as practicable after the Common Distribution Date, as specified in the Valid Election. For purposes of determining the amount of each equal annual installment, the assumed rate of interest shall be the average of the rates calculated in accordance with Section 4(a) for the 20 quarters preceding the date on which the distribution commences. 11 (d) If the Director submits a Valid Election on or after the first day of the calendar year in which such Director's Termination occurs but prior to December 31 of the calendar year in which such Director's Termination occurs, pursuant to the terms of such Valid Election distributions shall be paid under the Plan commencing no earlier than the Common Distribution Date using one of the following methods: (i) in a lump sum as soon as practicable after the Common Distribution Date; or (ii) in equal annual installment payments over a period specified in the Valid Election from two (2) to twenty (20) years commencing as soon as practicable after the Common Distribution Date. For purposes of determining the amount of each equal annual installment, the assumed rate of interest shall be the average of the rates calculated in accordance with Section 4(a) for the 20 quarters preceding the Common Distribution Date. (e) All distributions of amounts accrued in a Director's deferred compensation account will be paid exclusively in cash. 12 (f) In the event of a Director's death, any amounts to which the Director is entitled hereunder will be distributed to the Beneficiary(ies) entitled thereto: (i) if installment payments have commenced pursuant to Section 5(c)(ii) or Section 5(d)(ii), either (1) as a continuation of the installment payments, or (2) in a lump sum equal to the present value of the remaining installments determined using the same interest rate assumption used in calculating the amount of the installments, as provided in a Valid Election; (ii) if no distribution has taken place pursuant to Section 5(c) or Section 5(d), either (1) in equal annual installments over a period from two (2) to twenty (20) years, using the same interest rate assumption set forth in Section 5(c)(ii) to calculate the amount of each installment, or (2) in a lump sum, as provided in a Valid Election; or (iii) if no provision is made in a Valid Election filed with the Company or if all 13 of the Beneficiaries designated by a Director predecease the Director, in a lump sum payment to the estate of the deceased Director as soon as practicable following the death of the Director. (g) Notwithstanding any provision to the contrary hereunder, at any time, the Director may change a Valid Election by electing to accelerate the date(s) of payment specified in such prior election, subject to the following circumstances: (i) the Committee in its sole discretion consents to the change in Valid Election, and (ii) the amounts that are subject to such accelerated payment date(s) shall be reduced by 6%. Subject to the preceding sentence, the calculation of the amount of the accelerated payment(s) and the calculation of such reduction shall be made in the sole discretion of the Committee. SECTION 6. Anti-Dilution. In the event of any change in capitalization which affects the FON Common Stock or the PCS Common Stock, such as a stock dividend, a stock 14 distribution, a stock split-up or a subdivision or combination of shares, such adjustments, if any, as the Board in its discretion deems appropriate to reflect such change shall be made with respect to the number of FON Units in each FON Tracking Stock account or the number of PCS Units in each PCS Tracking Stock account, as the case may be. SECTION 7. Beneficiaries. (a) A Director may, by filing a Beneficiary Designation with the Company during the Director's lifetime, designate (1) a Beneficiary or Beneficiaries to whom distribution of the Director's deferred compensation accounts will be made in the event of the Director's death prior to the full receipt of the Director's interests under this Plan, and (2) the proportions to be distributed to each such designated Beneficiary if there be more than one. Any such designation may be revoked or changed by the Director at any time and from time to time by filing a new Beneficiary Designation with the Company. If a designated Beneficiary dies after the Director but prior to distribution of all that designated Beneficiary's proportionate share of the Director's interest under this Plan, the then remaining balance of such share will be distributed in a lump sum payment to the estate of the designated Beneficiary. 15 (b) If the Company, after reasonable inquiry, is unable within one year to determine whether any designated Beneficiary did in fact survive the event that entitled such Beneficiary to receive distribution under this Plan, it will be conclusively presumed that such Beneficiary did in fact die prior to such event. SECTION 8. Committee. This Plan will be administered by a Committee consisting of at least three (3) members appointed by the Board of the Company, who are employees of Sprint or a subsidiary of Sprint and who do not participate in this Plan. Except as otherwise expressly provided in this Plan, the Committee shall have full power and authority, within the limits provided by this Plan: (a) to construe this Plan and make equitable adjustments for any mistakes or errors made in the administration of this Plan; (b) to determine all questions arising in the administration of this Plan, including the power to determine the rights of Directors participating in this Plan and their Beneficiaries and the amount of their respective interests; (c) to adopt such rules and regulations as it may deem reasonably necessary for the proper and efficient administration of this Plan consistent with its purposes; 16 (d) to enforce this Plan in accordance with its terms and with the rules and regulations adopted by the Committee; and (e) to do all other acts which in its judgment are necessary or desirable for the proper and advantageous administration of this Plan. The Committee shall act by the vote or concurrence of a majority of its members and shall maintain a written record of its decisions and actions. All decisions and actions of the Committee pursuant to the provisions of this Plan shall be final and binding upon all persons affected thereby. No member of the Committee shall have any personal liability to anyone, either as such member or as an individual, for anything done or omitted to be done in good faith in carrying out the provisions of this Plan. SECTION 9. Non-Alienation. No right or benefit under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right or benefit under this Plan shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits except such claims as may be made by the Company or any Subsidiary. SECTION 10. Notice. Any notice authorized or required to be given to the Company under this Plan shall be deemed given upon delivery in writing, signed by the person giving 17 the notice, to the Secretary of the Company or such other officer as may be designated by the Board. SECTION 11. Plan Modifications. The Board of the Company may at any time terminate this Plan or may, from time to time, amend any provision of this Plan in such manner and to such extent as it may, in its discretion, deem to be advisable. In the event this Plan is terminated, any amount remaining in any Director's account will be distributed in such manner as is determined by the Committee in its sole discretion. SECTION 12. Applicable Law. This Plan shall be governed by the law of the State of Kansas. EX-10.U 8 AGREEMENTS REGARDING SPECIAL COMPENSATION Exhibit (10)(u) Special Compensation and Non-Compete Agreement This Agreement is entered into as of the 6th day of August, 1999 (the "Grant Date"), by and between Sprint Corporation, a Kansas corporation ("Sprint," and it, together with its Subsidiaries, the "Employer"), and Vonya B. McCann ("Employee"). Recitals 1. Employer is engaged in the telecommunications and related businesses. This is a worldwide business that may be conducted from sites and serve customers throughout the world. 2. By virtue of her agreement to work for Employer, Employee will gain access to valuable Proprietary Information of Employer. 3. Employer desires to enter into this Agreement to provide severance and other benefits for Employee in exchange for Employee's agreement to maintain the confidentiality of certain information and to refrain from competing with Employer during and after termination of her employment with Employer. Capitalized terms are defined in Section 5 or parenthetically throughout this Agreement. Now, Therefore, in consideration of the premises and of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties hereby agree as follows: 1. Employment At Will. Employee's employment may be terminated by either party for any reason. Employee shall provide Employer with written notice of her intent to terminate at least 30 days before the effective date of the termination. Except in the event of Termination for Cause, Employer shall provide Employee with written notice of its intent to terminate Employee's employment at least 30 days before the effective date of the termination. 2. Employee's Covenants. 2.01. Exclusivity of Services. Employee shall, during her employment with Employer, owe an undivided duty of loyalty to Employer and agrees to devote her entire business time and attention to the performance of those duties and responsibilities and to use her best efforts to promote and develop the business of Employer. Employee shall adhere to the conflicts of interest provisions set forth in Section 7 of the Sprint Code of Ethics (or any successor provision, which is incorporated by this reference) 1 as in effect as of the date of this Agreement and as may be amended from time to time hereafter. The determination of the Committee as to the Employee's compliance with this provision shall be final. 2.02. Proprietary Information. Employee acknowledges that during the course of her employment she has learned or will learn or develop Proprietary Information. Employee further acknowledges that unauthorized disclosure or use of such Proprietary Information, other than in discharge of Employee's duties, will cause Employer irreparable harm. Except in the course of her employment with Employer under this Agreement, in the pursuit of the business of Employer, or as otherwise required in employment with Employer, Employee shall not, during the course of her employment or at any time following termination of her employment, directly or indirectly, disclose, publish, communicate, or use on her behalf or another's behalf, any Proprietary Information. If during or after her employment Employee has any questions about whether particular information is Proprietary Information she shall consult with Employer's Corporate Secretary. 2.03. Non-Competition. Employee shall not, during the Non-Compete Period, engage in Competitive Employment, whether paid or unpaid and whether as a consultant, employee, or otherwise. This provision shall not apply if, within one year following a Change in Control: (i) Employer terminates Employee's employment with Employer for any reason other than Termination for Cause or Total Disability; or (ii) Employee terminates her employment with Employer upon Constructive Discharge. If Employee ceases to be employed by Employer because of the sale, spin-off, divestiture, or other disposition by Employer of the Subsidiary, division, or other divested unit employing Employee, this provision shall continue to apply during the Non-Compete Period, except that Employee's continued employment for the Subsidiary, division, or other divested unit disposed of by the Employer shall not be deemed a violation of this provision. Employee agrees that because of the worldwide nature of Employer's business, breach of this agreement by accepting Competitive Employment anywhere in the United States would irreparably injure Employer and that, therefore, a more limited geographic restriction is neither feasible nor appropriate to protect Employer's interests. Employee's representation of a Competitor of Employer in the private practice of law as a member of a law firm shall not be deemed as breaching this Non-Competition covenant. 2 2.04. Inducement of Employees, Customers and Others. During the term of her employment and the Non-Compete Period, Employee shall not directly or indirectly solicit, induce, or encourage any employee, consultant, agent, or customer of Employer with whom she has worked or about whom she has gained Proprietary Information to terminate his or its employment, agency, or customer relationship with Employer or to render services for or transfer business to any Competitor of Employer. 2.05. Return of Employer's Property. Employee shall, upon termination of her employment with Employer, return to Employer all property of Employer in her possession, including all notes, reports, sketches, plans, published memoranda or other documents, whether in hard copy or in computer form, created, developed, generated, received, or held by Employee during employment, concerning or related to Employer's business, whether containing or relating to Proprietary Information or not. Employee 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 Employer's premises without Employer's authorization. 2.06. Exit Interview. At Employer's request, Employee shall participate in an exit interview prior to her Severance Date to provide for the orderly transition of her duties, to arrange for the return of Employer's property, to discuss her intended new employment, and to discuss and complete such other matters as may be necessary to ensure full compliance with this Agreement. 2.07. Confidentiality of Agreement. Employee shall not disclose or discuss the existence of this Agreement, the Special Compensation, or any other terms of the Agreement except (i) to members of her immediate family, (ii) to her financial advisor or attorney, but then only to the extent necessary for them to assist her, (iii) to a potential employer on a strictly confidential basis, and then only to the extent necessary for reasonable disclosure in the course of serious negotiations, or (iv) as required by law or to enforce her legal rights. 3. Payment of Special Compensation. In lieu of any payments or benefits available under any and all Employer severance plans or policies but not in lieu of benefits under Sprint's Long-Term Disability Plan, Employee shall be entitled to Special Compensation plus any vacation pay for vacation accrued but not taken by Employee on her Severance Date, if 3 (i) Employer terminates Employee's employment with Employer for any reason other than Termination for Cause or Total Disability or (ii) Employee terminates her employment with Employer upon Constructive Discharge. The payments and benefits provided for in this section shall be in addition to all other sums then payable and owing to Employee hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Employee for employment or services provided to any Person other than Employer after the Severance Date and shall be in full settlement and satisfaction of all of Employee's claims against and demands upon Employer. Employee's right to receive severance or other benefits pursuant to this section shall cease immediately if (1) Employee is reemployed by Employer, (2) Employee materially breaches this Agreement, or (3) Employee, while bound by the provisions of Section 2.03, represents a Competitor of Employer in the private practice of law as permitted by the last sentence of Section 2.03. 4. Dispute Resolution. 4.01. Jurisdiction and Venue. Employee consents to jurisdiction and venue in the state and federal courts in and for Johnson County, Kansas, for any and all disputes arising under this Agreement, provided, however, that Employer may seek injunctive relief in any court of competent jurisdiction to enjoin any violation of the covenants under Section 2, as well as seeking damages therefor. 4.02. Remedies. Employee acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of this Agreement will not cause her undue hardship and that the provisions are reasonably necessary and commensurate with the need to protect Employer and its legitimate and proprietary business interests and property from irreparable harm. Employee acknowledges that failure to comply with the terms of this Agreement, particularly the provisions of Section 2, will cause irreparable damage to Employer. Therefore, Employee agrees that Employer is entitled to specific performance or injunctive relief, without bond, against Employee to prevent such damage or breach, and the existence of any claim or cause of action Employee may have against Employer shall not constitute a defense thereto. If Employee materially breaches any provision of Section 2 or if any of those provisions are held to be unenforceable against Employee, Employee shall return any Special Compensation paid pursuant to this Agreement. During Employee's employment with Employer, the Committee shall determine whether Employee has materially breached the provisions of Section 2, and the Committee's determination shall be final. 5. Definitions. 4 5.01. Affiliate. "Affiliate" means, with respect to any Person, a Person, other than a Subsidiary of such Person, (i) controlling, controlled by, or under common control with such Person and (ii) any other Person with whom such Person reports consolidated financial information for financial reporting purposes. "Control" for this purpose means direct or indirect possession by one Person of voting or management rights of at least 20% with respect to another Person. 5.02. Change in Control. "Change in Control" means the occurrence of any of the following events: (i) the acquisition by any "person" or "group" as such terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of Sprint, (B) Sprint or a corporation owned, directly or indirectly, by the stock holders of Sprint in substantially the same proportions as their ownership of stock of Sprint, or (C) Deutsche Telekom AG or France Telecom, individually or collectively; of securities of Sprint representing 20% or more of the combined voting power of Sprint's then outstanding securities; or (ii) at the end of any two-year period, less than a majority of the directors of Sprint are directors (A) who were directors of Sprint at the beginning of the two-year period or (B) whose election or nomination as director was approved by a vote of 2/3's of the then directors described in this clause (ii) of this Section 5.02 by prior nomination or election; or (iii) the shareholders of Sprint approve a merger (in which Sprint is not the surviving operating entity), consolidation, liquidation, or dissolution of Sprint, or a sale of all or substantially all of the assets of Sprint; 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. 5.03. Committee. "Committee" means the Organization, Compensation, and Nominating Committee of Sprint's board of directors. 5 5.04. Competitive Employment. "Competitive Employment" means the performance of duties or responsibilities for a Competitor of Employer (i) that are of a similar nature or employ similar professional or technical skills (e.g., marketing, engineering, legal, etc.) to those employed by Employee in her performance of services for Employer at any time during the two years before the Severance Date, (ii) that relate to products or services that are competitive with Employer's products or services with respect to which Employee performed services for Employer at any time during the two years before the Severance Date, or (iii) in the performance of which Proprietary Information to which Employee had access at any time during the two-year period before the Severance Date could be of substantial economic value to the Competitor of Employer. 5.05. Competitor of Employer. Because of the highly competitive, evolving nature of Employer's industry, the identities of companies in competition with Employer 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. A Sprint Affiliate shall not be a Competitor of Employer. "Competitor of Employer" means (i) any Person doing business in the United States whose primary business is providing local or long distance telephone or wireless service; (ii) any Person doing business in the United States, who, together with its Consolidated Affiliates, receives more than 15% of its gross operating revenue from a line of business in which Employer, together with its Consolidated Affiliates, receives more than 15% of its gross operating revenues, all as measured by the most recent available financial information of both Employer and such other Person, at the time Employee accepts, or proposes to accept, employment with or to otherwise perform services for such Person; (iii) any Person doing business in the United States and operating, for less than 5 years, a line of business from which Employer derives more than 15% of its gross operating revenues, notwithstanding such Person's lack of substantial revenues in such line of business; and (iv) any Person doing business in the United States, who receives more than 15% of its gross operating revenue from a line of business in which Employer has operated for less than 5 years, notwithstanding Employer's lack of substantial revenues in such line of business. 6 If financial information is not publicly available or is inadequate for purposes of applying this definition, the burden shall be on the Employee to demonstrate that such Person is not a Competitor of Employer. 5.06. Consolidated Affiliate. "Consolidated Affiliate" means, with respect to any person, all Affiliates and Subsidiaries of such person, if any, with whom the financial statements of such person are required, under generally accepted accounting principles, to be reported on a consolidated basis. 5.07. Constructive Discharge. "Constructive Discharge" means termination by the Employee of her employment with the Employer by written notice given within 60 days following one or more of the following events: (i) unless Employer first offers to Employee a position having an equal or greater grade rating, reassignment of Employee from her then current position with Employer to a position having a lower grade rating, in each case under Employer's methodology of rating employment positions for its employees generally; (ii) a reduction in Employee's targeted total compensation by more than 10% other than by an across-the-board reduction affecting substantially all similarly situated employees of Employer; or (iii) a change in the Employee's base employment area to anywhere other than the Washington, D.C., metropolitan area within one year following a Change in Control. 5.08. Non-Compete Period. "Non-Compete Period" means the 18-month period beginning on Employee's Severance Date. If Employee 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. 5.09. Person. "Person" means any individual, corporation, partnership, association, company, or other entity. 5.10. 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 Employer or Employer'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, in- 7 cluding the identity of other employees of Employer, 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 Employer or of any customer or supplier of Employer, or (iii) has been identified to Employee as confidential by Employer, either orally or in writing. 5.11. Severance Date. "Severance Date" means the last day on which Employee actually performs services as an employee of Employer. 5.12. Severance Period. "Severance Period" means the 18-month period beginning on Employee's Severance Date. 5.13. Special Compensation. "Special Compensation" means Employee's right (i) to continue to receive during the Severance Period periodic compensation at the same rate as her base salary in effect at the Employee's Severance Date; (ii) to receive bonuses under one or more of Sprint's Management Incentive Plan, Executive Management Incentive Plan, and Sales Incentive Compensation Plan in which Employee participated on the Severance Date (together with other incentive compensation plans specifically approved for this purpose by the Committee, the "Short-Term Incentive Plans") based on the Employee's target amount under such plans on the Severance Date, and assuming achievement of performance targets under the Short-Term Incentive Plans of (A) the actual performance level for periods before the beginning of the Severance Period and (B) the lesser of (a) the actual performance level during the Severance Period and (b) 100% of targeted performance during the Severance Period, pro-rating the foregoing performance levels under the Short-Term Incentive Plans based on the ratio of the amount of time in each of the foregoing time periods to the amount of time in the whole performance period under each Short-Term Incentive Plan; (iii) to receive an award under the Long Term Incentive Plan and the Executive Long Term Incentive Plan (the "Long-Term Incentive Plans"), assuming achievement of performance targets under the Long-Term Incentive Plans of 8 (A) the actual performance level for periods before the beginning of the Severance Period and (B) 0% of targeted performance during the Severance Period, pro-rating the foregoing performance levels under the Long-Term Incentive Plans based on the ratio of the amount of time in each of the foregoing time periods to the amount of time in the whole performance period under each Long-Term Incentive Plan; (iv) to continue to participate throughout the Severance Period in all group health plans (as defined in Code section 106(b)(3) or any successor provision of the Internal Revenue Code of 1986, as amended, including but not limited to any medical and dental) that Employer continues to make available to Employer's employees generally and that Employee was participating in on her Severance Date, except that participation in those plans after Employee becomes employed full-time during the Severance Period shall immediately cease unless Employee elects to continue coverage under the COBRA continuation provisions of any group health plan by paying the applicable premium therefor; (v) to continue to participate throughout the Severance Period in all group life insurance and qualified or non-qualified retirement plans that Employer continues to make available to Employer's employees generally and that Employee was participating in on her Severance Date; (vi) to receive out-placement counseling by a firm selected by Employer to continue until Employee becomes employed; (vii) to continue to receive throughout the Severance Period all executive perquisites (including automobile allowance, long distance services and all miscellaneous services) Employee was entitled to receive on the Severance Date except country club membership dues and accrual of vacation; and (viii) to have the end of the Severance Period treated as Employee's termination date for purposes of Sprint's employee stock option plans and restricted stock plans. Employee shall not be entitled to participate in Sprint's long- and short-term disability plan after the Severance Date. 5.14. Subsidiary. "Subsidiary" means, with respect to any Person (the "Controlling Person"), all other Persons (the "Controlled Persons") in whom the Controlling Person, alone or in combination with one or more of its Subsidiaries, owns or controls more than 50% of the management or voting rights, together with all Subsidiaries of such Controlled Persons. 5.15. Termination for Cause. "Termination for Cause" means termination by Employer of Employee's employment because of 9 (i) conduct by the Employee that violates the Employers code of ethics or reflects adversely on the Employee's honesty or (ii) Employee's willful engagement in conduct that is materially injurious to the Employer. Termination for failure to meet performance expectations, unless willful, continuing, and substantial, shall not be deemed a Termination for Cause. 5.16. Total Disability. "Total Disability" shall have the same meaning as in Sprint's Long Term Disability Plan, as amended from time to time. 6. General Provisions. 6.01. Obligations to Survive Termination of Employment. Employee's obligations under this Agreement shall survive her termination of employment with Employer. 6.02. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Employee's executors, administrators, legal representatives, heirs, and legatees and to Employer's successors and assigns. 6.03. Partial Invalidity. The various provisions of this Agreement are intended to be severable and to constitute independent and distinct binding obligations. Should any provision of this Agreement be determined to be void and unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other provision or part thereof, and such provision or part thereof shall be deemed modified to the extent required to permit enforcement. Without limiting the generality of the foregoing, if the scope of any provision contained in this Agreement is too broad to permit enforcement to its full extent, but may be enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Employee hereby agrees that such scope may be judicially modified accordingly. 6.04. Waiver. The waiver by either party of a breach of any provision of this Agreement by any other party shall not operate or be construed as a waiver of any subsequent breach. 6.05. Prior Agreements Merged into Agreement. This Agreement represents the entire understanding of the parties and, to the extent that there is any conflict, supersedes all other agreements with respect to the subject matter hereof. 6.06. Notices. 10 Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party (i) upon actual receipt at the address of such party specified below if delivered personally or by regular U.S. mail; (ii) upon receipt by the sender of a "GOOD" or "OK" confirmation of transmission if transmitted by facsimile, but only if a copy is also sent by regular mail or courier; (iii) when delivery is certified if sent as certified mail, return receipt requested, addressed, in any case to the party at the following addresses: If to Employee: If to Employer: Vonya B. McCann Sprint Corporation 2911 Fessenden St., N.W. Attn: Corporate Secretary Washington, D.C. 2330 Shawnee Mission Parkway Westwood, KS 66205 FAX: (913) 624-2256 or to such other address or telecopy number as any party may designate by written notice in the aforesaid manner, or with respect to Employee, such address as Employee may provide Employer for purposes of its human resources database. 6.07. Governing Law. Because Employer's business is headquartered in Kansas, and to ensure uniformity of enforcement of this Agreement, the validity, interpretation, and enforcement of this Agreement shall be governed by the laws of the State of Kansas. 6.08. Number and Gender. Wherever the context requires, each term stated in either the singular or plural shall include the singular and the plural, and the pronouns stated in either the masculine, the feminine, or the neuter gender shall include the masculine, feminine, or neuter as appropriate. 6.09. Headings. The headings of the Sections of this Agreement are for reference purposes only and do not define or limit, and shall not be used to interpret or construe the contents of this Agreement. 11 In Witness Whereof, the parties have caused this Agreement to be duly executed and effective as of August 6, 1999. Sprint Corporation by: /s/ Don A. Jensen Don A. Jensen, Vice President and Secretary /s/ Vonya B. McCann Vonya B. McCann, Employee 12 Special Compensation and Non-Compete Agreement This Agreement is entered into as of the 9th day of December, 1997 (the "Effective Date"), by and between Sprint Corporation, a Kansas corporation ("Sprint," and it, together with its Subsidiaries, the "Employer"), and Thomas E. Weigman ("Employee"). Recitals 1. Employer is engaged in the telecommunications and related businesses. This is a worldwide business that may be conducted from sites and serve customers throughout the world. 2. By virtue of his work for Employer, Employee has gained and will continue to gain additional valuable Proprietary Information of Employer. 3. Employer desires to enter into this Agreement to provide severance and other benefits for Employee in exchange for Employee's agreement to maintain the confidentiality of certain information and to refrain from competing with Employer during and after termination of his employment with Employer. Capitalized terms are defined in Section 6 or parenthetically throughout this Agreement. Now, Therefore, in consideration of the premises and of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties hereby agree as follows: 1. Employment At Will. Employee's employment may be terminated by either party for any reason. Employee shall provide Employer with written notice of his intent to terminate at least 30 days before the effective date of the termination. Except in the event of Termination for Cause, Employer shall provide Employee with written notice of its intent to terminate Employee's employment at least 30 days before the effective date of the termination. 2. Employee's Covenants. 2.01. Exclusivity of Services. Employee shall, during his employment with Employer, owe an undivided duty of loyalty to Employer and agrees to devote his entire business time and 1 attention to the performance of those duties and responsibilities and to use his best efforts to promote and develop the business of Employer. Employee shall adhere to the conflicts of interest provisions set forth in Section 7 of the Sprint Code of Ethics (or any successor provision, which is incorporated by this reference) as in effect as of the date of this Agreement and as may be amended from time to time hereafter. The determination of the Committee as to the Employee's compliance with this provision shall be final. 2.02. Proprietary Information. Employee acknowledges that during the course of his employment he has learned or will learn or develop Proprietary Information. Employee further acknowledges that unauthorized disclosure or use of such Proprietary Information, other than in discharge of Employee's duties, will cause Employer irreparable harm. Except in the course of his employment with Employer under this Agreement, in the pursuit of the business of Employer, or as otherwise required in employment with Employer, Employee 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 Employee has any questions about whether particular information is Proprietary Information he shall consult with Employer's Corporate Secretary. 2.03. Non-Competition. Employee shall not, during the Non-Compete Period, engage in Competitive Employment, whether paid or unpaid and whether as a consultant, employee, or otherwise. This provision shall not apply if, within one year following a Change in Control: (i) Employer terminates Employee's employment with Employer for any reason other than Termination for Cause or Total Disability; or (ii) Employee terminates his employment with Employer upon Constructive Discharge. If Employee ceases to be employed by Employer because of the sale, spin-off, divestiture, or other disposition by Employer of the subsidiary, division, or other divested unit employing Employee, this provision shall continue to apply during the Non-Compete Period, except that Employee's continued employment for the Subsidiary, division, or other divested unit disposed of by the Employer shall not be deemed a violation of this provision. 2 Employee agrees that because of the worldwide nature of Employer's business, breach of this agreement by accepting Competitive Employment anywhere in the United States would irreparably injure Employer and that, therefore, a more limited geographic restriction is neither feasible nor appropriate to protect Employer's interests. 2.04. Inducement of Employees, Customers and Others. During the term of his employment and the Non-Compete Period, Employee shall not directly or indirectly solicit, induce, or encourage any employee, consultant, agent, or customer of Employer with whom he has worked or about whom he has gained Proprietary Information to terminate his or its employment, agency, or customer relationship with Employer or to render services for or transfer business to any Competitor of Employer. 2.05. Return of Employer's Property. Employee shall, upon termination of his employment with Employer, return to Employer all property of Employer in his possession, including all notes, reports, sketches, plans, published memoranda or other documents, whether in hard copy or in computer form, created, developed, generated, received, or held by Employee during employment, concerning or related to Employer's business, whether containing or relating to Proprietary Information or not. Employee 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 Employer's premises without Employer's authorization. 2.06. Exit Interview. At Employer's request, Employee shall participate in an exit interview prior to his Severance Date to provide for the orderly transition of his duties, to arrange for the return of Employer's property, to discuss his intended new employment, and to discuss and complete such other matters as may be necessary to ensure full compliance with this Agreement. 3 2.07. Confidentiality of Agreement. Employee shall not disclose or discuss the existence of this Agreement, the Alternative Stock-Based Award, the Special Compensation, or any other terms of the Agreement except (i) to members of his immediate family, (ii) to his financial advisor or attorney, but then only to the extent necessary for them to assist him, (iii) to a potential employer on a strictly confidential basis, and then only to the extent necessary for reasonable disclosure in the course of serious negotiations, or (iv) as required by law or to enforce his legal rights. 3. Alternative Stock-Based Awards. As partial consideration for Employee's agreements hereunder, Employee shall be granted one of the two Stock-Based Awards, at the election of Employee, on the terms set forth in this section. Employee must indicate which of the two forms of compensation he elects to receive by checking the corresponding box above his signature line at the bottom of this Agreement. If Employee signs this Agreement but checks neither box or both boxes, Employee shall be considered to have elected to receive restricted stock. 3.01. Alternative Award of Restricted Stock. If Employee elects to receive Restricted Stock, this Section 3.01 shall be considered a part of this Agreement, otherwise it shall not be considered a part of this Agreement. Employer hereby grants to Employee an award of 7,500 shares of restricted stock under Sprint's 1990 Restricted Stock Plan, the terms of which are hereby incorporated into this Agreement by this reference. (a) Lapse of Restrictions. Employee may not sell, transfer, assign, pledge, or otherwise encumber or dispose of shares of restricted stock until the restrictions on the shares lapse. Restrictions on the shares covered by this award shall lapse, with respect to 25% of the total shares granted, on each of the first four anniversary dates of the Effective Date. (b) Rights as Stockholder and Issuance of Shares. Except as set forth in the 1990 Restricted Stock Plan, Employee shall have all rights of a stockholder with respect to the shares of restricted 4 stock, including the right to vote the shares of stock and the right to dividends on the shares. The shares of restricted stock shall be registered in the name of the Employee and the certificates evidencing the shares shall, at Employer's sole election, either (i) bear an appropriate legend referring to the terms, conditions, and restrictions applicable to the award or (ii) be held in escrow by the Company. Within 60 days of the Effective Date of this Agreement, the Employee shall execute a stock power or powers assigning the shares of restricted stock to Sprint, and Sprint shall hold the stock power and the certificate in escrow and may use the stock power to effect forfeiture of the restricted stock to the extent the shares are forfeited under the terms of this Agreement. Sprint shall cause the certificate evidencing unrestricted shares of common stock to be issued to the Employee as soon as practicable after the restrictions lapse on the restricted shares. 3.02. Alternative Award of Stock Options. If Employee elects to receive stock options, this Section 3.02 shall be considered a part of this Agreement; otherwise it shall not be considered a part of this Agreement. Sprint hereby grants to Employee, under Sprint's 1990 Stock Option Plan, an option to purchase 30,000 shares of Sprint common stock at a price of $56.50 per share. The option shall become exercisable, with respect to 25% of the total shares granted, on each of the first four anniversaries of the Effective Date. The option shall expire on December 9, 2007. The terms of the 1990 Stock Option Plan are hereby incorporated into this Agreement by reference. 3.03. Provisions Applicable to Awards of both Restricted Stock and Stock Options. (a) Acceleration of Stock-Based Awards. (1) Conditions to Acceleration. The restrictions on all shares of restricted stock that have not otherwise lapsed shall lapse or the stock options shall become immediately exercisable, as the case may be, if, on or after the first anniversary of the Effective Date, Employee is not in breach of this Agreement and (i) Employer terminates Employee's employment with Employer for any reason other than Termination for Cause or Employee's Total Disability or 5 (ii) Employee terminates his employment with Employer by reason of Employee's Constructive Discharge or (iii) Employee ceases to be employed by Employer because of a sale, merger, divestiture, or other transaction entered into by Employer. (2) No Acceleration on Transfer of Employment to Affiliates. In no event shall the restrictions lapse on restricted stock nor the exercisability of stock options be accelerated as provided in the prior section upon Employee's ceasing employment with Employer to commence employment with an Affiliate of Sprint. (3) Section 280G Limits on Acceleration. If the acceleration of the vesting of restricted stock or the exercisability of the stock-based award hereunder, together with all other payments or benefits contingent on a change in control within the meaning of Internal Revenue Code Section 280G or any successor provision ("280G"), results in any portion of such payments or benefits to the Employee not being deductible by the Employer or its successor as a result of the application of 280G, the Employee's 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, restricted stock, or other benefits not deductible by Sprint under 280G in reverse chronological order of grant date from the application of this or other acceleration provision, until no portion of such benefits is rendered non-deductible by application of Code Section 280G. (b) Forfeiture of Stock-Based Award on Transfer to Affiliates and on Termination of Employment in Certain Circumstances. Employee shall not be entitled to sell or continue to own any unvested shares of restricted stock or exercise or continue to own any unexercisable stock options, as the case may be, if before such restricted shares vest or before such stock options become exercisable (i) Employee ceases employment with Employer and begins employment with an Affiliate of Employer, (ii) Employer terminates Employee's employment with Employer for any reason constituting Termination for Cause or by reason of Employee's Total Disability, or 6 (iii) Employee terminates his employment with Employer for any reason other than Employee's Constructive Discharge. Except as to clause (iii), this provision applies regardless of what subsequent employment Employee may take. (c) Tax Withholding. Employer may withhold the amount of any tax attributable to any amount payable or shares issuable under this Agreement. 4. Payment of Special Compensation. In lieu of any payments or benefits available under any and all Employer severance plans or policies but not in lieu of benefits under Sprint's Long-Term Disability Plan, Employee shall be entitled to Special Compensation plus any vacation pay for vacation accrued but not taken by Employee on his Severance Date, if (i) Employer terminates Employee's employment with Employer for any reason other than Termination for Cause or Total Disability or (ii) Employee terminates his employment with Employer upon Constructive Discharge. The payments and benefits provided for in this section shall be in addition to all other sums then payable and owing to Employee hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Employee for employment or services provided to any Person other than Employer after the Severance Date and shall be in full settlement and satisfaction of all of Employee's claims against and demands upon Employer. Employee's right to receive severance or other benefits pursuant to this section shall cease immediately if Employee is re-employed by Employer or Employee materially breaches this Agreement. 5. Dispute Resolution. 5.01. Jurisdiction and Venue. Employee consents to jurisdiction and venue in the state and federal courts in and for Johnson County, Kansas, for any and all disputes arising under this Agreement, provided, however, that Employer may seek injunctive relief in any court of competent jurisdiction to enjoin any violation of the covenants under Section 2, as well as seeking damages therefor. 7 5.02. Remedies. Employee acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of this Agreement will not cause him undue hardship and that the provisions are reasonably necessary and commensurate with the need to protect Employer and its legitimate and proprietary business interests and property from irreparable harm. Employee acknowledges that failure to comply with the terms of this Agreement, particularly the provisions of Section 2, will cause irreparable damage to Employer. Therefore, Employee agrees that, in addition to any other remedies at law or in equity available to Employer for Employee's breach or threatened breach of this Agreement, Employer is entitled to specific performance or injunctive relief, without bond, against Employee to prevent such damage or breach, and the existence of any claim or cause of action Employee may have against Employer shall not constitute a defense thereto. If Employee materially breaches any provision of Section 2 or if any of those provisions are held to be unenforceable against Employee (i) Employee shall return any Special Compensation paid pursuant to this Agreement and (ii) if Employee's breach occurs within the five-year period beginning on the Effective Date of this Agreement, Employee shall return to Employer the stock received with respect to the Stock-Based Award, or, if Employee has disposed of the stock, an amount equal to the fair market value thereof on the date of disposition. This remedy is a return of consideration and shall be in addition to any other remedies. During Employee's employment with Employer, the Committee shall determine whether Employee has materially breached the provisions of Section 2, and the Committee's determination shall be final. 6. Definitions. 6.01. Affiliate. "Affiliate" means, with respect to any Person, a Person, other than a Subsidiary of such Person, (i) controlling, controlled by, or under common control with such Person and (ii) any other Person with whom such Person reports consolidated financial information for financial reporting purposes. "Control" for this purpose means direct or indirect possession by one Person of voting or management rights of at least 20% with respect to another Person. 8 6.02. Change in Control. "Change in Control" means the occurrence of any of the following events: (i) the acquisition, without the approval of a majority of the directors described in clause (ii) of this Section 6.02, by any "person" or "group" as such terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder other than (A) a trustee or other fiduciary holding securities under an employee benefit plan of Sprint, (B) Sprint or a corporation owned, directly or indirectly, by the stockholders of Sprint in substantially the same proportions as their ownership of stock of Sprint, or (C) Deutsche Telekom AG or France Telecom, individually or collectively; of securities of Sprint representing 20% or more of the combined voting power of Sprint's then outstanding securities; or (ii) at the end of any two-year period, less than a majority of the directors of Sprint are directors (A) who were directors of Sprint at the beginning of the two-year period or (B) whose election or nomination as director was approved by a vote of 2/3's of the then directors described in this clause (ii) of this Section 6.02 by prior nomination or election; or (iii) the shareholders of Sprint approve a merger (in which Sprint is not the surviving operating entity), consolidation, liquidation, or dissolution of Sprint, or a sale of all or substantially all of the assets of Sprint; 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. 6.03. Committee. "Committee" means the Organization, Compensation, and Nominating Committee of Sprint's board of directors. 9 6.04. Competitive Employment. "Competitive Employment" means the performance of duties or responsibilities for a Competitor of Employer (i) that are of a similar nature or employ similar professional or technical skills (e.g., marketing, engineering, legal, etc.) to those employed by Employee in his performance of services for Employer at any time during the two years before the Severance Date, (ii) that relate to products or services that are competitive with Employer's products or services with respect to which Employee performed services for Employer at any time during the two years before the Severance Date, or (iii) in the performance of which Proprietary Information to which Employee had access at any time during the two-year period before the Severance Date could be of substantial economic value to the Competitor of Employer. 6.05. Competitor of Employer. Because of the highly competitive, evolving nature of Employer's industry, the identities of companies in competition with Employer 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. A Sprint Affiliate shall not be a Competitor of Employer. "Competitor of Employer" means (i) any Person doing business in the United States whose primary business is providing local or long distance telephone or wireless service; (ii) any Person doing business in the United States, who, together with its Consolidated Affiliates, receives more than 15% of its gross operating revenue from a line of business in which Employer, together with its Consolidated Affiliates, receives more than 15% of its gross operating revenues, all as measured by the most recent available financial information of both Employer and such other Person, at the time Employee accepts, or proposes to accept, employment with or to otherwise perform services for such Person; (iii) any Person doing business in the United States and operating, for less than 5 years, a line of business from which Employer derives more than 15% of its gross operating revenues, notwithstanding such Person's lack 10 of substantial revenues in such line of business; and (iv) any Person doing business in the United States, who receives more than 15% of its gross operating revenue from a line of business in which Employer has operated for less than 5 years, notwithstanding Employer's lack of substantial revenues in such line of business. If financial information is not publicly available or is inadequate for purposes of applying this definition, the burden shall be on the Employee to demonstrate that such Person is not a Competitor of Employer. 6.06. Consolidated Affiliate. "Consolidated Affiliate" means, with respect to any person, all Affiliates and Subsidiaries of such person, if any, with whom the financial statements of such person are required, under generally accepted accounting principles, to be reported on a consolidated basis. 6.07. Constructive Discharge. "Constructive Discharge" means termination by the Employee of his employment with the Employer by written notice given within 60 days following one or more of the following events: (i) unless Employer first offers to Employee a position having an equal or greater grade rating, reassignment of Employee from his then current position with Employer to a position having a lower grade rating, in each case under Employer's methodology of rating employment positions for its employees generally; (ii) a reduction in Employee's targeted total compensation by more than 10% other than by an across-the-board reduction affecting substantially all similarly situated employees of Employer; or (iii) a change in the Employee's base employment area to anywhere other than the Kansas City metropolitan area within one year following a Change in Control. 6.08. Non-Compete Period. "Non-Compete Period" means the 18-month period beginning on Employee's Severance Date. If Employee 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. 11 6.09. Person. "Person" means any individual, corporation, partnership, association, company, or other entity. 6.10. 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 Employer or Employer'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 Employer, 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 generally to the public; and (ii) is useful or of value to the current or anticipated business, or research or development activities of Employer or of any customer or supplier of Employer, or (iii) has been identified to Employee as confidential by Employer, either orally or in writing. 6.11. Severance Date. "Severance Date" means the last day on which Employee actually performs services as an employee of Employer. 6.12. Severance Period. "Severance Period" means the 18-month period beginning on Employee's Severance Date. 6.13. Special Compensation. "Special Compensation" means Employee's right (i) to continue to receive during the Severance Period periodic compensation at the same rate as his base salary in effect at the Employee's Severance Date; (ii) to receive bonuses under one or more of Sprint's Management Incentive Plan, Executive Management Incentive Plan, and Sales Incentive Compensation Plan in which Employee participated on the Severance 12 Date (together with other incentive compensation plans specifically approved for this purpose by the Committee, the "Short-Term Incentive Plans") based on the Employee's target amount under such plans on the Severance Date, and assuming achievement of performance targets under the Short-Term Incentive Plans of (A) the actual performance level for periods before the beginning of the Severance Period and (B) the lesser of (a) the actual performance level during the Severance Period and (b) 100% of targeted performance during the Severance Period, pro-rating the foregoing performance levels under the Short-Term Incentive Plans based on the ratio of the amount of time in each of the foregoing time periods to the amount of time in the whole performance period under each Short-Term Incentive Plan; (iii) to receive an award under the Long Term Incentive Plan and the Executive Long Term Incentive Plan (the "Long-Term Incentive Plans"), assuming achievement of performance targets under the Long-Term Incentive Plans of (A) the actual performance level for periods before the beginning of the Severance Period and (B) 0% of targeted performance during the Severance Period, pro-rating the foregoing performance levels under the Long-Term Incentive Plans based on the ratio of the amount of time in each of the foregoing time periods to the amount of time in the whole performance period under each Long-Term Incentive Plan; (iv) to continue to participate throughout the Severance Period in all group health plans (as defined in Code section 106(b)(3) or any successor provision of the Internal Revenue Code of 1986, as amended, including but not limited to any medical and dental) that Employer continues to make available to Employer's employees generally and that Employee was participating in on his Severance Date, except that participation in those plans after Employee becomes employed full-time during the Severance Period shall immediately cease unless Employee elects to continue coverage under the COBRA continuation provisions of any group health plan by paying the applicable premium therefor; 13 (v) to continue to participate throughout the Severance Period in all group life insurance and qualified or non-qualified retirement plans that Employer continues to make available to Employer's employees generally and that Employee was participating in on his Severance Date; (vi) to receive out-placement counseling by a firm selected by Employer to continue until Employee becomes employed; (vii) to continue to receive throughout the Severance Period all executive perquisites (including automobile allowance, long distance services and all miscellaneous services) Employee was entitled to receive on the Severance Date except country club membership dues and accrual of vacation; and (viii) to have the end of the Severance Period treated as Employee's termination date for purposes of Sprint's employee stock option plans and restricted stock plans. Employee shall not be entitled to participate in Sprint's long- and short-term disability plan after the Severance Date. 6.14. Stock-Based Award. "Stock-Based Award" means the award of restricted stock or stock options as elected by Employee under Section 3 of this Agreement. 6.15. Subsidiary. "Subsidiary" means, with respect to any Person (the "Controlling Person"), all other Persons (the "Controlled Persons") in whom the Controlling Person, alone or in combination with one or more of its Subsidiaries, owns or controls more than 50% of the management or voting rights, together with all Subsidiaries of such Controlled Persons. 6.16. Termination for Cause. "Termination for Cause" means termination by Employer of Employee's employment because of (i) conduct by the Employee that violates the Employers code of ethics or reflects adversely on the Employee's honesty or (ii) Employee's willful engagement in conduct that is materially injurious to the Employer. Termination for failure to meet performance expectations, unless willful, continuing, and substantial, shall not be deemed a Termination for Cause. 14 6.17. Total Disability. "Total Disability" shall have the same meaning as in Sprint's Long Term Disability Plan, as amended from time to time. 7. General Provisions. 7.01. Obligations to Survive Termination of Employment. Employee's obligations under this Agreement shall survive his termination of employment with Employer. 7.02. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Employee's executors, administrators, legal representatives, heirs, and legatees and to Employer's successors and assigns. 7.03. Partial Invalidity. The various provisions of this Agreement are intended to be severable and to constitute independent and distinct binding obligations. Should any provision of this Agreement be determined to be void and unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other provision or part thereof, and such provision or part thereof shall be deemed modified to the extent required to permit enforcement. Without limiting the generality of the foregoing, if the scope of any provision contained in this Agreement is too broad to permit enforcement to its full extent, but may be enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Employee hereby agrees that such scope may be judicially modified accordingly. 7.04. Waiver. The waiver by either party of a breach of any provision of this Agreement by any other party shall not operate or be construed as a waiver of any subsequent breach. 7.05. Prior Agreements Merged into Agreement. This Agreement represents the entire understanding of the parties and, to the extent that there is any conflict, supersedes all other agreements with respect to the subject matter hereof. 7.06. Notices. Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party 15 (i) upon actual receipt at the address of such party specified below if delivered personally or by regular U.S. mail; (ii) upon receipt by the sender of a "GOOD" or "OK" confirmation of transmission if transmitted by facsimile, but only if a copy is also sent by regular mail or courier; (iii) when delivery is certified if sent as certified mail, return receipt requested, addressed, in any case to the party at the following addresses: If to Employee: If to Employer: Thomas E. Weigman Sprint Corporation 11729 Manor Attn: Corporate Secretary Leawood, KS 66211 2330 Shawnee Mission Parkway Westwood, KS 66205 FAX: (913) 624-2256 or to such other address or telecopy number as any party may designate by written notice in the aforesaid manner, or with respect to Employee, such address as Employee may provide Employer for purposes of its human resources database. 7.07. Governing Law. Because Employer's business is headquartered in Kansas, and to ensure uniformity of enforcement of this Agreement, the validity, interpretation, and enforcement of this Agreement shall be governed by the laws of the State of Kansas. 7.08. Number and Gender. Wherever the context requires, each term stated in either the singular or plural shall include the singular and the plural, and the pronouns stated in either the masculine, the feminine, or the neuter gender shall include the masculine, feminine, or neuter as appropriate. 7.09. Headings. The headings of the Sections of this Agreement are for reference purposes only and do not define or limit, and shall not be used to interpret or construe the contents of this Agreement. 16 In Witness Whereof, the parties have caused this Agreement to be duly executed and effective as of December 9, 1997. Sprint Corporation by: /s/ Don A. Jensen Don A. Jensen, Vice President and Secretary I hereby elect to receive the following as the Stock-Based Award (check one): ___ Restricted Stock _x_ Stock Options /s/ Thomas E. Weigman Thomas E. Weigman, Employee 17 EX-10.V 9 DIRECTOR'S DEFERRED FEE PLAN Exhibit (10)(v) Directors' Deferred Fee Plan ARTICLE I PURPOSE The purpose of the Sprint Corporation Directors' Deferred Fee Plan (hereinafter referred to as the "Plan") is to provide funds upon termination of service or death for Directors (and their Beneficiaries) of Sprint Corporation. It is intended that the Plan will aid in retaining and attracting Directors of exceptional ability by providing such Directors with a means to supplement their standard of living. ARTICLE II DEFINITIONS For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: 2.1 Account Transfer Request. "Account Transfer Request" means a written notice, in a form prescribed by the Company, by a Participant to transfer all or any portion of one Deferred Benefit Account to another Deferred Benefit Account as provided for in paragraph 6.7. 2.2 Amendment of Payment Election Form. "Amendment of Payment Election Form" means a written notice, in a form prescribed by the Company, filed with the Company by a Participant to change the manner in which such Participant's Deferral Benefits are to be paid. 2.3 Beneficiary. "Beneficiary" means the person, persons, or entity designated by the Participant, as provided in Article VIII, to receive any benefits payable under the Plan. Any Participant Beneficiary Designation shall be made in a written instrument filed with the Company and shall become effective only when received, accepted, and acknowledged in writing by the Company. 2.4 Board "Board" means the Board of Directors of the Company. 2.5 Committee. "Committee" means the Organization, Compensation and Nominating Committee of the Board. 2.6 Company. "Company" means Sprint Corporation, or any successor thereto. 2.7 Deferral Benefit. "Deferral Benefit" means the benefit payable to a Participant on the Participant's death or termination of service as a Director, as calculated in Article VII hereof. 2.8 Deferred Benefit Account. "Deferred Benefit Account" means the accounts maintained on the books of account of the Company for each Participant pursuant to Article VI. Separate Deferred Benefit Accounts shall be maintained for each Participant. More than one Deferred Benefit Account shall be maintained for each Participant to reflect (a) separate deferral elections made pursuant to separately executed Participation Agreements, (b) Account A, Account B, Account D, Account AA, Account BB, and Account DD elections made by each Participant in each such Participation Agreement, and (c) One Time Grants. A Participant's Deferred Benefit Account shall be used solely as a device for the measurement and determination of the amounts to be paid to the Participant or the Participant's Beneficiary pursuant to this Plan. A Participant's Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind. 2.9 Determination Date. "Determination Date" means the date on which the amount of a Participant's Deferred Benefit Account is determined as provided in Article VI hereof. The last day of each calendar month shall be a Determination Date. 2.10 Director. "Director" means a member of the Board of Directors of the Company who is not an employee of the Company or its subsidiaries. 2.11 Fee. "Fee" means any cash compensation paid to a Director for his services as a Director other than a distribution under this Plan. 2.12 FON Share Unit. "FON Share Unit" means a measure of participation under the Plan having a value based on the market value of one share of FON Common Stock, Series 1, of the Company. 2.13 Interest Yield. "Interest Yield" means, with respect to any calendar month, (a) in the case of balances in Account AA, three percentage points over the composite yield on Moody's Seasoned Corporate Bond Yield Index for the preceding calendar month as determined from Moody's Bond Record published by Moody's Investors Services, Inc. (or any successor thereto), or, if such monthly yield is no longer published, a substantially similar average selected by the Company, and (b) in the case of balances in Account A, the greater of (i) the prime rate in effect at Citibank, N.A., at the opening of business on the 2 first business day of the month, or if said bank, for any reason, no longer publishes its prime rate, the prime rate similarly determined of another major bank selected by the Company and (ii) six percent per annum. 2.14 New Director. "New Director" means a Director who had not accumulated at least five years of service as a Director as of December 10, 1996 and any Director who is first elected after such date. Each New Director is entitled to a One Time Grant. 2.15 One Time Grant, "One Time Grant" means a one time grant to New Directors of FON Share Units credited into Account B and PCS Share Units credited into Account D. The number of FON Share Units and the number of PCS Share Units to be granted to each New Director are determined by the Committee. 2.16 Participant. "Participant" means any New Director and any Director who elects to participate by filing a Participation Agreement as provided in Article IV. 2.17 Participation Agreement. "Participation Agreement" means the agreement, in a form prescribed by the Company, filed by a Participant before the beginning of the period in which the Participant's Fees are to be deferred pursuant to the Plan. A new Participation Agreement shall be filed by the Participant for each separate Fee deferral election. 2.18 PCS Share Unit. "PCS Share Unit" means a measure of participation under the Plan having a value based on the market value of a share of PCS Common Stock, Series 1, of the Company. 2.19 Plan. "Plan" means the Sprint Corporation Directors' Deferred Fee Plan as set forth in this document. This Plan is the successor to, and comprises an amendment and revision of, the United Telecommunications, Inc., 1985 Directors' Deferred Fee Plan adopted February 12, 1985. 2.20 Plan Administrator. "Plan Administrator" means the person appointed by the Company to represent the Company in the administration of this Plan. 2.21 Plan Year. "Plan Year" means a twelve-month period commencing May 1st and ending the following April 30th. The first Plan Year commenced May 1, 1985. 2.22 Recapitalization Date. "Recapitalization Date" means November 23, 1998. 3 2.23 Share Units. "Share Units" means the Share Units credited to Accounts B and BB prior to the recapitalization of the Company's Common Stock on the Recapitalization Date. 2.24 Spouse. "Spouse" means a Participant's wife or husband who was lawfully married to the Participant upon the Participant's death or severance from service. 2.25 Transition Date. "Transition Date" means May 1, 1990. ARTICLE III ADMINISTRATION 3.1 Plan Administrator; Company and Committee; Duties. This Plan shall be administered by the Plan Administrator. Decisions of the Plan Administrator may be reviewed by the Company through the Committee. Members of the Committee may be Participants under this Plan. The Company shall also have the authority to make, amend interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions including interpretations of this Plan as may arise in connection with the Plan. 3.2 Binding Effect of Decisions. The decision or action of the Company in respect to any question arising out of or in connection with the administration, interpretation, and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan unless a written appeal is received by the Company within sixty days of the disputed action. The appeal will be reviewed by the Committee, and its decision shall be final, conclusive, and binding on the Participant and on all persons claiming by, through, or under the Participant. ARTICLE IV PARTICIPATION 4.1 Participation. Participation in the Plan shall be limited to New Directors and Directors, under age 70, who elect to participate in the Plan by filing a Participation Agreement with the Company. Except as provided below, an initial Participation Agreement must be filed no later than the March 31st immediately preceding the Plan Year in which the Participant's participation under the agreement will commence, and the election to 4 participate shall be effective on the first day of the Plan Year following receipt by the Company of a properly completed and executed Participation Agreement; provided, however, that if March 31st falls on a Saturday, Sunday or holiday, the filing date for the Participation Agreement shall be no later than the next business day after March 31st. With respect to an individual becoming a Director during a Plan Year who thereby becomes eligible to participate in the Plan, an initial Participation Agreement may be filed within 30 days of the Company's notification to the Director of the Director's eligibility to participate, and such election to participate shall be effective on the first day of the month following the Company's receipt thereof, except that elections not received by the Company before the 15th day of any calendar month shall be effective no earlier than the first day of the second month following the month of receipt. 4.2 Amount of Deferral and Length of Participation. A Participant may elect in any Participation Agreement to defer up to 100% of the Fees that are expected at the time of election to be earned in the Plan Year for which the Participation Agreement relates and all subsequent Plan Years until changed by the Participant's filing of a new Participant Agreement, provided, the minimum amount of Fees that may be deferred shall, in each case, be $5,000 per year or 100% of Fees payable, whichever is less. (a) The deferral percentage in each Participation Agreement shall be applied to the Participant's Fees as they are payable during the period of election. (b) A Participant's election to defer Fees shall be irrevocable upon the filing of the respective Participation Agreement; provided, however, that the deferral of Fees under any Participation Agreement may be suspended or amended as provided in paragraphs 7.3 or 9.1. If a Participant desires to change the percentage of Fees deferred or desires to cease deferring Fees, the Participant must file a new Participation Agreement. Such new Participation Agreement must be filed no later than the March 31st immediately preceding the Plan Year in which the new Participation Agreement is to take effect, or if March 31st falls on a Saturday, Sunday or holiday, the next business day after March 31st. The new Participation Agreement shall be effective as to Fees paid in Plan Years beginning after the last day of the Plan Year in which the agreement is filed with the Company. Any previously filed Participation 5 Agreement will no longer apply to the deferral of fees. Only one Participation Agreement will be in effect for new deferrals in each Plan Year. In the event a Participant elects to defer Fees pursuant to a new Participation Agreement, the new election shall be treated as an arrangement for which a separate Deferred Benefit Account shall be maintained and separate Deferral Benefits shall be payable. ARTICLE V DEFERRED FEES 5.1 Elective Deferred Fees. The amount of Fees that a Participant elects to defer in the Participation Agreement executed by the Participant, with respect to each Plan Year of participation in the Plan, shall be credited by the Company to the Participant's Deferred Benefit Account throughout each Plan Year as the Participant is paid. The amount credited to a Participant's Deferred Benefit Account shall equal the amount deferred, except to the extent that the Company is required to withhold any taxes or other amounts related to the Participant's deferred fees pursuant to any federal, state or local law. In the event withholding is required, the amount required to be withheld shall first be taken from the Participant's fees that have not been deferred. If these fees are not sufficient to meet the withholding obligation, the remainder will be taken from the amount deferred. 5.2 Vesting of Deferred Benefit Account. Participants shall be 100% vested in their Deferred Benefit Accounts, except for the Account B and Account D resulting from a One Time Grant. The FON Share Units and PCS Share Units granted as part of a One Time Grant will vest at the rate of 50% on the fifth anniversary of the Participant's election as a Director and 10% per year on the sixth through tenth anniversaries of such election. The FON Share Units and PCS Share Units resulting from dividend credits on such FON Share Units and PCS Share Units will vest at the same time as such FON Share Units and PCS Share Units vest. Any FON Share Units and PCS Share Units that have not vested at the time of the Participant's termination of service as a Director shall be forfeited. 6 ARTICLE VI DEFERRED BENEFIT ACCOUNT 6.1 Determination of Account. Each Participant's Deferred Benefit Account, as of each Determination Date, shall consist of the balance of the Participant's Deferred Benefit Account as of the immediately preceding Determination Date plus the Participant's elective deferred Fees withheld since the immediately preceding Determination Date pursuant to paragraph 5.1 and plus amounts credited to the Participant's Deferred Benefit Account pursuant to paragraphs 6.4 and 6.5. The Deferred Benefit Account of each Participant shall be reduced by the amount of all distributions, if any, made from such Deferred Benefit Account since the preceding Determination Date. 6.2 Type of Deferral. A Participant may elect to have any portion of the amount deferred credited to Account A (fixed income return), to Account B (FON Share Units) or to Account D (PCS Share Units). The initial election shall be made by a properly executed Participation Agreement. An election to change the apportionment of deferred amounts between Accounts A, B and D may be made by a Participant filing with the Plan Administrator a revised Participation Agreement indicating such change on or before March 31 of each calendar year. The revised Participation Agreement shall be deemed a continuation of the initial Participation Agreement to which it relates. The revised Participation Agreement shall be effective for Plan Years beginning after the date it is filed. Deferrals in such Plan Years shall be credited in accordance with the election of the revised Participation Agreement. 6.3 Creation of Accounts AA, BB, D, and DD. (a) Accounts AA and BB. As of the start of business on the Transition Date, all amounts standing to the credit of each Participant in Account A were transferred to an Account AA. As of the start of business on the Transition Date, amounts standing to the credit of each Participant in Account B that were attributable to prior transfers from Account A into Account B were transferred to an Account BB. The amount of such transfers was an amount equal to the sum of the dollar amount of all transfers from Account A to Account B during the period beginning on the effective date of the Participation Agreement and ending on the Transition Date. 7 For all purposes of this Plan, except as otherwise noted in this Plan, Account AA shall be treated in the same manner as Account A, and Account BB shall be treated in the same manner as Account B. (b) Accounts D and DD. As of the Recapitalization Date, there was credited to an Account D and DD, created for each Participant having a positive balance in an Account B or BB with respect to any Plan Year, a number of PCS Share Units determined as follows: (1) one-half of a PCS Share Unit in Account D for each Share Unit in Account B for such Participant for such Plan Year as of the Recapitalization Date; and (2) one-half of a PCS Share Unit in Account DD for each Share Unit in Account BB for such Participant for such Plan Year as of the Recapitalization Date. 6.4 Maintenance of Accounts A and AA. As of each Determination Date, the Participant's Deferred Benefit Accounts A and AA shall be increased by the amount of interest earned since the preceding Determination Date based on the Interest Yield. Interest shall be credited on the average of the balances of the Deferred Benefit Account on the Determination Date (before crediting the interest) and on the last preceding Determination Date, but after the Deferred Benefit Account has been adjusted for any contributions or distributions to be credited or deducted for each such day. 6.5 Maintenance of Share Unit Accounts. Accounts B and BB and Accounts D and DD shall maintain balances in FON Share Units and PCS Share Units, respectively. (a) Maintenance of Accounts B and BB. (1) Conversion of Share Units into FON Share Units. As of the Recapitalization Date, each Share Unit in Accounts B and BB was converted into a FON Share Unit. (2) Conversion between Dollar Amounts and FON Share Units in Accounts B and BB. When an amount is to be added to a Participant's Deferred Benefit Accounts B or BB, it shall be converted into FON Share Units, or fractions thereof, by dividing the amount to be credited by the closing 8 price of the FON Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. When a number of FON Share Units is to be subtracted from a Participant's Deferred Benefit Accounts B or BB, such number of FON Share Units shall be converted into a dollar amount by multiplying such number of FON Share Units by the closing price of the FON Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. (3) Dividends on FON Share Units. When a dividend is declared and paid by the Company on its FON Common Stock, Series 1, an amount shall be credited to the Participant's Accounts B and BB as though the same dividend had been paid on the FON Share Units in such accounts as of the Determination Date immediately preceding the record date for the dividend, and such amount shall be converted to FON Share Units. Such amount shall be valued as of the Determination Date immediately following the payment of the dividend. (4) Effect of Recapitalization. In the event of a stock dividend, stock split, or other corporate reorganization involving the FON Common Stock, Series 1, the Company shall make equitable adjustment to a Participant's Accounts B and BB as may be necessary to give effect to such change in the Company's capital structure. (5) Conversion of FON Share Units to Dollars on Distribution. FON Share Units in Accounts B and BB shall be converted to an equivalent dollar amount before any distribution thereof to a Participant pursuant to Article VII. For purposes of distribution, the value of a FON Share Unit shall be the average closing price of the FON Common Stock, Series 1, on the New York Stock Exchange on the last trading day of each of (i) the 12 calendar months immediately preceding the date of distribution or (ii) the smaller number of calendar months (including part of a month) elapsed from the Recapitalization Date to such distribution. If a Participant elects payment in other than a 9 lump sum, Share Units shall be so converted to a dollar amount with respect to each payment made in the distribution. During the period of distribution, dividends and other equitable adjustments shall be credited to the Participant's Accounts B and BB in accordance with paragraphs 6.5(a)(3) and 6.5(a)(4). (b) Maintenance of Accounts D and DD. (1) Conversion between Dollar Amounts and PCS Share Units in Accounts D and DD. When an amount is to be added to a Participant's Deferred Benefit Accounts D or DD, it shall be converted into PCS Share Units, or fractions thereof, by dividing the amount to be credited by the closing price of the PCS Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. When a number of PCS Share Units is to be subtracted from a Participant's Deferred Benefit Accounts D or DD, such number of PCS Share Units shall be converted into a dollar amount by multiplying such number of PCS Share Units by the closing price of the PCS Common Stock, Series 1, as reported by the New York Stock Exchange on the last trading day on or before the Determination Date. (2) Dividends on PCS Share Units. When a dividend is declared and paid by the Company on its PCS Common Stock, Series 1, an amount shall be credited to the Participant's Accounts D and DD as though the same dividend had been paid on the PCS Share Units in such accounts as of the Determination Date immediately preceding the record date for the dividend, and such amount shall be converted to PCS Share Units. Such amount shall be valued as of the Determination Date immediately following the payment of the dividend. (3) Effect of Recapitalization. In the event of a stock dividend, stock split, or other corporate reorganization involving the PCS Common Stock, Series 1, the Company shall make equitable adjustment to a Participant's Accounts D and DD as may be necessary to give effect to such change in the Company's capital structure. 10 (4) Conversion of PCS Share Units to Dollars on Distribution. PCS Share Units in Accounts D and DD shall be converted to an equivalent dollar amount before any distribution thereof to a Participant pursuant to Article VII. For purposes of distribution, the value of a PCS Share Unit shall be the average closing price of the PCS Common Stock, Series 1, on the New York Stock Exchange on the last trading day of each of (i) the 12 calendar months immediately preceding the date of distribution or (ii) the smaller number of calendar months (including part of a month) elapsed from the Recapitalization Date to such distribution. If a Participant elects payment in other than a lump sum, PCS Share Units shall be so converted to a dollar amount with respect to each payment made in the distribution. During the period of distribution, dividends and other equitable adjustments shall be credited to the Participant's Accounts D, and DD in accordance with paragraphs 6.5(b)(2) and 6.5(b)(3). 6.6 Statement of Accounts. The Company shall submit to each Participant, within 120 days after the close of each Plan Year, a statement in such form as the Company deems desirable, setting forth the balance to the credit of such Participant in the Participant's Deferred Benefit Accounts A and AA, B and BB, and D and DD, in each case as of the last day of the preceding Plan Year. 6.7 Transfer Between Accounts. Within the limitations of this paragraph 6.7, a Participant may elect, by executing an Account Transfer Request: (1) to transfer all or any portion of the Participant's Account A to Account B or Account D, (2) to transfer all or any portion of the Participant's Account B to Account A or Account D, (3) to transfer all or any portion of the Participant's Account D to Account A or Account B, (4) to transfer all or any portion of the Participant's Account AA to Account BB or Account DD, (5) to transfer all or any portion of his Account BB to Account AA or Account DD, and (6) to transfer all or any portion of his Account DD to Account AA or Account BB. Such election shall be effective on the last day of the calendar month in which the Plan Administrator receives the Participant's executed Account Transfer Request. Transfers may not be made more than four times in any Plan Year, and no such transfer may be made unless a period of at least three months shall have elapsed from the effective date of the most recent such 11 transfer (whether it occurred in the current Plan Year or not) to the effective date of the current transfer. No part of the Account B or the Account D resulting from a One Time Grant may be transferred to any other account. ARTICLE VII BENEFITS 7.1 Termination of Service as Director. Subject to paragraph 7.4 below, upon any termination of service of the Participant for reasons other than the Participant's death, the Company shall pay to the Participant a Deferral Benefit equal to the amount of the Participant's Deferred Benefit Account determined under paragraph 6.1 thereof, but excluding any unvested FON Share Units or PCS Share Units. 7.2 Death. If a Participant dies after the commencement of payments of the Participant's Deferral Benefit, the Participant's Beneficiary shall continue to receive the remaining balance of the Participant's Deferred Benefit Account in accordance with the Participant's election pursuant to paragraph 7.4. If a Participant dies before any payments of a Deferral Benefit, the amounts to which the Participant's Beneficiary is entitled shall be determined as follows: (a) Accounts A, B, BB, D, and DD shall be the Deferred Benefit Account values thereof excluding any unvested FON Share Units or PCS Share Units, and (b) Account AA shall be the greater of (i) the Deferred Benefit Account value thereof and (ii) ten times the amount of the elected annual fee deferral allocated to Account AA pursuant to the Participation Agreement as revised on the date of the Participant's death, subject to such conditions relating to the Participant's health as the Company may impose. The Deferral Benefit shall be payable as provided for in paragraph 7.4. If a Participant's Beneficiary dies before payments of the Participant's Deferral Benefit are complete, payments will continue to be made to the estate of the beneficiary in accordance with the Participant's election pursuant to paragraph 7.4. 12 The Deferral Benefit provided above shall be in lieu of all other benefits under this Plan. 7.3 Suspension of Participation; Failure to Continue Participation. The Committee, in its sole discretion, may suspend the deferral of a Participant's Fees upon the advanced written request of a Participant on account of financial hardship suffered by that Participant. A Participant must file any request for suspension on or before the 15th day preceding the regular payment date on which the suspension is to take effect. The Committee, in its sole discretion, shall determine the amount, if any, that will not be deferred by the Participant as a result of the financial hardship. The suspension of any deferrals under this paragraph shall not affect amounts deferred with respect to periods before the effective date of the suspension. A Participant whose deferrals are suspended may not execute a subsequent Participation Agreement that would take effect before the beginning of the third Plan Year following the close of the Plan Year in which the suspension first took effect. 7.4 Form of Benefit Payment (a) Upon the happening of an event described in paragraphs 7.1 or 7.2 above, the Company shall pay to the Participant or the Participant's Beneficiary the amount specified therein (at a time designated in the Participation Agreement, but commencing no later than the Company's mandatory termination date for Directors) in one of the following forms as elected by the Participant, either in the Participation Agreement or the Amendment of Payment Election Form filed by the Participant: (1) a lump sum payment. (2) with respect to balances in Accounts A and AA, an annual payment of a fixed amount that shall amortize the Deferred Benefit Account balance in equal annual payments of principal and interest over a period from 2 to 20 years. For purposes of determining the amount of the annual payment, the assumed rate of interest on Accounts A and AA shall be the average of the applicable Interest Yield as of each Determination Date for the 60 months preceding the initial annual installment payment. (3) with respect to balances in Accounts B and BB, an annual payment over a period from 2 to 20 years. Each payment 13 shall be the value, as determined pursuant to paragraph 6.5(a)(5), of the number of FON Share Units equal to (i) the number of FON Share Units in the accounts on the Determination Date immediately following the event described in paragraphs 7.1 or 7.2, divided by (ii) the number of annual installments elected. During the period that a Participant is receiving a distribution from Account B or BB, FON Share Unit dividends will be added to the Accounts in accordance with subparagraph 6.5(a)(3). Such FON Share Unit dividends shall be valued in the same manner as previously described, and the value of all such FON Share Units accruing after a distribution from Accounts B or BB is made shall be paid to the Participant with the next distribution from the account. (4) With respect to balances in Accounts D and DD, an annual payment over a period from 2 to 20 years. Each payment shall be the value, as determined pursuant to paragraph 6.5(b)(4), of the number of PCS Share Units equal to (i) the number of PCS Share Units in the accounts on the Determination Date immediately following the event described in paragraphs 7.1 or 7.2, divided by (ii) the number of annual installments elected. During the period that a Participant is receiving a distribution from Account D or DD, PCS Share Unit dividends will be added to the Accounts in accordance with subparagraph 6.5(b)(2) hereof. Such PCS Share Unit dividends shall be valued in the same manner as previously described, and the value of all such PCS Share Units accruing after a distribution from Accounts D or DD is made shall be paid to the Participant with the next distribution from the account. (b) A Participant may change the form in which the Participant's benefits shall be paid by filing an Amendment of Payment Election Form indicating such change at least 13 months before the date upon which the initial payment to be made is determined. No such Amendment of Payment Election Form shall change the amount elected to be deferred in the Participation Agreement to which it relates, nor the time elected for commencement of benefit payments. 14 (c) In the absence of a Participant's election under subparagraph 7.4(a), benefits shall be paid in the form specified in subparagraphs 7.4(a)(2), 7.4(a)(3), and 7.4(a)(4) over a 15 year period. 7.5 Withholding; Payroll Taxes. To the extent required by the law in effect at the time payments are made, the Company shall withhold from payments made hereunder any taxes required to be withheld from a Director's fees for the federal or any state or local government. 7.6 Commencement of Payments. Unless otherwise provided, payments under this Plan shall begin within 60 days following receipt of notice by the Company of an event that entitles a Participant (or a Beneficiary) to payments under this Plan, or at such earlier date as may be determined by the Company pursuant to the terms of the Plan. All payments shall be made as of the first day of the month. ARTICLE VIII BENEFICIARY DESIGNATION 8.1 Beneficiary Designation. Each Participant shall have the right, at any time, to designate any person or persons as the Participant's Beneficiary or Beneficiaries (both principal as well as contingent) to whom payment under this Plan shall be paid in the event of the Participant's death before complete distribution to the Participant of the benefits due the Participant under the Plan. 8.2 Amendments. Any Beneficiary Designation may be changed by a Participant by the written filing of such change on a form prescribed by the Company. The filing of a new Beneficiary Designation form will cancel all Beneficiary Designations previously filed. 8.3 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, then the Participant's designated Beneficiary shall be deemed to be the person or persons surviving the Participant in the first of the following classes in which there is a survivor, share and share alike: (a) The surviving Spouse; (b) The Participant's children, except that if any of the children predecease the Participant but leave issue surviving, then such issue shall take by right of representation the share their parent would have taken if living; 15 (c) The Participant's personal representative (executor or administrator). 8.4 Effect of Payment. The payment to the Participant's Beneficiary or the Beneficiaries' estate shall completely discharge the Company's obligations relating to the Participant under this Plan. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 Amendment. The Board may at any time amend the Plan in whole or in part; provided, however, that no amendment shall be effective to decrease or restrict any Deferred Benefit Account at the time of such amendment. 9.2 Right to Terminate. The Board may at any time terminate the Plan with respect to new elections to defer if, in its judgment, the continuance of the Plan, the tax, accounting, or other effects thereof, or potential payments thereunder would not be in the best interests of the Company. The Board may also terminate the Plan in its entirety at any time, and upon any such termination, each Participant (a) who is then receiving a Deferral Benefit shall be paid in a lump sum, or over such period of time as determined by the Company, the then remaining balance in the Participant's Deferred Benefit Account, and (b) who has not received a Deferral Benefit shall be paid in a lump sum, or over such period of time as determined by the Company, the balance in the Participant's Deferred Benefit Account. ARTICLE X MISCELLANEOUS 10.1 Unsecured General Creditor. Participants and their Beneficiaries shall have no legal or equitable rights, claims, or interests in any property or assets of the Company or its subsidiaries, nor shall they be Beneficiaries of, or have any rights, claims, or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or that may be acquired by the Company ("Policies"). Such Policies or other assets of the Company and its subsidiaries shall not be held under any trust for the benefit of Participants or their Beneficiaries or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of such assets and Policies shall be and remain the general, unpledged, unrestricted assets of the Company and 16 its subsidiaries. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. 10.2 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, before actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 10.3 Not a Contract of Service. The terms and conditions of this Plan shall not be deemed to constitute a contract of service between the Company and the Participant, and the Participant (or the Participant's Beneficiary) shall have no rights against the Company except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained as a Director. 10.4 Protective Provisions. A Participant will cooperate with the Company by furnishing any and all information requested by the Company, in order to facilitate the payment of benefits hereunder, by taking such physical examinations as the Company may deem necessary, and by taking such other action as may be requested by the Company. 10.5 Applicable Law. The Plan, and any Participation Agreement related thereto, shall be governed by the laws of the State of Kansas, without regard to the principles of conflicts of law. 17 EX-12 10 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Sprint Corporation - ------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------ (millions) Earnings Income (loss) from continuing operations before income taxes $(1,072) $1,039 $1,748 $1,994 $1,480 Capitalized interest (151) (167) (93) (104) (57) Equity in losses of less than 50% owned entities 80 42 680 199 33 - ------------------------------------------------------------------------------------ Subtotal (1,143) 914 2,335 2,089 1,456 - ------------------------------------------------------------------------------------ Fixed charges Interest charges 1,011 885 277 301 318 Interest factor of operating rents 311 275 135 120 119 Pre-tax cost of preferred stock dividends of subsidiaries -- -- -- -- 1 - ------------------------------------------------------------------------------------ Total fixed charges 1,322 1,160 412 421 438 - ------------------------------------------------------------------------------------ Earnings, as adjusted $ 179 $2,074 $2,747 $2,510 $1,894 ------------------------------------------------------------ Ratio of earnings to fixed charges -- (/1/) 1.79(/2/) 6.67(/3/) 5.96(/4/) 4.32(/5/) ------------------------------------------------------------
(/1/)Earnings, as adjusted, were inadequate to cover fixed charges by $1.1 billion in 1999. (/2/)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. (/3/)Earnings as computed for the ratio of earnings to fixed charges includes nonrecurring items. These items include a litigation charge of $20 million, gains on the sales of local exchanges of $45 million and a gain on the sale of an equity investment in an equipment provider of $26 million. Excluding these items, the ratio of earnings to fixed charges would have been 6.54 for 1997. (/4/)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. (/5/)Earnings as computed for the ratio of earnings to fixed charges includes the nonrecurring restructuring charge of $88 million recorded in 1995. Excluding this charge, the ratio of earnings to fixed charges would have been 4.53 for 1995. 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 (a) interest on all debt of continuing operations (including amortization of debt issuance costs), (b) the interest component of operating rents, and (c) the pre-tax cost of subsidiary preferred stock dividends. EX-21 11 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 Held By Jurisdiction of Its Incorporation or Immediate Name Organization Parent - ---------------------------------------------------------------------------- American Telecasting, Inc. Delaware 100 American Telecasting Development, Inc. Delaware 100 Fresno MMDS Associates, A General Partnership Delaware 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 Delaware Partnership 65 FMA Licensee Subsidiary, Inc. California 100 Superchannels of Las Vegas, Inc. Arizona 58 Carolina Telephone and Telegraph Company North Carolina 100 Carolina Telephone Long Distance, Inc. North Carolina 100 NOCUTS, Inc. Pennsylvania 100 SC One Company Kansas 100
EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - ------------------------------------------------------------------------------
Ownership Interest Held By Jurisdiction of 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 98.8(/2/) 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 6.9 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 78.8
- -------------------------------------------------------------------------------- (/1/)Sprint Corporation owns all of the common stock. The voting preferred stock is held by 11 Sprint subsidiaries. (/2/)Centel Corporation owns all of the common stock. The voting preferred stock has been called for redemption. The redemption date is March 31, 2000. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - ------------------------------------------------------------------------------
Ownership Interest Held By Jurisdiction of Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------ Sprint Asian American, Inc. Kansas 100 Sprint Capital Corporation Delaware 100 SprintCom, Inc. Kansas 100 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 Healthcare Systems, Inc. Kansas 100 Sprint International Holding, Inc. Kansas 100 Sprint Cayman Holding, Ltd. Cayman Islands 100 Shanghai Cayman Holding, Ltd. Cayman Islands 100 Sprint International do Brasil Ltda. Brazil 50 Sprint UK Holdings Limited United Kingdom 100 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 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 Paranet, Inc. Kansas 100 Sprint Paranet Canada, Inc. Canada 100 Sprint Payphone Services, Inc. Florida 100 Sprint TELECENTERS Inc. Florida 100 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
EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Sprint Corporation - ------------------------------------------------------------------------------
Ownership Interest Held By Jurisdiction of Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------ 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 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/) 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. (dba Sprint PCS) 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
- -------------------------------------------------------------------------------- (/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%. (/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 Held By Jurisdiction of Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------- 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 UCOM, Inc. Missouri 100 Sprint Communications Company L.P. Delaware Partnership 34 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 49 MinorCo, L.P. Delaware Partnership 40 PhillieCo Partners I, L.P. Delaware Partnership 47 PhillieCo Partners II, L.P. Delaware Partnership 47 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
- -------------------------------------------------------------------------------- (/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 Held By Jurisdiction of Its Incorporation or Immediate Name Organization Parent - ------------------------------------------------------------------------------- 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 US Telecom, Inc. Kansas 100 ASC Telecom, Inc. (dba AlternaTel) Kansas 100 LCF, Inc. California 100 SC Seven Company Kansas 50 Sprint Communications Company L.P. Delaware Partnership 59 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 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 5 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 Sprint FON Inc. Delaware 100 Sprint Global Venture, Inc. Kansas 86 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 2 Sprint Global Venture, Inc. Kansas 13 Sprint International Construction Company Delaware 100 Sprint Israel Cellular, Inc. Delaware 100 Sprint R.P. Telekom Sp. z o.o. Poland 50 Sprint Telecommunications France Inc. Delaware 100 Sprint Telecommunications Services GmbH Germany 100 Sprint Telecommunications (UK) Limited Delaware 100 Wireless Cable of Florida, Inc. Florida 100
- -------------------------------------------------------------------------------- (/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. EX-23.A 12 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. 333-83577; Form S-3, No. 33-58488; 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. 33-59318; 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; and Form S-8, No. 333-92809) of Sprint Corporation and in the related Prospectuses and in the Joint Proxy Statement/Prospectus of MCI WORLDCOM, Inc. and Sprint Corporation that is made a part of the Registration Statement (Form S-4, No. 333-90421) of MCI WORLDCOM, Inc. of our reports dated February 1, 2000 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, 1999. /s/ Ernst & Young LLP ------------------------------------- Ernst & Young LLP Kansas City, Missouri March 20, 2000 EX-23.B 13 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 333-83577) on Form S-3 and Registration Statements (Nos. 33- 38761, 33-31802, 2-97322, 33-59316, 33-59318, 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, and 333-92809) on Form S-8 of Sprint Corporation and in Registration Statement No. 333-90421 on Form S-4 of MCI WORLDCOM, Inc. of our report dated February 2, 1999, on the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries for each of the two years in the period ended December 31, 1998 appearing in this Annual Report on Form 10-K of Sprint Corporation for the year ended December 31, 1999. /s/ Deloitte & Touche LLP ------------------------------------- Deloitte & Touche LLP Kansas City, Missouri March 20, 2000 EX-27.A 14 FINANCIAL DATA SCHEDULE 12/31/99
5 1,000,000 12-MOS DEC-31-1999 DEC-31-1999 120 317 3,693 285 777 5,580 37,098 15,129 39,250 6,832 15,685 0 247 2,702 10,611 39,250 0 19,928 0 14,258 0 0 860 (1,072) (327) (745) (130) (60) 0 (935) 0 0 FON GROUP EPS - BASIC 1.81 FON GROUP EPS - DILUTED 1.78 PCS GROUP EPS - BASIC (2.73) PCS GROUP EPS - DILUTED (2.73) IN DECEMBER 1999, THE SPRINT BOARD OF DIRECTORS AUTHORIZED A TWO-FOR-ONE STOCK SPLIT OF THE SPRINT PCS COMMON STOCK IN THE FORM OF A STOCK DIVIDEND, WHICH WAS DISTRIBUTED ON FEBRUARY 4, 2000 TO THE PCS SHAREHOLDERS. IN THE 1999 SECOND QUARTER, SPRINT EFFECTED A TWO-FOR-ONE STOCK SPLIT OF ITS FON COMMON STOCK. NEW SHARES WERE ISSUED JUNE 4, 1999 TO SHAREHOLDERS OF RECORDS ON MAY 13, 1999. PRIOR FINANCIAL DATA SCHEDULE HAVE BEEN RESTATED FOR THESE SPLITS.
EX-27.B 15 FINANCIAL DATA SCHEDULE SEP/1999
5 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 426 339 3,549 251 694 5,589 35,693 14,917 37,984 6,318 14,376 0 247 2,222 11,297 37,984 0 14,608 0 10,436 0 0 600 (658) (188) (470) (154) (21) 0 (645) 0 0 FON GROUP EPS - BASIC 1.33 FON GROUP EPS - DILUTED 1.31 PCS GROUP EPS - BASIC (1.99) PCS GROUP EPS - DILUTED (1.99) IN DECEMBER 1999, THE SPRINT BOARD OF DIRECTORS AUTHORIZED A TWO-FOR-ONE STOCK SPLIT OF THE SPRINT PCS COMMON STOCK IN THE FORM OF A STOCK DIVIDEND, WHICH WAS DISTRIBUTED ON FEBRUARY 4, 2000 TO THE PCS SHAREHOLDERS. IN THE 1999 SECOND QUARTER, SPRINT EFFECTED A TWO-FOR-ONE STOCK SPLIT OF ITS FON COMMON STOCK. NEW SHARES WERE ISSUED JUNE 4, 1999 TO SHAREHOLDERS OF RECORD ON MAY 13, 1999. PRIOR FINANCIAL DATA SCHEDULES HAVE BEEN RESTATED FOR THESE SPLITS.
EX-27.C 16 FINANCIAL DATA SCHEDULE JUNE 30/1999
5 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 103 0 3,362 232 575 4,595 34,487 14,311 36,099 5,665 12,822 0 247 2,220 11,520 36,099 0 9,540 0 6,801 0 0 399 (384) (110) (274) (94) (21) 0 (389) 0 0 FON GROUP EPS - BASIC 0.92 FON GROUP EPS - DILUTED 0.90 PCS GROUP EPS - BASIC (1.33) PCS GROUP EPS - DILUTED (1.33) IN DECEMBER 1999, THE SPRINT BOARD OF DIRECTORS AUTHORIZED A TWO-FOR-ONE STOCK SPLIT OF THE SPRINT PCS COMMON STOCK IN THE FORM OF A STOCK DIVIDEND, WHICH WAS DISTRIBUTED ON FEBRUARY 4, 2000 TO THE PCS SHAREHOLDERS. IN THE 1999 SECOND QUARTER, SPRINT EFFECTED A TWO-FOR-ONE STOCK SPLIT OF ITS FON COMMON STOCK. NEW SHARES WERE ISSUED JUNE 4, 1999 TO SHAREHOLDERS OF RECORD ON MAY 13, 1999. PRIOR FINANCIAL DATA SCHEDULES HAVE BEEN RESTATED FOR THESE SPLITS.
EX-27.D 17 FINANCIAL DATA SCHEDULE MARCH 31, 1999
5 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 148 0 3,050 198 500 4,153 33,382 13,759 33,721 5,458 11,759 0 247 1,323 11,502 33,721 0 4,652 0 3,375 0 0 191 (248) (77) (171) (28) (21) 0 (220) 0 0 FON GROUP EPS - BASIC 0.47 FON GROUP EPS - DILUTED 0.46 PCS GROUPNEPS - BASIC (0.73) PCS GROUP EPS - DILUTED (0.73) IN DECEMBER 1999, THE SPRINT BOARD OF DIRECTORS AUTHORIZED A TWO-FOR-ONE STOCK SPLIT OF THE SPRING PCS COMMON STOCK IN THE FORM OF A STOCK DIVIDEND, WHICH WAS DISTRIBUTED ON FEBRUARY 4, 2000 TO THE PCS SHAREHOLDERS. IN THE 1999 SECOND QUARTER, SPRINT EFFECTED A TWO-FOR-ONE STOCK SPLIT OF ITS FON COMMON STOCK. NEW SHARES WERE ISSUED JUNE 4, 1999 TO SHAREHOLDERS OF RECORD ON MAY 13, 1999. PRIOR FINANCIAL DATA SCHEDULES HAVE BEEN RESTATED FOR THESE SPLITS.
EX-27.E 18 FINANCIAL DATA SCHEDULE DEC 31, 1998
5 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 605 0 2,894 186 477 4,414 32,144 13,161 33,257 5,446 11,942 0 247 1,292 10,909 33,257 0 16,881 0 11,706 0 0 718 1,039 454 585 (135) (36) 0 414 0 0 FROM JANUARY 1, 1998 THROUGH NOVEMBER 23, 1998 SPRINT EPS - BASIC 1.98 SPRINT EPS - DILUTED 1.95 FROM NOVEMBER 23, 1998 THROUGH DECEMBER 31, 1998 FON Group EPS - Basic 0.14 FON Group EPS - Diluted 0.14 PCS Group EPS - Basic (0.67) PCS Group EPS - Diluted (0.67) In December 1999, the Sprint Board of Directors authorized a two-for-one stock split of the Sprint PCS common stock in the form of a dividend, which was distributed on February 4, 2000 to the PCS shareholders. In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON common stock. New shares were issued June 4, 1999 to shareholders of record on May 13, 1999. Prior Financial Data Schedules have been restated for these splits.
EX-27.F 19 FINANCIAL DATA SCHEDULE SEP 30, 1998
5 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 48 0 2,682 166 350 3,879 26,259 12,757 20,543 3,206 5,040 0 0 1,091 8,211 20,543 0 12,410 0 8,438 0 0 521 1,189 442 747 (86) (4) 0 657 1.52 1.50
EX-27.G 20 FINANCIAL DATA SCHEDULE JUNE 30, 1998
5 1,000,000 6-MOS DEC-31-1998 JUN-30-1998 93 0 2,652 160 381 3,893 25,263 12,375 19,880 3,206 4,406 10 0 1,091 8,132 19,880 0 8,137 0 5,518 0 0 336 811 315 496 (75) (4) 0 417 0.97 0.95
EX-27.H 21 FINANCIAL DATA SCHEDULE MARCH 31, 1998
5 1,000,000 3-MOS DEC-31-1998 MAR-31-1998 158 0 2,685 166 379 4,018 23,803 12,024 18,846 3,188 4,076 10 0 1,091 8,065 18,846 0 4,011 0 2,703 0 0 165 407 158 249 (38) (4) 0 207 0.48 0.47
EX-27.I 22 FINANCIAL DATA SCHEDULE DEC 31, 1997
5 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 102 0 2,643 147 352 3,773 23,211 11,717 18,274 3,077 3,749 0 0 1,091 7,934 18,274 0 14,564 0 8,855 0 0 184 1,748 654 1,094 (142) 0 0 952 2.21 2.18
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