-----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, DxV6d1F7WKbdGbY4RId9C1nM/A70gFEhWTPJWJaMTvBVsi8ebfC5kSCP6skPMO4h E6IFBKBv1l1pMzvz2zCHgQ== 0000101830-98-000015.txt : 19980306 0000101830-98-000015.hdr.sgml : 19980306 ACCESSION NUMBER: 0000101830-98-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980305 SROS: CSX SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPRINT CORP CENTRAL INDEX KEY: 0000101830 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 480457967 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04721 FILM NUMBER: 98557702 BUSINESS ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY STREET 2: P O BOX 11315 CITY: WESTWOOD STATE: KS ZIP: 66205 BUSINESS PHONE: 9136243000 MAIL ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY STREET 2: NULL CITY: WESTWOOD STATE: KS ZIP: 66205 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TELECOMMUNICATIONS INC DATE OF NAME CHANGE: 19920316 FORMER COMPANY: FORMER CONFORMED NAME: UNITED UTILITIES INC DATE OF NAME CHANGE: 19731011 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ----------------------------- 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 1-4721 SPRINT CORPORATION (Exact name of registrant as specified in its charter) KANSAS 48-0457967 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) P.O. Box 11315, Kansas City, Missouri 64112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (913) 624-3000 --------------------------- 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 Common stock, $2.50 par value, and Rights New York Stock Exchange (shares outstanding at January 30, 1998, Chicago Stock Exchange 343,786,235) Pacific 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. [ ] Aggregate market value of voting stock held by non-affiliates at January 30, 1998, is $20,411,378,123. 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, 1997, is incorporated by reference in Part III hereof. SPRINT CORPORATION SECURITIES AND EXCHANGE COMMISSION ANNUAL REPORT ON FORM 10-K Part I Item 1. Business The Corporation Sprint Corporation, incorporated in 1938 under the laws of Kansas, is mainly a holding company. The principal activities of Sprint and its subsidiaries (Sprint) include domestic and international long distance and local exchange telecommunications services. Other activities include emerging businesses and product distribution and directory publishing as discussed below. Regulatory Developments The Telecommunications Act of 1996 (Telecom Act), which was signed into law in February 1996, was designed to promote competition in all aspects of telecommunications. It eliminated legal and regulatory barriers to entry into local telephone markets. It also required incumbent local exchange carriers (LECs), 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. The Telecom Act also allows Bell Operating Companies (BOCs) 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 ruling from the Federal Communications Commission (FCC) that the provision of in-region long distance service is in the public interest. The Telecom Act's impact on Sprint remains unclear because the rules for competition are still being decided by regulators and the courts. Sprint has filed for competitive local exchange carrier (CLEC) status in most states in anticipation of the local markets opening to competition; however, currently, Sprint is not actively marketing CLEC services. See "Emerging Businesses" for more information. In those areas where Sprint is the incumbent LEC, local competition is expected to eventually result in some loss of market share. Because Sprint's LEC operations are geographically dispersed and largely in rural markets, local competition is expected to occur more gradually. In accordance with the Telecom Act, the FCC adopted detailed rules in 1996 to govern interconnection to incumbent local networks by new market entrants. Some LECs and state public utility commissions appealed these rules to the U.S. Court of Appeals, which prevented most of the pricing rules from taking effect, pending a full review by the court. In 1997, the court struck down the FCC's pricing rules. It ruled that the Telecom Act left jurisdiction over pricing matters to the states. The court also struck down certain other FCC rules on jurisdictional or substantive grounds. The U.S. Supreme Court has agreed to review the appeals court decision. In 1997, the FCC issued important decisions on the structure and level of access charges and universal service. These decisions will impact the industry in several ways, including the following: - An additional subsidy was created to support telecommunications services for schools, libraries and rural health care providers. All carriers providing telecommunications services will be required to fund this program, which is capped at $2.7 billion per year. However, LECs can pass their portion of these costs on to long distance carriers. - Per-minute interstate access rates charged by LECs will decline over time to become cost-based, beginning in July 1997. - Certain monthly flat-rate charges paid by some local telephone customers will increase beginning in 1998. - Certain per-minute access charges paid by long distance companies were converted to flat monthly charges based on pre-subscribed lines. - A basis has been established for replacing implicit access subsidies with an explicit interstate universal service fund beginning in 1999. A number of LECs, long distance companies and others have appealed some or all of the FCC's orders. The effective date of the orders has not been delayed, but the appeals are expected to take a year or more to conclude. The impact of these FCC decisions on Sprint is difficult to determine, but is not expected to be material. Some BOCs have also challenged the Telecom Act restrictions on their entry into long distance markets as unconstitutional. A federal district court in Wichita Falls, Texas, ruled the restrictions unlawful because they constituted a legislative act that imposed punishment without a judicial proceeding. The United States government, along with Sprint and others, filed appeals of this decision. The federal district court delayed implementing its decision pending resolution of the appeals. In 1997, several BOCs claimed they met the competitive checklist and sought FCC approval to offer in-region long distance service. These applications were denied by the FCC. Even if BOCs were to get authority to offer in-region long distance services, it is likely that any loss of revenues at the retail level would be offset in whole or in part because Sprint is the underlying network provider to some regional BOCs. Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance telephone company. It operates a nationwide all-digital long distance communications network that uses state-of-the-art fiber-optic and electronic technology. The division mainly provides domestic and international voice, video and data communications services. It offers its services to the public subject to varying levels of state and federal regulation, but rates are not subject to rate-base regulation except nominally in some states. The division's net operating revenues were $9.0 billion in 1997, $8.3 billion in 1996 and $7.3 billion in 1995. AT&T continues to dominate the long distance communications market. MCI Communications Corporation (MCI) is the nation's second largest long distance telephone company. The division competes with AT&T, MCI and other telecommunications providers in all segments of the long distance communications market. Competition is based on price and pricing plans, the types of services offered, customer service, and communications quality, reliability and availability. See "Regulatory Developments" for a discussion of the new telecommunications legislation and related regulatory developments, and the potential impact on the long distance division. Local Division The local division consists of regulated LECs serving more than 7 million access lines in 19 states. It provides local exchange services, access by telephone customers and other carriers to Sprint's local exchange facilities, sales of telecommunications equipment and long distance services within specified geographical areas. The division's net operating revenues were $5.3 billion in 1997, $5.1 billion in 1996 and $4.7 billion in 1995. The division's major revenue categories as a percentage of the division's total net operating revenues were as follows:
1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Local service 43.1% 40.6% 40.0% Network access 36.1 36.5 36.4 Toll service 6.4 8.2 10.3 Other 14.4 14.7 13.3 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 100.0% 100.0% 100.0% -- ------------- --- ------------- -- -------------
AT&T is the division's largest customer for network access services. In 1997 and 1996, 13% of the division's net operating revenues were from services (mainly network access services) provided to AT&T compared with 15% in 1995. On a consolidated basis, revenues from AT&T were 5% of Sprint's revenues in 1997 and 1996 and 6% in 1995. While AT&T is a significant customer, Sprint does not believe the division's revenues are dependent on AT&T, as customers' demand for interLATA long distance telephone service is not tied to any one long distance carrier. The division's LECs are subject to FCC jurisdiction, as well as state public utility commission (PUC) jurisdiction in each state in which the LECs operate. In each state in which the PUCs exercise authority to grant certificates of public convenience and necessity, the LECs have been granted certificates of indefinite duration to provide local exchange telephone service in their current service areas. See "Regulatory Developments" for a discussion of the new telecommunications legislation and related regulatory developments, and the potential impact on the local division. Product Distribution and Directory Publishing Division The product distribution and directory publishing (PDDP) businesses consist of North Supply Company (North Supply) and Sprint Publishing & Advertising (SPA). North Supply is a wholesale distributor of telecommunications products. Products range from basics --wire and cable, telephones and repair parts -- to complete private branch exchange systems, transmission systems and security and alarm equipment. Competition in North Supply's markets demands a high level of customer service to succeed, as a number of competitors, including other national wholesale distributors, sell the same products and services. SPA publishes and markets white and yellow page telephone directories in certain of Sprint's local exchange areas, as well as in the greater metropolitan areas of Milwaukee, Wisconsin and Chicago, Illinois. SPA's revenues are mainly derived from selling directory advertisements. SPA competes with telephone directory publishers and other advertising media for advertising revenues. Emerging Businesses Emerging businesses consists of consumer Internet access services, mainly through Sprint Internet Passport;(SM) CLEC services; international development activities (outside the scope of Global One); PCS controlled by Sprint; and integration management and support services for computer networks (Sprint Paranet). In 1996, Sprint began offering Internet services to consumers through Sprint Internet Passport.(SM) In 1997, Sprint launched Sprint Internet Private Passport,(SM) which provides customized, private Internet access services to businesses. In February 1998, Sprint announced it was forming a broad business relationship with EarthLink Network Inc. (EarthLink), an Internet service provider. As part of this relationship, EarthLink will obtain Sprint's Internet Passport customers and will take over the day-to-day operations of those services. This relationship requires regulatory approval and is expected to close in the 1998 second quarter. To take advantage of newly competitive markets, Sprint initiated efforts to enter local markets across the United States by filing for CLEC status. However, Sprint has stopped actively marketing its CLEC services until the rules for local competition become clearer, economics improve and more effective working arrangements and electronic interfaces with incumbent LECs can be developed. While Sprint's measured course on entering the CLEC market has enabled it to avoid significant losses, Sprint continues to devote significant resources toward developing a distinct approach. See "Regulatory Developments" for a discussion of the new telecommunications legislation and related regulatory developments, and the potential impact on Sprint's emerging businesses. Sprint has undertaken efforts to pursue selected business opportunities in key countries and markets around the world. Projects will be selected based on their ability to provide significant growth and financial return, the impact on Global One's position in world markets, and the traffic volumes carried on Sprint's U.S. networks. As part of an overall strategy to increase personal communication services (PCS) coverage, Sprint directly acquired the rights to PCS licenses. The licenses cover 139 markets across the United States, reaching a total population of 70 million. Sprint plans to affiliate these licenses with the licenses previously acquired by Sprint Spectrum Holding Company, L.P. (Sprint PCS). With this affiliation, licensed coverage for Sprint-branded PCS will include nearly 260 million people across the United States, Puerto Rico and the U.S. Virgin Islands. Sprint began construction in some markets in 1997. While zoning issues will dictate the rate of buildout progress, Sprint hopes to achieve coverage in areas that could reach 25 to 30 million people by the end of 1998. In September 1997, Sprint acquired Houston-based Paranet, Inc., which will allow Sprint to capitalize on the accelerating demand for network management services. Sprint Paranet's design, implementation and consultation expertise should also enable Sprint to maintain and add to its traditional long distance revenues. Strategic Alliances Sprint PCS Sprint is a 40% partner in Sprint PCS, a partnership with Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Sprint PCS is building the nation's first single-technology, all-digital, state-of-the-art wireless network to provide PCS across the United States. Sprint PCS offers services in more than 130 metropolitan markets, which include more than 600 cities. On January 1, 1998, a "Deadlock Event" occurred due to the failure of the Sprint PCS partnership board to approve the proposed Sprint PCS budget and business plan. Under the partnership agreement, if a partner refers the issue for resolution pursuant to specified procedures and it remains unresolved, buy/sell provisions can be triggered, which could result in Sprint either increasing or selling its partnership interest. Discussions among the partners about restructuring their interests in Sprint PCS are ongoing. However, there is no certainty the discussions will result in a change to the partnership structure. Global One Sprint is also a partner in Global One, a joint venture with Deutsche Telekom AG (DT) and France Telecom (FT) to provide seamless global telecommunications services to business, residential and carrier markets worldwide. Sprint is a one-third partner in Global One's operating group serving Europe (excluding France and Germany), and is a 50% partner in Global One's operating group for the worldwide activities outside the United States and Europe. DT and FT each own 10% of Sprint's voting equity through Sprint's Class A common stock. As Class A common shareholders, they have the right in most cases to proportionate representation on Sprint's Board of Directors. They may also purchase additional Class A common shares from Sprint to keep their ownership level at 10% each. Environment Sprint's environmental compliance and remediation expenditures mainly result from the operation of standby power generators for its telecommunications equipment. The expenditures arise in connection with standards compliance, permits or occasional remediation, which are usually related to generators, batteries or fuel storage. Sprint has been identified as a potentially responsible party at sites relating to either landfill contamination or 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 effects. Patents, Trademarks and Licenses Sprint owns numerous patents, patent applications and trademarks in the United States and other countries. Sprint is also licensed under domestic and foreign patents and trademarks owned by others. In total, these patents, patent applications, trademarks and licenses are of material importance to Sprint's business. Generally, Sprint's trademarks and trademark licenses have no limitation on duration; Sprint's patents and licensed patents have lives generally ranging from one to 17 years. Sprint's PCS licenses have an initial duration of 10 years. Sprint expects to renew these licenses for additional 10 year terms under FCC rules. Employee Relations At year-end 1997, Sprint had approximately 51,000 employees, of whom 22% are represented by unions. During 1997, Sprint had no material work stoppages caused by labor controversies. Information as to Industry Segments For information required by this section, refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segmental Results of Operations" and Note 15 of the "Notes to Consolidated Financial Statements" sections of the Financial Statements and Financial Statement Schedules filed as part of this report. Item 2. Properties Sprint's total property, plant and equipment totaled $23.2 billion at year-end 1997, of which $14.0 billion relates to local communications services and $8.2 billion relates to long distance communications services. These properties mainly consist of land, buildings, digital fiber-optic network, switching equipment, microwave radio and cable and wire facilities. Sprint leases certain switching equipment and several general office facilities. The long distance division has been granted easements, rights-of-way and rights-of-occupancy, mainly by railroads and other private landowners, for its fiber-optic network. PDDP's properties mainly consist of office and warehouse facilities to support the business units in the distribution of telecommunications products and publication of telephone directories. Sprint owns its corporate headquarters building and other property located in the greater Kansas City metropolitan area. Property, plant and equipment totaling $12.9 billion is either pledged as security for first mortgage bonds and certain notes or is restricted for use as mortgaged property. Item 3. Legal Proceedings 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 result in a material effect on Sprint's consolidated financial statements. 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 1997.
Item 10(b). Executive Officers of the Registrant Office Name Age - -------------------------------------------------------------- --------------------------------- ------ Chairman and Chief Executive Officer William T. Esrey (1) 58 President and Chief Operating Officer Ronald T. LeMay (2) 52 President and Chief Operating Officer - Local Telecommunications Division Michael B. Fuller (3) 53 President and Chief Operating Officer - Long Distance Division Patti S. Manuel (4) 41 President - National Integrated Services Kevin E. Brauer (5) 47 Executive Vice President - General Counsel and External Affairs J. Richard Devlin (6) 47 Executive Vice President - Chief Financial Officer Arthur B. Krause (7) 56 Senior Vice President - Corporate Finance Gene M. Betts (8) 45 Senior Vice President - External Affairs John R. Hoffman (9) 52 Senior Vice President - Controller John P. Meyer (10) 47 Senior Vice President - Strategic Planning and Corporate Development Theodore H. Schell (11) 53 Senior Vice President - Treasurer M. Jeannine Strandjord (12) 52 Senior Vice President - Human Resources I. Benjamin Watson (13) 49 Vice President - Secretary Don A. Jensen (14) 62
(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 February 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 Spectrum Holding Company, L.P. 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 and Chief Operating Officer - Local Telecommunications Division in October 1996. From 1990 to 1996, he served as President of United Telephone - Midwest Group, an operating group of subsidiaries of Sprint. (4) Ms. Manuel was elected President and Chief Operating Officer - Long Distance Division in February 1998. She was also elected as President and Chief Operating Officer of Sprint Communications Company L.P. (the Limited Partnership), a subsidiary of Sprint, in February 1998. She had served as President of Sprint Business, a division of the Limited Partnership, since May 1997. From 1994 to 1997, she was President of sales and marketing for Sprint Business. She was named President of marketing for Sprint Business in 1993. (5) Mr. Brauer was elected President - National Integrated Services in October 1997. He had served as Senior Vice President since June 1997. From 1992 to 1997, he was President of Sprint Business. (6) Mr. Devlin was elected Executive Vice President - General Counsel and External Affairs in 1989. (7) Mr. Krause was elected Executive Vice President - Chief Financial Officer in 1988. (8) Mr. Betts was elected Senior Vice President in 1990. (9) Mr. Hoffman was elected Senior Vice President - External Affairs in 1990. (10) Mr. Meyer was elected Senior Vice President - Controller in 1993. (11) Mr. Schell was elected Senior Vice President - Strategic Planning and Corporate Development in 1990. (12) Ms. Strandjord was elected Senior Vice President - Treasurer in 1990. (13) Mr. Watson was elected Senior Vice President - Human Resources in 1993. (14) 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. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price Per Share - -------------------------------------------------------------------------------------------------------------------- 1997 1996 --------------------------------------------- ---------------------------------------------- High Low Period High Low Period -- ----------- --- ---------- --- ----------- --- ----------- -- ------------- --- --------- First quarter $ 48 $ 38 3/8 $ 45 3/8 $ 38 5/8* $ 31 15/16* $ 38 Second quarter 52 3/4 42 1/4 52 1/4 44 3/8 37 1/2 42 Third quarter 52 5/8 44 50 42 7/8 34 1/2 38 7/8 Fourth quarter 60 5/8 48 3/4 58 5/8 44 37 1/2 39 7/8 - --------------------- -- ----------- --- ---------- --- ----------- -- --- ----------- -- ------------- --- ---------
* Adjusted to reflect the spinoff of Sprint's Cellular division in March 1996. As of February 27, 1998, Sprint had approximately 85,000 common stock record holders and two Class A common stock record holders. The principal trading market for Sprint's common stock is the New York Stock Exchange. The common stock is also listed and traded on the Chicago Stock Exchange and Pacific Exchange. The Class A common stock is not publicly traded. Sprint declared common stock dividends of $0.25 per share during each quarter of 1997 and 1996. Sprint declared Class A common stock dividends of $0.25 per share during each quarter of 1997 and during the last three quarters of 1996. Item 6. Selected Financial Data For information required by Item 6, refer to the "Selected Financial Data" section of the Financial Statements and Financial Statement Schedules filed as part of this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For information required by Item 7, refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Financial Statements and Financial Statement Schedules filed as part of this report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Sprint's exposure to market risk - through derivative financial instruments and other financial instruments, such as investments in marketable securities and long-term debt - is not material. Item 8. Financial Statements and Supplementary Data For information required by Item 8, refer to the "Consolidated Financial Statements" and "Financial Statement Schedule" sections of the Financial Statements and Financial Statement Schedules filed as part of this report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 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, 1997. 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 report. 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, 1997. 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, 1997. 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, 1997. 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, 1997. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. The consolidated financial statements of Sprint 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 filed as part of this report is listed in the Index to Financial Statements and Financial Statement Schedules. 3. The following exhibits are filed as part of this report: EXHIBITS (3) Articles of Incorporation and Bylaws: (a) Articles of Incorporation, as amended (filed as Exhibit 3(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). (b) Bylaws, as amended (filed as Exhibit 3(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). (4) Instruments defining the Rights of Sprint's Equity 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 June 9, 1997, between Sprint Corporation and UMB Bank, n.a. as Rights Agent (filed as Exhibit 1 to Sprint Corporation Registration Statement on Form 8-A dated June 12, 1997 (File No. 1-4721), and incorporated herein by reference). (c) Standstill Agreement dated as of July 31, 1995, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit (10)(c) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). (d) Amendments to Certain Agreements and Interpretation, dated June 24, 1997, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit 4(d) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). (e) Indenture, dated as of March 1, 1983, between Sprint Corporation (formerly United Telecommunications, Inc.) and The Bank of New York (formerly Irving Trust Company), as Trustee (filed as Exhibit 4-A to United Telecommunications, Inc. Registration Statement No. 33-4563 and incorporated herein by reference). (f) First Supplemental Indenture, dated as of April 1, 1986, between Sprint Corporation (formerly United Telecommunications, Inc.) and The Bank of New York (formerly Irving Trust Company), as Trustee (filed as Exhibit 4(d) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference). (g) Second Supplemental Indenture, dated as of May 1, 1990, between Sprint Corporation (formerly United Telecommunications, Inc.) and The Bank of New York, as Trustee (filed as Exhibit 4(e) to United Telecommunications, Inc. Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (h) Form of Indenture, dated as of July 1, 1992, between Sprint Corporation and The First National Bank of Chicago, as Trustee (filed as Exhibit 4-A to Sprint Corporation Registration Statement No. 33-48689 and incorporated herein by reference). (i) Form of Indenture, dated as of June 15, 1993, among Sprint Capital Corporation, Sprint Corporation and The Bank of New York, as Trustee (filed as Exhibit 4-A to Sprint Corporation Registration Statement No. 33-64564 and incorporated herein by reference). (10) Material Agreements - Joint Ventures: (a) Joint Venture Agreement dated as of June 22, 1995 among Sprint Corporation, Sprint Global Venture, Inc., France Telecom and Deutsche Telekom AG (filed as Exhibit (10)(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). (b) Amendment No. 1 to Joint Venture Agreement, dated as of January 31, 1996, among Sprint Corporation, Sprint Global Venture, Inc., France Telecom, Deutsche Telekom AG and Atlas Telecommunications, S.A. (filed as Exhibit 99A to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (c) Investment Agreement dated as of July 31, 1995 among Sprint Corporation, France Telecom and Deutsche Telekom AG (including as an exhibit the Stockholders' Agreement among France Telecom, Deutsche Telekom AG and Sprint Corporation) (filed as Exhibit (10)(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). (d) Amended and Restated Agreement of Limited Partnership of MajorCo., L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership (filed as Exhibit 99C to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (e) Parents Agreement dated as of January 31, 1996, between Sprint Corporation and Tele-Communications, Inc. (filed as Exhibit 99D to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (f) Parents Agreement dated as of January 31, 1996, between Sprint Corporation and Comcast Corporation (filed as Exhibit 99E to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (g) Parents Agreement dated as of January 31, 1996, between Sprint Corporation and Cox Communications, Inc. (filed as Exhibit 99F to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (10) Executive Compensation Plans and Arrangements: (h) 1985 Stock Option Plan, as amended (filed as Exhibit (10)(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). (i) 1990 Stock Option Plan, as amended (filed as Exhibit (99) to Sprint Corporation Registration Statement No. 333-46491 and incorporated herein by reference). (j) 1990 Restricted Stock Plan, as amended (filed as Exhibit (99) to Sprint Corporation Registration Statement No. 333-46487 and incorporated herein by reference). (k) Executive Deferred Compensation Plan, as amended (filed as Exhibit (10)(k) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). (l) Management Incentive Stock Option Plan, as amended (filed as Exhibit (10)(c) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). (m) 1997 Long-Term Stock Incentive Program (filed as Exhibit (99) to Sprint Corporation Registration Statement No. 33-25449 and incorporated herein by reference). (n) 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). (o) Amended and Restated Centel Directors Deferred Compensation Plan (filed as Exhibit (10)(c) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). (p) 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). (q) 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). (r) 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). (s) 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). (t) Short-Term Incentive Compensation Plan (filed as Exhibit 10(k) to United Telecommunications, Inc. Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference). (u) 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). (v) 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). (w) Agreements Regarding Special Compensation and Post Employment Restrictive Covenants between Sprint Corporation and certain of its Executive Officers (filed as Exhibit 10(x) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1993, 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 and Exhibit (10)(w) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). Agreements Regarding Special Compensation and Post Employment Restrictive Covenants between Sprint Corporation and four of its Executive Officers. (x) Director's Deferred Fee Plan, as amended (filed as Exhibit (10)(x) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). (y) Form of Contingency Employment Agreements between Sprint Corporation and certain of its executive officers (filed as Exhibit 10(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference). (z) 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). (aa) Summary of Executive Officer and Board of Directors Benefits (filed as Exhibit (10)(k) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). (bb) Description of Retirement Agreement between Sprint Corporation and one of its executive officers. (cc) 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). (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, 1997 (b) September 30, 1997 Restated (c) June 30, 1997 Restated (d) March 31, 1997 Restated (e) December 31, 1996 Restated (f) September 30, 1996 Restated (g) June 30, 1996 Restated (h) March 31, 1996 Restated (i) December 31, 1995 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 No reports on Form 8-K were filed during the three months ended December 31, 1997. (c) Exhibits are listed in Item 14(a). (d) The consolidated financial statements and consolidated financial statement schedule of Sprint Spectrum Holding Company, L.P. filed as part of this report are listed in the Index to Financial Statements and Financial Statement Schedules. 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 5, 1998 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 5th day of March, 1998. /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 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 5th day of March, 1998. /s/ DuBose Ausley DuBose Ausley, Director /s/ Warren L. Batts Warren L. Batts, Director /s/ Michel Bon Michel Bon, Director /s/ Ruth M. Davis Ruth M. Davis, Director /s/ W. T. Esrey William T. Esrey, Director /s/ Irvine O. Hockaday, Jr. Irvine O. Hockaday, Jr., Director /s/ Harold S. Hook Harold S. Hook, Director /s/ Ronald T. LeMay Ronald T. LeMay, Director /s/ Linda K. Lorimer Linda K. Lorimer, Director /s/ Charles E. Rice Charles E. Rice, Director /s/ Ron Sommer Ron Sommer, Director /s/ Stewart Turley Stewart Turley, Director
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Sprint Corporation Page Reference --------------------- Selected Financial Data F-2 Management's Discussion and Analysis of Financial Condition and Results of Operations F-3 Consolidated Financial Statements (audited by Ernst & Young LLP): Management Report F-17 Report of Independent Auditors F-18 Consolidated Statements of Income for each of the three years ended December 31, 1997 F-19 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-20 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997 F-21 Consolidated Statements of Common Stock and Other Shareholders' Equity for each of the three years ended December 31, 1997 F-22 Notes to Consolidated Financial Statements F-23 Financial Statement Schedule (audited by Ernst & Young LLP): Schedule II - Consolidated Valuation and Qualifying Accounts for each of the three years ended December 31, 1997 F-43 Financial Statement Schedule (audited by Deloitte & Touche LLP): Separate Financial Statements of 50% or Less Owned Entities - Sprint Spectrum Holding Company, L.P. Financial Statements and Financial Statement Schedule Report of Independent Auditors F-45 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-46 Consolidated Statements of Operations for each of the three years ended December 31, 1997 F-47 Consolidated Statements of Changes in Partners' Capital for each of the three years ended December 31, 1997 F-48 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997 F-49 Notes to Consolidated Financial Statements F-50 Schedule II - Consolidated Valuation and Qualifying Accounts for each of the three years ended December 31, 1997 F-68 Certain financial statement schedules have been omitted because the required information is not present, or has been included in the consolidated financial statements and related notes.
F-1
SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- (in millions, except per share data) Results of Operations Net operating revenues $ 14,873.9 $ 13,887.5 $ 12,735.3 $ 11,964.8 $ 10,894.9 $ 10,093.3 Operating income (1) 2,451.4 2,267.2 1,834.3 1,690.7 1,214.1 1,199.8 Income from continuing operations (1), (2) 952.5 1,190.9 946.1 899.2 517.1 550.6 Earnings per common share from continuing operations (1), (2) Basic 2.21 2.82 2.71 2.59 1.51 1.63 Diluted 2.18 2.79 2.69 2.56 1.49 1.62 Dividends per common share 1.00 1.00 1.00 1.00 1.00 1.00 Financial Position Total assets $ 18,184.8 $ 16,826.4 $ 15,074.3 $ 14,425.2 $ 13,781.8 $ 13,308.4 Property, plant and equipment, net 11,494.1 10,464.1 9,715.8 10,258.8 9,883.1 9,895.6 Total debt (including short-term borrowings) 3,879.6 3,273.9 5,668.9 4,927.7 5,084.1 5,436.7 Redeemable preferred stock 11.5 11.8 32.5 37.1 38.6 40.2 Common stock and other shareholders' equity 9,025.2 8,519.9 4,642.6 4,524.8 3,918.3 3,971.6 Cash Flow Data Cash from operating activities - continuing operations(3) $ 3,379.0 $ 2,403.6 $ 2,609.6 $ 2,339.6 $ 2,007.8 $ 2,397.3 Capital expenditures 2,862.6 2,433.6 1,857.3 1,751.6 1,429.8 1,342.4
Sprint adopted Statement of Financial Accounting Standards No.128, "Earnings per Share" (EPS), at year-end 1997 (see Note 11 of Notes to Consolidated Financial Statements). EPS amounts have been restated to comply with this new standard. All EPS amounts discussed in this report represent "basic" EPS as defined in the new standard. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or shareholders' equity as previously reported. (1) During 1997 and 1996, Sprint recorded nonrecurring charges of $20 and $60 million, respectively, related to litigation within the long distance division. These charges reduced income from continuing operations by $13 million ($0.03 per share) in 1997 and $36 million ($0.09 per share) in 1996. During 1995, Sprint recorded a nonrecurring charge of $88 million related to a restructuring within the local division, which reduced income from continuing operations by $55 million ($0.16 per share). During 1993, Sprint recorded nonrecurring charges of $293 million related to (a) transaction costs from the merger with Centel Corporation and expenses of integrating and restructuring the operations of the two companies and (b) a realignment and restructuring within the long distance division. These charges reduced income from continuing operations by $193 million ($0.57 per share). (2) During 1997, Sprint recognized gains of $45 million on sales of local exchanges and a $26 million gain on the sale of an equity investment in an equipment provider. These gains increased income from continuing operations by $27 million ($0.06 per share) and $17 million ($0.04 per share), respectively. During 1994, Sprint recognized a $35 million gain on the sale of equity securities, which increased income from continuing operations by $22 million ($0.06 per share). During 1993, due to the enactment of the Revenue Reconciliation Act of 1993, Sprint adjusted its deferred income tax assets and liabilities to reflect the increased tax rate. This adjustment reduced income from continuing operations by $11 million ($0.03 per share). During 1992, Sprint recognized gains of $81 million on sales of local exchanges, which increased income from continuing operations by $44 million ($0.13 per share). (3) The 1996 amount was reduced by $600 million for cash required to terminate an accounts receivable sales agreement. The 1992 amount includes $300 million of cash proceeds from the sale of accounts receivable. F-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Corporation FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Sprint Corporation, with its subsidiaries, (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. Factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include: - the effects of vigorous competition in the markets in which Sprint operates; - the cost of entering new markets necessary to provide seamless services; - the risks related to Sprint's investments in Global One, Sprint Spectrum Holding Company, L.P. (Sprint PCS) and other joint ventures; - the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; - requirements imposed on Sprint or latitude allowed its competitors by the Federal Communications Commission (FCC) or state regulatory commissions under the Telecommunications Act of 1996 (Telecom Act); - unexpected results of litigation filed against Sprint; and - 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. Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance telephone company. It operates a nationwide, all-digital long distance communications network using state-of-the-art fiber-optic and electronic technology. The division mainly provides domestic and international voice, video and data communications services. It offers its services to the public subject to varying levels of state and federal regulation. Local Division The local division consists of regulated local exchange carriers (LECs) serving more than 7 million access lines in 19 states. It provides local exchange services, access by telephone customers and other carriers to Sprint's local exchange facilities, sales of telecommunications equipment and long distance services within specified geographical areas. Product Distribution and Directory Publishing Division The product distribution and directory publishing businesses provide wholesale distribution services of telecommunications products, and publish and market white and yellow page telephone directories. Emerging Businesses Emerging businesses consists of consumer Internet access services, mainly through Sprint Internet Passport (sm); competitive local exchange carrier (CLEC) services; international development activities (outside the scope of Global One); personal communication services (PCS) controlled by Sprint; and integration, management and support services for computer networks (Sprint Paranet). F-3 Strategic Alliances Global One Sprint is a partner in Global One, a joint venture with Deutsche Telekom AG (DT) and France Telecom (FT) to provide seamless global telecommunications services to business, residential and carrier markets worldwide. Sprint is a one-third partner in Global One's operating group serving Europe (excluding France and Germany) and is a 50% partner in Global One's operating group for the worldwide activities outside the United States and Europe. DT and FT each own 10% of Sprint's voting equity through Sprint's Class A common stock. As Class A common shareholders, they have the right in most cases to proportionate representation on Sprint's Board of Directors. They may also purchase additional Class A common shares from Sprint to keep their ownership level at 10% each. See Note 7 of Notes to Consolidated Financial Statements for more information. Sprint's long distance division contributed certain assets and related operations of its international business unit to Global One when the venture was formed in January 1996. Sprint PCS Sprint is a 40% partner in Sprint PCS, a partnership with Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Sprint PCS is building the nation's first single-technology, all- digital, state-of-the-art wireless network to provide PCS across the United States. PCS uses digital technology, which has sound quality superior to existing cellular technology and is less susceptible to interference and eavesdropping. PCS also offers features such as voice mail and Caller ID. Sprint PCS offers service in more than 130 metropolitan markets, which include more than 600 cities. As part of an overall strategy to increase PCS coverage, Sprint directly acquired the rights to PCS licenses covering 139 markets across the United States. These licenses reach a total population of 70 million people. Sprint expects to affiliate these licenses with Sprint PCS. With this affiliation, licensed coverage for Sprint-branded PCS will include nearly 260 million people across the United States, Puerto Rico and the U.S. Virgin Islands. On January 1, 1998, a "Deadlock Event" occurred due to the failure of the partnership board to approve the proposed Sprint PCS budget and business plan. Under the partnership agreement, if a partner refers the issue for resolution pursuant to specified procedures and it remains unresolved, buy/sell provisions can be triggered, which could result in Sprint either increasing or selling its partnership interest. Discussions among the partners about restructuring their interests in Sprint PCS are ongoing. However, there is no certainty the discussions will result in a change to the partnership structure. Spinoff of Cellular Division In March 1996, Sprint completed the tax-free spinoff of Sprint's cellular division (Cellular) to Sprint common shareholders (Spinoff). See "Liquidity and Capital Resources - Discontinued Operation" for more information. F-4 Regulatory Developments The Telecom Act, which was signed into law in February 1996, was designed to promote competition in all aspects of telecommunications. It eliminated legal and regulatory barriers to entry into local telephone markets. It also required incumbent LECs, 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. The Telecom Act also allows Bell Operating Companies (BOCs) to provide in-region long distance service once they obtain state certification of compliance with a competitive "checklist," have a facilities-based competitor, and obtain an FCC ruling that the provision of in-region long distance service is in the public interest. The Telecom Act's impact on Sprint remains unclear because the rules for competition are still being decided by regulators and the courts. Sprint has filed for CLEC status in most states in anticipation of the local markets opening to competition; however, Sprint currently is not actively marketing CLEC services. See "Segmental Results of Operations Emerging Businesses" for more information. In those areas where Sprint is the incumbent LEC, local competition is expected to eventually result in some loss of market share. Because Sprint's LEC operations are geographically dispersed and largely in rural markets, local competition is expected to occur more gradually. In accordance with the Telecom Act, the FCC adopted detailed rules in 1996 to govern interconnection to incumbent local networks by new market entrants. Some LECs and state public utility commissions appealed these rules to the U.S. Court of Appeals, which prevented most of the pricing rules from taking effect, pending a full review by the court. In 1997, the court struck down the FCC's pricing rules. It ruled that the Telecom Act left jurisdiction over pricing matters to the states. The court also struck down certain other FCC rules on jurisdictional or substantive grounds. The U.S. Supreme Court has agreed to review the appeals court decision. In 1997, the FCC issued important decisions on the structure and level of access charges and universal service. These decisions will impact the industry in several ways, including the following: - An additional subsidy was created to support telecommunications services for schools, libraries and rural health care providers. All carriers providing telecommunications services will be required to fund this program, which is capped at $2.7 billion per year. However, LECs can pass their portion of these costs on to long distance carriers. - Per-minute interstate access rates charged by LECs will decline over time to become cost-based, beginning in July 1997. - Certain monthly flat-rate charges paid by some local telephone customers will increase beginning in 1998. - Certain per-minute access charges paid by long distance companies were converted to flat monthly charges based on pre-subscribed lines. - A basis has been established for replacing implicit access subsidies with an explicit interstate universal service fund beginning in 1999. F-5 A number of LECs, long distance companies and others have appealed some or all of the FCC's orders. The effective date of the orders has not been delayed, but the appeals are expected to take a year or more to conclude. The impact of these FCC decisions on Sprint is difficult to determine, but is not expected to be material. Some BOCs have also challenged the Telecom Act restrictions on their entry into long distance markets as unconstitutional. A federal district court in Wichita Falls, Texas, ruled the restrictions unlawful because they constituted a legislative act that imposed punishment without a judicial proceeding. The United States government, along with Sprint and others, filed appeals of this decision. The federal district court delayed implementing its decision pending resolution of the appeals. In 1997, several BOCs claimed they met the competitive checklist and sought FCC approval to offer in-region long distance service. These applications were denied by the FCC. Even if BOCs were to get authority to offer in-region long distance services, it is likely that any loss of revenues at the retail level would be offset in whole or in part because Sprint is the underlying network provider to some regional BOCs. Results of Operations Sprint adopted Statement of Financial Accounting Standards (SFAS) No.128, "Earnings per Share" (EPS), at year-end 1997 (see Note 11 of Notes to Consolidated Financial Statements). EPS amounts have been restated to comply with this new standard. All EPS amounts in the following discussions represent "basic" EPS as defined in SFAS 128. Consolidated Total net operating revenues for 1997 were $14.9 billion, a 7% increase from $13.9 billion in 1996. Total net operating revenues for 1995 were $12.7 billion. Income from continuing operations was $953 million ($2.21 per share) in 1997 compared with $1.2 billion ($2.82 per share) in 1996 and $946 million ($2.71 per share) in 1995. Core Businesses Sprint's core businesses generated record levels of net operating revenues and improved operating results in 1997. Core results exclude the impact from joint ventures and emerging businesses. Long distance calling volumes increased 14% in 1997, and access lines served by the local division grew 5.6%, excluding sales of local exchanges during 1997. Excluding nonrecurring items, income from core operations was $1.6 billion ($3.73 per share) in 1997 versus $1.4 billion ($3.42 per share) in 1996 and $1.0 billion ($2.97 per share) in 1995. Nonrecurring Items Consolidated and core income from continuing operations for 1997 include gains on sales of local exchanges ($0.06 per share) and a gain on the sale of an equity investment in an equipment provider ($0.04 per share). In addition, 1997 and 1996 include litigation charges within the long distance division ($0.03 per share and $0.09 per share, respectively). The 1995 amounts include a charge for restructuring the local division ($0.16 per share). F-6 Segmental Results of Operations Long Distance Division
- -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Net operating revenues $ 8,954.8 $ 8,302.1 $ 7,277.4 Operating expenses Interconnection 3,941.1 3,722.7 3,102.7 Operations 1,236.6 1,051.8 1,046.6 Selling, general and administrative 1,962.9 1,970.3 1,839.7 Depreciation and amortization 716.7 633.3 581.6 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Total operating expenses 7,857.3 7,378.1 6,570.6 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Operating income $ 1,097.5 $ 924.0 $ 706.8 -- ------------- --- ------------- -- ------------- Operating margin 12.3% 11.1% 9.7% -- ------------- --- ------------- -- ------------- Capital expenditures $ 1,218.1 $ 1,133.7 $ 861.7 -- ------------- --- ------------- -- ------------- Identifiable assets $ 6,464.6 $ 5,997.7 $ 4,799.0 -- ------------- --- ------------- -- -------------
During 1997 and 1996, Sprint recorded nonrecurring litigation charges of $20 and $60 million, respectively (see Note 9 of Notes to Consolidated Financial Statements). In January 1996, the division contributed certain international assets and related operations to Global One. For comparative purposes, the following discussion of long distance division operating results excludes the nonrecurring charges and assumes the contribution occurred at the beginning of 1995. Operating margins would have been 12.5% in 1997, 12.0% in 1996 and 10.9% in 1995. Net Operating Revenues Net operating revenues increased 8% in 1997 and 17% in 1996. All major market segments -- residential, business and wholesale -- contributed to these increases. In general, the increases reflect strong calling volume growth of 14% in 1997 and 20% in 1996 and continued growth in the data services market. Revenue growth in 1997 was affected by a more competitive pricing environment, a change in the mix of products sold and an increase in the bad debt provision. Management continues to monitor Sprint's credit extension policies to ensure they remain effective. In addition, 1996 includes revenues from carrying the Internal Revenue Service 800 help line traffic, a service Sprint no longer provides, while 1997 reflects lower yields on other government contracts. Residential Market -- Residential market revenues reflect the continuing success of Sprint Sense,(R) a flat-rate calling plan, as well as growth in 1997 from international calls, prepaid phone cards and casual callers accessing the Sprint network. Business Market -- Business market revenues reflect increased calling volumes for toll-free and direct-distance-dialing toll (WATS) calls made within the United States. Growth in the small and medium business market was due to the continuing success of the division's small business product, Fridays Free. Data services, which includes sales of capacity on Sprint's network to Internet service providers, showed strong growth because of continued demand and expanded service offerings. Wholesale Market -- The wholesale market showed strong growth in both domestic and international markets. Domestic increases mainly reflect increased WATS calling volumes, partly offset by a decline in rates due to increased competition. F-7 Interconnection Costs Interconnection costs consist of amounts paid to LECs, other domestic service providers and foreign telephone companies to complete calls made by the division's domestic customers. These costs increased 6% in 1997 and 20% in 1996, reflecting strong growth in calling volumes, partly offset by lower unit costs for both domestic and international access. The lower domestic rates are generally due to FCC-mandated access rate reductions that took effect in July 1997 -- see "Regulatory Developments" for more information. Interconnection costs were 44.0% of net operating revenues in 1997, 45.0% in 1996 and 43.9% in 1995. Operations Expense Operations expense mainly consists of costs related to operating and maintaining the long distance network and costs of equipment sales. It also includes costs of providing operator, public payphone and video teleconferencing services, as well as telecommunications services for the hearing-impaired. Operations expense increased 20% in 1997 and 17% in 1996. As a percentage of net operating revenues, operations expense was 13.8% in 1997, 12.5% in 1996 and 12.4% in 1995. The 1997 increases were mainly due to increased costs related to FCC-mandated payments to public payphone providers, network equipment leasing costs, costs related to data services growth and equipment sales. The 1996 increase in expense reflects overall revenue growth. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense increased 2% in 1997 and 8% in 1996. These increases reflect the overall growth of the division's operating activities as well as increases in marketing and promotions to support products and services. The 1997 increase also reflects increased information technology costs to support network quality, and customer acquisition and customer management. SG&A expense was 21.7% of net operating revenues in 1997, 22.9% in 1996 and 24.8% in 1995. These improvements reflect continued cost control and business process improvement efforts. Depreciation and Amortization Expense Depreciation and amortization expense increased 13% in 1997 and 12% in 1996, generally because of an increased asset base. Capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services and upgrade capabilities for providing new products and services. Depreciation and amortization expense was 8.0% of net operating revenues in 1997, 7.6% in 1996 and 8.0% in 1995. F-8 Local Division
- -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Net operating revenues $ 5,290.2 $ 5,126.8 $ 4,690.0 Operating expenses Costs of services and products 1,888.1 1,842.5 1,769.5 Selling, general and administrative 1,074.0 1,038.2 956.5 Depreciation and amortization 934.1 909.1 835.6 Restructuring costs - - 87.6 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Total operating expenses 3,896.2 3,789.8 3,649.2 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Operating income $ 1,394.0 $ 1,337.0 $ 1,040.8 -- ------------- --- ------------- -- ------------- Operating margin 26.4% 26.1% 22.2% -- ------------- --- ------------- -- ------------- Capital expenditures $ 1,258.4 $ 1,142.6 $ 950.8 -- ------------- --- ------------- -- ------------- Identifiable assets $ 7,609.7 $ 7,425.4 $ 6,962.0 -- ------------- --- ------------- -- -------------
Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between affiliates to more accurately reflect market pricing. The main effect of the pricing change was to reduce "Other Revenues." For comparative purposes, the following discussion of local division operating results assumes these pricing changes occurred at the beginning of 1995. Operating margins would have been 25.6% in 1997, 24.5% in 1996 and 22.3% in 1995 (excluding the restructuring charge). Net Operating Revenues Net operating revenues increased 4% in 1997 and 9% in 1996 mainly because of customer access line growth. Excluding sales of local exchanges in 1997, access line growth was 5.6% in both 1997 and 1996. Net operating revenues were $5,231.7 million in 1997, $5,013.3 million in 1996 and $4,581.2 million in 1995. Local Service Revenues -- Local service revenues, derived from local exchange services, increased 10% in 1997 and 11% in 1996. These increases reflect strong economic growth in the division's service areas and increases in second-line service for existing business and residential customers to meet their lifestyle and data access needs. Local service revenues also increased because of extended area calling plans and increased demand for advanced intelligent network services, such as Caller ID and Call Waiting. Network Access Revenues -- Network access revenues, derived from interexchange long distance carriers' use of the local network to complete calls, increased 2% in 1997 and 10% in 1996. The increases were largely due to increased calling volumes of 6% in 1997 and 10% in 1996. The 1997 revenue growth was partly offset by FCC-mandated access rate reductions effective in July 1997 -- see "Regulatory Developments" for more information. In addition, the FCC's 1995 interim interstate price cap plan increased network access revenues for 1996 and had a nominal effect on 1995. Toll Service Revenues -- Toll service revenues are mainly derived from providing long distance services within specified geographical areas, or local access transport areas (LATAs). These revenues decreased 19% in 1997 and 13% in 1996. During 1996 and 1995, the division resold interexchange long distance services in some of its service areas. This reseller service was phased out through early 1997, accounting for a large portion of the 1997 decline. Some of those customers, however, became customers of Sprint's long distance division, which has reduced the overall impact on Sprint. The decreases in toll service revenues also reflect extended local area calling plans and increased competition in the intrastate long distance market since interexchange long distance carriers now provide intraLATA long distance services in many states. The declines in toll service revenues were partly offset by related increases in the division's local and network access revenues. F-9 Other Revenues -- Other revenues are mainly derived from telecommunications equipment sales, directory sales and listing services, and billing and collection services. These revenues increased 10% in 1997 and 24% in 1996, mainly because of increased equipment sales. A major factor in the 1996 growth was the introduction of enhanced telephone instruments, such as Caller ID units. Costs of Services and Products Costs of services and products consists of costs related to operating and maintaining the local network and costs of equipment sales. These expenses increased 3% in 1997 and 4% in 1996 because of customer access line growth and increased equipment sales. Both years also reflect savings from the division's restructuring of the network function. Costs of services and products were 36.0% of net operating revenues in 1997, 36.7% in 1996 and 38.5% in 1995. The improvement in 1996 compared with 1995 reflects the capitalization of switch software costs beginning in 1996, as discussed in "Depreciation and Amortization Expense." Selling, General and Administrative Expense SG&A expense increased 3% in 1997 and 9% in 1996. These increases were mainly due to increased customer service costs related to access line growth and marketing costs to promote new products and services. These increases were partly offset by savings from the division's restructuring of the finance function and general cost control measures. SG&A expense was 20.6% of net operating revenues in 1997, 20.7% in 1996 and 21.0% in 1995. Depreciation and Amortization Expense Depreciation and amortization expense increased 3% in 1997 and 9% in 1996, mainly because of plant additions. The 1996 increase also reflects the initial year of amortizing capitalized switch software costs. At year-end 1995, Sprint adopted accounting principles for a competitive marketplace and discontinued applying SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," to its local division (see Note 13 of Notes to Consolidated Financial Statements). As a result, certain accumulated depreciation balances were increased; plant asset lives were shortened to reflect their economic lives; and switch software costs, which were previously expensed as incurred, are now capitalized and amortized over their estimated economic lives. Depreciation and amortization expense was 17.8% of net operating revenues in 1997, 18.1% in 1996 and 18.2% in 1995. Restructuring Costs In 1995, Sprint recorded an $88 million charge to restructure the division (see Note 15 of Notes to Consolidated Financial Statements). Product Distribution and Directory Publishing Division
- -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Net operating revenues $ 1,454.3 $ 1,225.4 $ 1,147.6 Operating expenses Costs of services and products 1,172.9 1,025.7 965.8 Selling, general and administrative 93.3 90.9 87.7 Depreciation and amortization 8.2 7.2 7.4 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Total operating expenses 1,274.4 1,123.8 1,060.9 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Operating income $ 179.9 $ 101.6 $ 86.7 -- ------------- --- ------------- -- ------------- Operating margin 12.4% 8.3% 7.6% -- ------------- --- ------------- -- ------------- Capital expenditures $ 10.5 $ 9.4 $ 7.8 -- ------------- --- ------------- -- ------------- Identifiable assets $ 519.0 $ 446.1 $ 395.4 -- ------------- --- ------------- -- -------------
F-10 Beginning in July 1997, Sprint changed its transfer pricing for certain transactions between affiliates to more accurately reflect market pricing. Had these pricing changes occurred at the beginning of 1995, net operating revenues would have increased 19% to $1,445.1 million in 1997 from $1,214.3 million in 1996. Revenues would have been $1,138.9 million in 1995. Sales to non-affiliates in 1997 compared with 1996 remained relatively flat because of increased competition. Cost of services and products would have increased 22% to $1,115.9 million in 1997 from $918.2 million in 1996. Costs of services and products would have been $863.4 million in 1995. The growth in revenues and costs of services and products reflects increased sales of telecommunications equipment and distribution services to the local division. Operating margins would have been 15.8% in 1997, 16.3% in 1996 and 15.8% in 1995. Emerging Businesses
- -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 1997 1996 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Net operating revenues $ 57.4 $ 0.5 --- ------------- -- ------------- Operating loss $ (183.0) $ (63.8) --- ------------- -- ------------- Capital expenditures $ 233.3 $ 49.9 --- ------------- -- ------------- Identifiable assets $ 1,290.3 $ 138.3 --- ------------- -- -------------
Revenues in 1997 increased mainly because of Sprint Paranet and Sprint Internet access services. Operating losses for both years largely reflect activities to develop or enter newly competitive domestic and international markets, such as Internet access and competitive local services. During 1996, Sprint began offering Internet services to consumers through Sprint Internet Passport. (sm) During 1997, Sprint launched Sprint Internet Private Passport, (sm) which provides customized, private Internet access services to businesses. In February 1998, Sprint announced it was forming a broad business relationship with EarthLink Network Inc. (EarthLink), an Internet service provider. As part of this relationship, EarthLink will obtain Sprint's Internet Passport customers and will take over the day-to-day operations of those services. This will create a combined base of 600,000 Internet access customers, and enable Sprint to build its brand equity and market share. This relationship requires regulatory approval and is expected to close in the 1998 second quarter. During the 1997 third quarter, Sprint stopped actively marketing its CLEC services until the rules for local competition become clearer, economics improve, and more effective working arrangements and electronic interfaces with incumbent LECs can be developed. While Sprint's measured course on entering the CLEC market has enabled it to avoid significant losses, Sprint continues to devote significant resources toward developing a distinct approach. As part of an overall strategy to achieve nationwide PCS coverage, Sprint directly acquired PCS licenses for $544 million. The licenses cover 139 markets across the United States, reaching a total population of 70 million. Sprint plans to affiliate these licenses with the licenses previously acquired by Sprint PCS. With this affiliation, licensed coverage for Sprint-branded PCS will include nearly 260 million people across the United States, Puerto Rico and the U.S. Virgin Islands. Sprint began construction in some markets in 1997. While zoning issues will dictate the rate of buildout progress, Sprint hopes to achieve coverage in areas that could reach 25 to 30 million people by the end of 1998. Excluding the PCS license costs, Sprint expects capital expenditures to total $1.8 billion in 1998 for network buildout. In September 1997, Sprint acquired Houston-based Paranet, Inc., which will allow Sprint to capitalize on the accelerating demand for network management services. Sprint Paranet's design, implementation and consultation expertise should also enable Sprint to maintain and add to its traditional long distance revenues. See Note 12 of Notes to Consolidated Financial Statements for more information about the Paranet acquisition. F-11 Nonoperating Items Interest Expense Interest costs on borrowings consist of the following:
- ------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions) Interest expense on outstanding debt $ 159.9 $ 161.2 $ 231.0 Interest expense related to Cellular (1) - 21.5 124.0 Capitalized interest costs 93.0 104.0 57.0 - ------------------------------------------------------------------------------------------------------------------- Total interest costs on outstanding debt $ 252.9 $ 286.7 $ 412.0 ---------------------------------------------------- Average debt outstanding $ 3,251.3 $ 3,604.9 $ 5,505.2 ---------------------------------------------------- Effective interest rate 7.8% 8.0% 7.5% ----------------------------------------------------
(1) Interest expense related to Cellular is included in "Discontinued operation, net" on the Consolidated Statements of Income. Average debt outstanding decreased $1.9 billion in 1996, generally because of repayments funded by a portion of the cash received from DT and FT for their equity investments in Sprint and from Cellular's repayment of intercompany debt in connection with the Spinoff. Sprint's effective interest rate increased to 8.0% in 1996 from 7.5% in 1995, mainly because of the decline in short-term borrowings as a percentage of total borrowings. Sprint capitalizes interest costs on its investment in the directly acquired PCS licenses and the related network buildout. Through June 1997, Sprint also capitalized interest costs on borrowings related to its investment in Sprint PCS. Sprint stopped capitalizing these costs in July 1997 because Sprint PCS no longer qualified as a development-stage company. Global One Losses and related venture costs from Global One totaled $162 million in 1997, $82 million in 1996 and $23 million in 1995. The increased losses in 1997 were due to higher operating costs within Global One's existing global markets due to the slower-than-expected integration of the parent companies' networks and start-up related costs. Global One has begun a thorough review of operations, including network deployment, and management and support systems, in an effort to improve efficiencies and reduce operating costs. Sprint PCS Sprint PCS' revenues totaled $249 million in 1997 and $4 million in 1996. Sprint's share of operating losses from Sprint PCS and its affiliates was $660 million in 1997, $192 million in 1996 and $31 million in 1995. The 1997 losses reflect marketing and promotional costs to support a growing customer base. In early 1998, Sprint PCS' customer base exceeded 1 million customers. The venture plans to continue to aggressively obtain new customers, which will likely result in higher losses in 1998 compared with 1997. Average monthly revenue per customer in 1997 approximated $64, which is higher than wireless industry averages. This higher average is being driven by marketing plans that both target and encourage higher usage. Sprint PCS customer churn rates and customer marketing costs have been as expected at this stage of development. As the PCS markets mature and Sprint PCS gains additional scale, both of these measures are expected to trend toward cellular industry levels. F-12 Other Income (Expense), Net Other income (expense) consists of the following:
- ------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions) Dividend and interest income $ 75.4 $ 99.7 $ 12.6 Net gains on sales of assets 71.5 15.9 - Loss on sales of accounts receivable - (4.2) (38.6) Other, net (6.4) 3.9 (12.9) - ------------------------------------------------------------------------------------------------------------------- Total other income (expense), net $ 140.5 $ 115.3 $ (38.9) ----------------------------------------------------
Dividend and interest income for 1997 and 1996 reflects income earned on the cash received from DT and FT for their equity investment in Sprint, as well as Cellular's repayment of intercompany debt in connection with the Spinoff. Sprint has since invested these funds in strategic initiatives and has decreased certain borrowings, reducing the balance held in temporary investments in 1997. In 1997, Sprint recognized pretax gains of $45 million on sales of local exchanges. Also in 1997, Sprint sold its equity interest in an equipment provider, resulting in a $26 million pretax gain. Income Taxes Sprint's effective tax rates were 39.8% in 1997, 37.7% in 1996 and 36.1% in 1995. See Note 4 of Notes to Consolidated Financial Statements for information about the differences that cause the effective income tax rate to vary from the statutory federal rate. Discontinued Operation, Net Sprint recognized an after-tax loss of $3 million ($0.01 per share) in 1996 and after-tax income of $15 million ($0.04 per share) in 1995 related to its investment in Cellular. Cellular was spun off to Sprint common shareholders in March 1996 (see Note 14 of Notes to Consolidated Financial Statements). Extraordinary Items, Net During 1996, Sprint redeemed, prior to maturity, $190 million of debt with interest rates ranging from 6.0% to 9.5%. This resulted in a $5 million ($0.01 per share) after-tax loss. At year-end 1995, Sprint adopted accounting principles for a competitive marketplace and discontinued applying SFAS 71 to its local division (see Note 13 of Notes to Consolidated Financial Statements). This resulted in an after-tax, noncash extraordinary charge of $565 million ($1.62 per share) in 1995. Financial Condition Sprint's consolidated assets totaled $18.2 billion at year-end 1997 versus $16.8 billion at year-end 1996. Net property, plant and equipment increased $1.0 billion in 1997, mainly because of increased capital expenditures to support the core long distance and local networks. At year-end 1997, Sprint's total capitalization was $12.9 billion. Total capitalization consists of short-term borrowings, long-term debt (including current maturities), redeemable preferred stock, and common stock and other shareholders' equity. Short-term borrowings and long-term debt (including current maturities) increased to 30.0% of total capitalization at year-end 1997 from 27.7% at year-end 1996. See "Liquidity and Capital Resources" for additional discussions of changes in Sprint's Consolidated Balance Sheets. F-13 Liquidity and Capital Resources Operating Activities - Continuing Operations Cash flows from operating activities, which are Sprint's main source of liquidity, were $3.4 billion in 1997, $2.4 billion in 1996 and $2.6 billion in 1995. The growth in 1997 operating cash flows reflects improved operating results in Sprint's core businesses, partly offset by increased losses from its emerging businesses. During 1996, Sprint terminated an accounts receivable sales agreement, which reduced cash flows by $600 million. Excluding this termination, 1996 cash flows increased $394 million, mainly because of improved operating results in all divisions. Investing Activities - Continuing Operations Sprint's investing activities used cash of $4.5 billion in 1997, $3.1 billion in 1996 and $2.9 billion in 1995. Capital expenditures, which are Sprint's largest investing activity, were $2.9 billion in 1997, $2.4 billion in 1996 and $1.9 billion in 1995. Long distance capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services and upgrade capabilities for providing new products and services. The local division incurred capital expenditures to accommodate access line growth and expand capabilities for providing enhanced services. In 1997, Sprint paid the remaining $460 million for its directly owned PCS licenses, bringing total payments to $544 million. Also in 1997, Sprint purchased the net assets of Paranet, Inc. for $375 million (see Note 12 of Notes to Consolidated Financial Statements). "Investments in and loans to affiliates, net" consists of the following:
1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Sprint PCS(1) Capital contributions $ 405.9 $ 297.6 $ 910.9 Loans and advances, net 254.1 67.1 - Capitalized interest 46.3 96.3 43.2 Investments in debt securities - 100.0 - - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 706.3 561.0 954.1 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Global One Capital contribution - 39.5 - Advances, net 199.7 - - - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- 199.7 39.5 - - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Other, net 185.8 41.9 37.8 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Total $ 1,091.8 $ 642.4 $ 991.9 -- ------------- --- ------------- -- -------------
(1) Includes Sprint PCS and its affiliates. The capital contributions, and loans and advances, to Sprint PCS in 1997 and 1996 were used to fund its capital and operating requirements. The 1995 contributions were mainly used to fund payments for PCS licenses. In 1997, Sprint PCS borrowed $300 million from Sprint under a vendor financing facility. In July 1997, Sprint began amortizing the capitalized interest costs over the lives of the related assets. In 1996, Sprint purchased $183 million (face value) of Sprint PCS Senior Discount notes for $100 million. F-14 Financing Activities Sprint's financing activities provided cash of $72 million in 1997, $479 million in 1996 and $423 million in 1995. In 1997, Sprint borrowed $867 million, mainly to fund investments in and loans to affiliates. In 1996, DT and FT acquired Class A common shares for a combined total of $3.7 billion. Sprint mainly used these proceeds, and the cash from Cellular repaying intercompany debt, to reduce outstanding debt. In 1995, Sprint increased its short-term borrowings by $1.1 billion to fund commitments related to Sprint PCS and repay long-term debt. Sprint paid common and preferred dividends totaling $430 million in 1997, $420 million in 1996 and $352 million in 1995. Sprint's indicated annual dividend rate on common stock is currently $1.00 per share. Sprint purchased 3 and 10 million treasury shares in 1997 and 1996, respectively. Sprint may repurchase common shares on the open market through 1998 to meet share issuance requirements for employee benefit plans and for the conversion of preferred stock. Discontinued Operation In connection with the March 1996 Spinoff, Cellular repaid $1.4 billion of intercompany debt owed to Sprint. Prior to the Spinoff, Cellular's investing activities required net cash of $141 and $325 million in 1996 and 1995, respectively, mainly to fund capital expenditures and acquire cellular properties. Capital Requirements Sprint's 1998 investing activities, consisting of capital expenditures and investments in affiliates, are expected to require cash of $5.4 to $6.1 billion. Dividend payments are expected to total $430 million in 1998. These requirements will be funded with cash from operating activities and external sources. External borrowings are expected to total $2.0 to $2.5 billion in 1998. Sprint expects to spend $5.0 to $5.5 billion on capital expenditures in 1998. Of this total, the long distance and local divisions will require an estimated $2.7 to $3.0 billion. The remainder will mainly be used to build out the network for the new PCS markets directly owned by Sprint. Sprint PCS will require $200 to $300 million to fund operating cash requirements and to continue its network buildout. Global One will also require $200 to $300 million to fund operations and ongoing development activities. Liquidity At year-end 1997, Sprint could borrow $1.0 billion under a revolving credit agreement with a syndicate of domestic and international banks. In addition, in 1997, Sprint negotiated a separate five-year revolving credit facility with a bank. At year-end 1997, Sprint's unused capacity under the committed portion of this facility was $100 million. Sprint may also offer for sale up to $1.1 billion of debt securities under shelf registration statements filed with the Securities and Exchange Commission. Any borrowings Sprint may incur are ultimately limited by certain debt covenants. At year-end 1997, Sprint could borrow up to $13.5 billion under the most restrictive of its debt covenants. The most restrictive covenant related to dividends results from Sprint's revolving credit agreement. Among other restrictions, Sprint must maintain specified levels of consolidated net worth. As a result, $2.7 billion of Sprint's $3.7 billion retained earnings was restricted from the payment of dividends at year-end 1997. F-15 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 monthly status updates of all outstanding derivative positions. Interest Rate Risk Management Sprint's interest rate risk management program focuses on minimizing exposure to interest rate movements, setting an optimal mixture of floating- and fixed-rate debt, and minimizing liquidity risk. Sprint uses simulation analysis to assess its interest rate exposure and establish the desired ratio of floating- and fixed-rate debt. To the extent possible, Sprint manages interest rate exposure and the floating-to-fixed ratio through its borrowings, but sometimes uses interest rate swaps and caps to adjust its risk profile. Foreign Exchange Risk Management Sprint's foreign exchange risk management program focuses on hedging transaction exposure to optimize consolidated cash flow. Sprint's main transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Year 2000 Issue The "Year 2000" issue affects Sprint's installed computer systems, network elements, software applications, and other business systems that have time-sensitive programs that may not properly reflect or recognize the year 2000. Because many computers and computer applications define dates by the last two digits of the year, "00" may not be properly identified as the year 2000. This error could result in miscalculations or system failures. Sprint started a program in 1996 to identify and address the Year 2000 issue. It is taking an inventory of its network and computer systems and is creating and implementing plans to make them Year 2000 compliant. Sprint is using both internal and external sources to identify, correct or reprogram, and test its systems for Year 2000 compliance. The total cost of modifications and conversions is not known at this time; however, it is not expected to be material to Sprint's financial position, results of operations or cash flows and is being expensed as incurred. The Year 2000 issue may also affect the systems and applications of Sprint's customers, vendors or resellers. Sprint is also contacting others with whom it conducts business to receive the appropriate warranties and assurances that those third parties are, or will be, Year 2000 compliant. If compliance is not achieved in a timely manner, the Year 2000 issue could have a material effect on Sprint's operations. However, Sprint is focusing on identifying and addressing all aspects of its operations that may be affected by the Year 2000 issue and is addressing the most critical applications first. As a result, Sprint management does not believe its operations will be materially adversely affected. Impact of Recently Issued Accounting Pronouncements See Note 16 of Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. F-16 MANAGEMENT REPORT The management of Sprint Corporation has the responsibility for the integrity and objectivity of the information contained in this Annual Report. Management is responsible for the consistency of reporting such information and for ensuring that generally accepted accounting principles 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 codes of conduct are understood and practiced by its employees. The consolidated financial statements included in this Annual Report have been audited by Ernst & Young LLP, independent auditors. Their audit was conducted in accordance with generally accepted auditing standards and their report is included herein. The responsibility of the Board of Directors 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 F-17 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, 1997 and 1996, and the related consolidated statements of income, cash flows, and common stock and other shareholders' equity for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule (Schedule II) listed in the Index to Financial Statements and Financial Statement Schedules. These financial statements and Schedule II are the responsibility of the management of Sprint. Our responsibility is to express an opinion on these financial statements and Schedule II based on our audits. The 1997 financial statements and financial statement schedule of Sprint Spectrum Holding Company, L.P., a partnership in which Sprint has a 40% interest, have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the 1997 consolidated financial statements relates to data included for Sprint Spectrum Holding Company, L.P., it is based solely on their report. In the consolidated financial statements, Sprint's equity in Sprint Spectrum Holding Company, L.P. is stated at $749 million at December 31, 1997, and Sprint's equity in the net loss of Sprint Spectrum Holding Company, L.P. is stated at $625 million for the year then ended. We conducted our audits in accordance with generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule (Schedule II), when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 13 to the consolidated financial statements, Sprint discontinued accounting for the operations of its local telecommunications division in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," in 1995. ERNST & YOUNG LLP Kansas City, Missouri February 3, 1998 F-18
CONSOLIDATED STATEMENTS OF INCOME Sprint Corporation - ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions, except per share data) Net Operating Revenues $ 14,873.9 $ 13,887.5 $ 12,735.3 Operating Expenses Costs of services and products 7,451.0 6,912.9 6,504.9 Selling, general and administrative 3,245.2 3,116.4 2,842.1 Depreciation and amortization 1,726.3 1,591.0 1,466.4 Restructuring costs - - 87.6 ------------------------------------------------------------------------------------------------------------- Total operating expenses 12,422.5 11,620.3 10,901.0 ------------------------------------------------------------------------------------------------------------- Operating Income 2,451.4 2,267.2 1,834.3 Interest expense (187.2) (196.7) (260.7) Equity in loss of Global One (162.1) (82.1) (22.9) Equity in loss of Sprint PCS and affiliates (659.6) (191.8) (31.4) Other income (expense), net 140.5 115.3 (38.9) - ------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 1,583.0 1,911.9 1,480.4 Income taxes (630.5) (721.0) (534.3) - ------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 952.5 1,190.9 946.1 Discontinued operation, net - (2.6) 14.5 Extraordinary items, net - (4.5) (565.3) - ------------------------------------------------------------------------------------------------------------------- Net Income 952.5 1,183.8 395.3 Preferred stock dividends (1.0) (1.3) (2.6) - ------------------------------------------------------------------------------------------------------------------- Earnings applicable to common stock $ 951.5 $ 1,182.5 $ 392.7 ----------------------------------------------- Basic Earnings per Common Share Continuing operations $ 2.21 $ 2.82 $ 2.71 Discontinued operation - (0.01) 0.04 Extraordinary items - (0.01) (1.62) - ------------------------------------------------------------------------------------------------------------------- Total $ 2.21 $ 2.80 $ 1.13 ----------------------------------------------- Basic weighted average common shares 430.2 421.7 348.7 ----------------------------------------------- Diluted Earnings per Common Share Continuing operations $ 2.18 $ 2.79 $ 2.69 Discontinued operation - (0.01) 0.04 Extraordinary items - (0.01) (1.61) - ------------------------------------------------------------------------------------------------------------------- Total $ 2.18 $ 2.77 $ 1.12 ----------------------------------------------- Diluted weighted average common shares 436.5 427.0 351.3 ----------------------------------------------- Dividends per Common Share $ 1.00 $ 1.00 $ 1.00 ----------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
F-19
CONSOLIDATED BALANCE SHEETS Sprint Corporation - ------------------------------------------------------------------------------------------------------------------------ December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ (in millions, except per share data) Assets Current assets Cash and equivalents $ 101.7 $ 1,150.6 Accounts receivable, net of allowance for doubtful accounts of $146.7 and $117.4 2,495.6 2,343.6 Inventories 352.0 305.3 Notes and other receivables 464.6 101.9 Other 358.7 331.5 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 3,772.6 4,232.9 - ------------------------------------------------------------------------------------------------------------------------- Investments in equity securities 303.0 254.5 - ------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment Long distance communications services 8,245.5 7,467.8 Local communications services 14,011.5 13,368.7 Other 953.9 574.3 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 23,210.9 21,410.8 Less accumulated depreciation 11,716.8 10,946.7 - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 11,494.1 10,464.1 - ------------------------------------------------------------------------------------------------------------------------- Investments in and advances to affiliates 1,427.5 1,527.1 - ------------------------------------------------------------------------------------------------------------------------- Other assets 1,187.6 347.8 - ------------------------------------------------------------------------------------------------------------------------- Total $ 18,184.8 $ 16,826.4 ------------------------------------ Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 131.0 $ 99.1 Short-term borrowings - 200.0 Accounts payable 1,100.1 1,026.7 Accrued interconnection costs 672.7 709.0 Accrued taxes 270.7 189.2 Advance billings 202.9 199.7 Other 699.4 770.6 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 3,076.8 3,194.3 - ------------------------------------------------------------------------------------------------------------------------ Long-term debt 3,748.6 2,974.8 - ------------------------------------------------------------------------------------------------------------------------ Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,016.5 846.9 Postretirement and other benefit obligations 947.4 919.7 Other 358.8 359.0 - ------------------------------------------------------------------------------------------------------------------------ Total deferred credits and other liabilities 2,322.7 2,125.6 - ------------------------------------------------------------------------------------------------------------------------ Redeemable preferred stock 11.5 11.8 - ------------------------------------------------------------------------------------------------------------------------ Common stock and other shareholders' equity Common stock, par value $2.50 per share, 1,000.0 shares authorized, 350.3 shares issued, and 343.8 and 343.9 shares outstanding 875.7 875.7 Class A common stock, par value $2.50 per share, 500.0 shares authorized, 86.2 shares issued and outstanding 215.6 215.6 Capital in excess of par or stated value 4,457.7 4,425.9 Retained earnings 3,693.1 3,222.4 Treasury stock, at cost, 6.5 and 6.4 shares (292.9) (262.2) Other 76.0 42.5 ----------------------------------------------------------------------------------------------------------------- Total common stock and other shareholders' equity 9,025.2 8,519.9 - ------------------------------------------------------------------------------------------------------------------------ Total $ 18,184.8 $ 16,826.4 ---------------------------------- See accompanying Notes to Consolidated Financial Statements.
F-20
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Corporation - ----------------------------------------------------------------- ----------------- ---------------- ----------------- Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------- ----------------- ---------------- ----------------- (in millions) Operating Activities Net income $ 952.5 $ 1,183.8 $ 395.3 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net losses of affiliates 843.7 273.7 39.1 Extraordinary items, net - 4.9 565.3 Depreciation and amortization 1,726.3 1,591.0 1,466.4 Deferred income taxes and investment tax credits 165.7 (10.3) 5.8 Net (gains) losses on sales of assets (93.2) 7.5 4.2 Changes in assets and liabilities: Accounts receivable, net (127.0) (982.1) (135.4) Inventories and other current assets (94.4) 15.7 (38.6) Accounts payable and other current liabilities 18.0 362.0 178.1 Noncurrent assets and liabilities, net (18.4) (25.5) 123.0 Other, net 5.8 (17.1) 6.4 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Net cash provided by continuing operations 3,379.0 2,403.6 2,609.6 Net cash provided (used) by cellular division - (0.1) 162.5 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Net cash provided by operating activities 3,379.0 2,403.5 2,772.1 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Investing Activities Capital expenditures (2,862.6) (2,433.6) (1,857.3) Purchase of PCS licenses (460.1) (84.0) - Investments in and loans to affiliates, net (1,091.8) (642.4) (991.9) Paranet acquisition (375.0) - - Proceeds from sales of assets 292.3 2.1 6.7 Other, net (2.3) 42.4 (17.1) - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Net cash used by continuing operations (4,499.5) (3,115.5) (2,859.6) Repayment by cellular division of intercompany advances - 1,400.0 - Net cash used by cellular division - (140.7) (324.6) - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Net cash used by investing activities (4,499.5) (1,856.2) (3,184.2) - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Financing Activities Payments on long-term debt (135.0) (433.1) (630.0) Proceeds from long-term debt 866.5 9.4 260.7 Net change in short-term borrowings (200.0) (1,986.8) 1,109.5 Proceeds from Class A common stock issued - 3,661.3 - Dividends paid (430.0) (419.6) (351.5) Treasury stock purchased (144.5) (407.2) - Other, net 114.6 55.1 33.9 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Net cash provided by financing activities 71.6 479.1 422.6 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Increase (Decrease) in Cash and Equivalents (1,048.9) 1,026.4 10.5 Cash and Equivalents at Beginning of Year 1,150.6 124.2 113.7 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Cash and Equivalents at End of Year $ 101.7 $ 1,150.6 $ 124.2 --- ------------- -- ------------- --- ------------- See accompanying Notes to Consolidated Financial Statements.
F-21
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY Sprint Corporation - ------------------------------------------------------------------------------------------------------------------------- Capital in Excess Common Class A of Par or Shares Common Common Stated Retained Treasury Outstanding Stock Stock Value Earnings Stock Other Total - ------------------------------------------------------------------------------------------------------------------------- (in millions) Beginning 1995 balance 348.3 $ 871.4 $ - $ 942.9 $ 2,730.6 $ (9.6) $ (10.5) $ 4,524.8 Net income - - - - 395.3 - - 395.3 Common stock dividends - - - - (348.9) - - (348.9) Common stock issued 0.6 1.4 - 13.5 - - - 14.9 Treasury stock issued 0.3 - - - (3.5) 9.6 - 6.1 Change in unrealized holding gains on investments, net - - - - - - 54.6 54.6 Other, net - 0.1 - 3.6 (0.6) - (7.3) (4.2) - ------------------------------------------------------------------------------------------------------------------------- Ending 1995 balance 349.2 872.9 - 960.0 2,772.9 - 36.8 4,642.6 Net income - - - - 1,183.8 - - 1,183.8 Common stock dividends - - - - (346.1) - - (346.1) Class A common stock and preference stock dividends - - - - (74.9) - - (74.9) Common stock issued 1.1 2.5 - 17.5 - - - 20.0 Class A common stock issued 86.2 - 215.6 3,436.3 - - - 3,651.9 Treasury stock purchased (10.1) - - - - (407.2) - (407.2) Treasury stock issued 3.7 - - - (52.9) 145.0 - 92.1 Spinoff of cellular - - - - (260.2) - - (260.2) division Other, net - 0.3 - 12.1 (0.2) - 5.7 17.9 - ------------------------------------------------------------------------------------------------------------------------- Ending 1996 balance 430.1 875.7 215.6 4,425.9 3,222.4 (262.2) 42.5 8,519.9 Net income - - - - 952.5 - - 952.5 Common stock dividends - - - - (343.3) - - (343.3) Class A common stock dividends - - - - (86.2) - - (86.2) Treasury stock purchased (3.0) - - - - (144.5) - (144.5) Treasury stock issued 2.9 - - - (48.8) 113.8 - 65.0 Tax benefit from stock options exercised - - - 26.2 - - - 26.2 Other, net - - - 5.6 (3.5) - 33.5 35.6 - ------------------------------------------------------------------------------------------------------------------------- Ending 1997 balance 430.0 $ 875.7 $ 215.6 $ 4,457.7 $ 3,693.1 $ (292.9) $ 76.0 $ 9,025.2 ----------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation 1. Summary of Significant Accounting Policies Basis of Consolidation and Presentation The consolidated financial statements include the accounts of Sprint Corporation and its wholly owned and majority-owned subsidiaries (Sprint). Investments in entities in which Sprint exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). The consolidated financial statements are prepared according to generally accepted accounting principles. 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. Sprint applied Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," to its financial statements until December 1995. Under SFAS 71, revenues and related net income resulting from transactions between Sprint's nonregulated operations and its regulated local exchange carriers were not eliminated from the consolidated financial statements. Revenues from these intercompany transactions were $262 million in 1995. All other significant intercompany transactions have been eliminated. Classification of Operations The long distance division provides domestic and international voice, video and data communications services. The division offers its services to the public subject to varying levels of state and federal regulation, but rates are generally not subject to rate-base regulation. The local division consists of regulated telephone companies. These operations provide local exchange services, access by telephone customers and other carriers to local exchange facilities, sales of telecommunications equipment and long distance services within specified geographical areas. The product distribution and directory publishing division provides wholesale distribution services of telecommunications products, and publishes and markets white and yellow page telephone directories. Emerging businesses consists of activities related to consumer Internet access services, mainly through Sprint Internet Passport (sm); competitive local exchange carrier services; personal communication services (PCS) controlled by Sprint; international development activities (outside the scope of the Global One joint venture); and integration, management and support services for computer networks through Sprint Paranet. 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. F-23 1. Summary of Significant Accounting Policies (continued) 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 $225 million at year-end 1997 and $127 million at year-end 1996. Sprint 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 "Common stock and other shareholders' equity - Other," net of related income taxes. Inventories Inventories are stated at the lower of cost (principally first-in, first-out method) or market. 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. Repairs and maintenance costs are expensed as incurred. Depreciation The cost of property, plant and equipment is generally depreciated on a straight-line basis over estimated economic useful lives. Prior to Sprint's discontinued use of SFAS 71 at year-end 1995, the cost of property, plant and equipment for the local division had been generally depreciated on a straight-line basis over lives prescribed by regulatory commissions. Income Taxes Sprint records deferred income taxes based on certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for tax purposes. Investment tax credits related to regulated telephone property, plant and equipment have been deferred and are being amortized over the estimated useful lives of the related assets. Capitalized Interest Sprint capitalizes interest costs related to constructing capital assets, and to its investments in Sprint Spectrum Holding Company, L.P. (Sprint PCS) and its directly owned PCS licenses. Sprint stopped capitalizing interest on its Sprint PCS investment in July 1997 because Sprint PCS no longer qualified as a development-stage company. Capitalized interest totaled $93 million in 1997, $104 million in 1996 and $57 million in 1995. F-24 2. Investments Investments in Equity Securities The cost of investments in equity securities was $105 million at year-end 1997 and 1996. Gross unrealized holding gains were $198 million at year-end 1997 and $149 million at year-end 1996. Investments in and Loans to Affiliates Investments accounted for using the equity method mainly consist of Sprint's investments in Sprint PCS and Global One. Sprint is a 40% partner in Sprint PCS, a partnership with Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Sprint PCS is building the nation's first single-technology, state-of-the-art wireless network to provide PCS across the United States. Sprint is a also a partner in Global One, a joint venture with Deutsche Telekom AG (DT) and France Telecom (FT) formed to provide seamless global telecommunications services to business, residential and carrier markets worldwide. Sprint is a one-third partner in Global One's operating group serving Europe (excluding France and Germany), and is a 50% partner in Global One's operating group for the worldwide activities outside the United States and Europe. At year-end 1997, Sprint's share of underlying equity in Global One's net assets exceeded the carrying value of Sprint's investment in Global One by $158 million. This difference is being amortized through January 2001. Combined, summarized financial information (100% basis) of all entities accounted for using the equity method is as follows:
1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Results of operations Net operating revenues $ 2,195.6 $ 1,727.9 $ 779.5 -- ------------- --- ------------- -- ------------- Operating loss $ (2,162.2) $ (794.0) $ (58.3) -- ------------- --- ------------- -- ------------- Net loss $ (2,459.0) $ (844.3) $ (90.6) -- ------------- --- ------------- -- ------------- Financial position Current assets $ 2,331.5 $ 1,360.7 Noncurrent assets 10,861.0 6,779.3 - -------------------------------------------------------------- -- ------------- --- ------------- Total $ 13,192.5 $ 8,140.0 -- ------------- --- ------------- Current liabilities $ 2,800.2 $ 1,185.5 Noncurrent liabilities 6,395.2 2,042.1 Owners' equity 3,997.1 4,912.4 - -------------------------------------------------------------- -- ------------- --- ------------- Total $ 13,192.5 $ 8,140.0 -- ------------- --- -------------
At year-end 1997 and 1996, Sprint's investment in Sprint PCS, including advances and a vendor financing loan, totaled $1.2 billion. Sprint's investment in Global One, including advances, totaled $93 and $38 million, respectively. In 1996, Sprint purchased $183 million (face value) of Sprint PCS Senior Discount notes for $100 million. The bonds mature in 2006. At year-end 1997 and 1996, the accreted cost of the notes was $118 and $104 million and gross unrealized holding gains totaled $24 and $18 million, respectively. This investment has been included in "Current assets - Other" on the Consolidated Balance Sheets. F-25 3. Employee Benefit Plans Defined Benefit Pension Plan Substantially all Sprint employees are covered by a noncontributory defined benefit pension plan. Benefits for plan participants represented by collective bargaining units are based on negotiated schedules of defined amounts. For participants not covered by collective bargaining agreements, the plan provides pension benefits based on years of service and participants' compensation. Sprint's policy is to make annual plan contributions equal to an actuarially determined amount consistent with applicable 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. At year-end 1997, the plan's assets consisted mainly of investments in corporate equity securities and U.S. government and corporate debt securities. The net pension cost (credit) consists of the following:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions) Service cost -- benefits earned during the period $ 61.7 $ 65.4 $ 51.8 Interest cost on projected benefit obligation 148.9 138.5 129.7 Actual return on plan assets (448.5) (353.0) (472.1) Net amortization and deferral 240.0 159.4 287.9 - ------------------------------------------------------------------------------------------------------------------- Net pension cost (credit) $ 2.1 $ 10.3 $ (2.7) ---------------------------------------------------- Discount rate 7.75% 7.25% 8.50% Expected long-term rate of return on plan assets 9.50% 9.50% 9.50% Anticipated composite rate of future compensation increases 4.75% 4.25% 5.00% At year-end, the funded status and amounts recognized in the Consolidated Balance Sheets for the plan were as follows: 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (in millions) Actuarial present value of benefit obligations Vested benefit obligation $ (1,966.7) $ (1,713.6) ----------------------------------- Accumulated benefit obligation $ (2,129.6) $ (1,864.1) ----------------------------------- Projected benefit obligation $ (2,240.9) $ (1,967.0) Plan assets at fair value 2,929.4 2,584.2 - ------------------------------------------------------------------------------------------------------------------- Plan assets in excess of the projected benefit obligation 688.5 617.2 Unrecognized net gains (585.2) (481.8) Unrecognized prior service cost 105.4 100.4 Unamortized transition asset (122.1) (147.1) - ------------------------------------------------------------------------------------------------------------------- Prepaid pension cost $ 86.6 $ 88.7 ----------------------------------- Discount rate 7.25% 7.75% Anticipated composite rate of future compensation increases 4.25% 4.75%
F-26 3. Employee Benefit Plans (continued) Defined Contribution Plans Sprint sponsors defined contribution employee savings plans covering substantially all employees. Participants may contribute portions of their pay to the plans. For employees represented by collective bargaining units, Sprint matches contributions based on negotiated amounts. Sprint also matches contributions of employees not covered by collective bargaining agreements. For those participants, Sprint matches their contributions in Sprint common 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 matching contributions based on the performance of Sprint common stock compared to other telecommunications companies' stock. Sprint's matching contributions were $54 million in 1997, $56 million in 1996 and $51 million in 1995. At year-end 1997, the plans held 20 million Sprint common shares. Postretirement Benefits Sprint provides postretirement benefits (principally medical benefits) to substantially all employees. Employees retiring before certain dates are eligible for benefits at no cost, or at a reduced cost. Employees retiring after certain dates are eligible for benefits on a shared-cost basis. Sprint funds the accrued costs as benefits are paid. The net postretirement benefits cost consists of the following:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions) Service cost -- benefits earned during the year $ 20.8 $ 21.7 $ 22.2 Interest on accumulated postretirement benefit obligation 52.3 49.9 58.7 Net amortization and deferral (19.4) (13.7) (9.4) - ------------------------------------------------------------------------------------------------------------------- Net postretirement benefits cost $ 53.7 $ 57.9 $ 71.5 ---------------------------------------------------- Discount rate 7.75% 7.25% 8.50%
For measurement purposes, the assumed 1997 weighted average annual health care cost trend rate was 9%, gradually decreasing to an ultimate level of 5% by 2005. A 1% increase in the rate would have increased the 1997 net postretirement benefits cost by an estimated $12 million. Amounts included in the Consolidated Balance Sheets at year-end are as follows:
1997 1996 - ------------------------------------------------------------------------------- --- ------------- -- ------------- (in millions) Accumulated postretirement benefit obligation Retirees $ 328.3 $ 277.9 Active plan participants -- Fully eligible 145.2 127.6 Other 269.9 320.7 - ------------------------------------------------------------------------------- --- ------------- -- ------------- 743.4 726.2 Unrecognized prior service benefit 5.4 5.7 Unrecognized net gains 190.0 178.7 - ------------------------------------------------------------------------------- --- ------------- -- ------------- Accrued postretirement benefits cost $ 938.8 $ 910.6 --- ------------- -- ------------- Discount rate 7.25% 7.75%
F-27 The assumed 1998 annual health care cost trend rate was 8.5%, gradually decreasing to an ultimate level of 5% by 2005. A 1% increase in the rate would have increased the 1997 accumulated postretirement benefit obligation by an estimated $61 million. 4. Income Taxes Income tax expense allocated to continuing operations consists of the following:
1997 1996 1995 - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- (in millions) Current income tax expense Federal $ 385.9 $ 655.4 $ 437.4 State 78.9 75.9 91.1 - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Total current 464.8 731.3 528.5 - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Deferred income tax expense (benefit) Federal 174.3 (22.2) 45.9 State (4.8) 23.5 (23.6) Amortization of deferred investment tax credits (3.8) (11.6) (16.5) - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Total deferred 165.7 (10.3) 5.8 - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Total $ 630.5 $ 721.0 $ 534.3 -- -------------- -- ------------- --- -------------
The differences that cause the effective income tax rate to vary from the statutory federal rate of 35% were as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions) Income tax expense at the statutory rate $ 554.1 $ 669.2 $ 518.1 Less investment tax credits included in income 3.8 11.6 16.5 - ------------------------------------------------------------------------------------------------------------------- Expected federal income tax expense after investment tax credits 550.3 657.6 501.6 Effect of State income taxes, net of federal income tax effect 48.2 64.6 43.9 Equity in losses of foreign joint ventures 36.4 8.6 - Other, net (4.4) (9.8) (11.2) - ------------------------------------------------------------------------------------------------------------------- Income tax expense, including investment tax credits $ 630.5 $ 721.0 $ 534.3 ----------------------------------------------------- Effective income tax rate 39.8% 37.7% 36.1% -----------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows:
1997 1996 1995 - ---------------------------------------------------------------- --- ------------ -- ------------- -- ------------ (in millions) Discontinued operation $ - $ 7.0 $ 31.2 Extraordinary items - (2.9) (437.4) Unrealized holding gains on investments (1) 4.4 1.7 30.7 Stock ownership, purchase and options arrangements (1) (26.2) (14.1) (7.5) - ---------------------------------------------------------------- --- ------------ -- ------------- -- ------------
(1) These amounts have been recorded directly to "Common stock and other shareholders' equity - Other." F-28 4. Income Taxes (continued) Sprint recognizes deferred income taxes for the temporary differences between the carrying amounts of its assets and liabilities for financial statement purposes and their tax bases. The sources of the differences that give rise to the deferred income tax assets and liabilities at year-end 1997 and 1996, along with the income tax effect of each, were as follows:
1997 Deferred Income Tax 1996 Deferred Income Tax ------------- -- ------------- --- ------------- -- ------------- Assets Liabilities Assets Liabilities - -------------------------------------------- --- ------------- -- ------------- --- ------------- -- ------------- (in millions) Property, plant and equipment $ - $ 1,488.8 $ - $ 1,304.3 Postretirement and other benefits 376.1 - 360.3 - Reserves and allowances 111.3 - 115.6 - Unrealized holding gains on investments - 61.7 - 57.3 Other, net 108.5 - 106.8 - - -------------------------------------------- --- ------------- -- ------------- --- ------------- -- ------------- 595.9 1,550.5 582.7 1,361.6 Less valuation allowance 11.8 - 13.7 - - -------------------------------------------- --- ------------- -- ------------- --- ------------- -- ------------- Total $ 584.1 $ 1,550.5 $ 569.0 $ 1,361.6 --- ------------- -- ------------- --- ------------- -- -------------
The valuation allowance related to deferred income tax assets decreased $2 million in 1997 and $4 million in 1996 and 1995. Management believes it is more likely than not that these deferred income tax assets, net of the 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. At year-end 1997, Sprint had available for income tax purposes $4 million of state alternative minimum tax credit carryforwards to offset state income tax payable in future years. In addition, Sprint had tax benefits of $49 million related to state operating loss carryforwards. The loss carryforwards expire in varying amounts per year from 1998 through 2012. F-29 5. Borrowings Long-term Debt Long-term debt at year-end was as follows:
Maturing 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (in millions) Corporate Senior notes 8.1% to 9.8% 1998 to 2002 $ 475.3 $ 475.3 9.5% 2003 to 2007 200.0 200.0 Debentures 9.0% to 9.3% 2019 to 2022 350.0 350.0 Notes payable and commercial paper - 866.5 - Other 5.4% to 8.9% (1) 1998 to 2006 237.5 194.9 Long Distance Division Vendor financing agreements 7.4% to 8.9% 1997 to 1999 23.8 44.8 Other 6.2% to 8.4% 1997 to 2007 16.5 23.1 Local Division First mortgage bonds 2.0% to 7.8% 1997 to 2002 452.3 487.0 4.0% to 7.8% 2003 to 2007 346.0 346.8 6.9% to 9.8% 2008 to 2012 116.7 116.7 6.9% to 8.8% 2013 to 2017 169.6 169.8 8.8% to 9.9% 2018 to 2022 244.9 245.7 7.1% to 8.4% 2023 to 2027 145.0 145.0 Debentures and notes 5.8% to 9.6% 1998 to 2020 237.0 275.3 Other 2.0% to 9.8% 1998 to 2006 4.6 6.2 Unamortized debt discount (6.1) (6.7) - -------------------------------------------------------------------------------------------------------------------- 3,879.6 3,073.9 Less current maturities 131.0 99.1 - -------------------------------------------------------------------------------------------------------------------- Long-term debt $ 3,748.6 $ 2,974.8 -----------------------------------
(1) Notes may be exchanged at maturity for Southern New England Telecommunications Corporation (SNET) common shares owned by Sprint, or for cash. Based on SNET's closing market price, had the notes matured at year-end 1997, they could have been exchanged for 3.8 million SNET shares. At year-end 1997, Sprint held 4.2 million SNET shares, which have been included in "Investments in equity securities" on the Consolidated Balance Sheets. F-30 5. Borrowings (continued) Long-term debt maturities, excluding reclassified short-term borrowings, during each of the next five years are as follows:
- ------------------------------------------------------------------------------------------------------------------- (in millions) 1998 $ 131.0 1999 33.4 2000 693.3 2001 40.8 2002 354.5 - -------------------------------------------------------------------------------------------------------------------
Property, plant and equipment with a total cost of $12.9 billion is either pledged as security for first mortgage bonds and certain notes or is restricted for use as mortgaged property. During 1996, Sprint redeemed, prior to scheduled maturities, $190 million of debt with interest rates ranging from 6.0% to 9.5%. This resulted in a $5 million after-tax extraordinary loss. Short-term Borrowings At year-end 1997, Sprint had borrowed $618 million of bank notes payable and $249 million of commercial paper. Though these borrowings are renewable at various dates throughout the year, they have been classified as long-term debt because of Sprint's intent and ability, through unused credit facilities, to refinance these borrowings. Commercial paper and certain bank notes payable are supported by Sprint's revolving credit facility with a syndicate of domestic and international banks. Other notes payable relate to a separate revolving credit facility that Sprint executed with a bank in 1997. At year-end 1997, Sprint's unused lines of credit totaled $1.1 billion. Bank notes outstanding at year-end 1997 and 1996 had weighted average interest rates of 6.1% and 5.9%, respectively. At year-end 1997, the weighted average interest rate of commercial paper was 6.8%. Other Sprint was in compliance with all restrictive or financial covenants relating to its debt arrangements at year-end 1997. F-31 6. Redeemable Preferred Stock Sprint has approximately 22 million authorized preferred shares, including nonredeemable preferred stock. The redeemable preferred stock outstanding, at year-end, is as follows:
1997 1996 - ------------------------------------------------------------------------------------------------------------------- (in millions, except per share and share data) Fifth series -- stated value $100,000 per share, shares -- 95, voting, cumulative 6% annual dividend rate $ 9.5 $ 9.5 Other -- stated value $100 per share, shares -- 19,493 and 22,800, 4.7% annual dividend rate 2.0 2.3 - ------------------------------------------------------------------------------------------------------------------- Total $ 11.5 $ 11.8 -----------------------------------
Sprint's Fifth series preferred stock must be redeemed in full in 2003. If less than full dividends have been paid for four consecutive dividend periods, or if dividends in arrears exceed an amount equal to the dividends for six dividend periods, the Fifth series preferred shareholders may elect a majority of directors standing for election until all dividends in arrears have been paid. 7. Common Stock Common Stock At year-end 1997, common stock reserved for future grants under stock option plans or for future issuances under various other arrangements was as follows:
Shares - ---------------------------------------------------------------------------------------------------------------- (in millions) Employees Stock Purchase Plan 6.4 Employee savings plans 3.4 Automatic Dividend Reinvestment Plan 1.2 Officer and key employees' and directors' stock options 8.2 Conversion of preferred stock and other 1.4 - ---------------------------------------------------------------------------------------------------------------- Total 20.6 ------------------
Under a Shareholder Rights Plan, one preferred stock purchase right is attached to each common and Class A common share. Each right is exercisable only if certain takeover events occur. Each right will initially entitle the holder to purchase 1/1000 of a share (a Unit) of a no par Preferred Stock-Sixth Series, Junior Participating (Preferred Stock) at $225 per Unit or, in certain cases, common stock. The Preferred Stock is voting, cumulative and accrues dividends on a quarterly basis generally equal to the greater of $100 per share or 1,000 times the total per share amount of all common dividends. No Preferred Stock shares were issued or outstanding at year-end 1997. The rights may be redeemed by Sprint at $0.01 per right and will expire in June 2007, unless extended. During 1997, 1996 and 1995, Sprint declared and paid annual common stock dividends of $1.00 per share. The most restrictive covenant related to common dividends results from Sprint's $1.5 billion revolving credit agreement. Among other restrictions, this agreement requires Sprint to maintain specified levels of consolidated net worth. Due to this requirement, $2.7 billion of Sprint's $3.7 billion consolidated retained earnings was effectively restricted from the payment of dividends at year-end 1997. 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, $567 million of those subsidiaries' $1.3 billion total retained earnings was restricted at year-end 1997. The flow of cash in the form of advances from the subsidiaries to Sprint is generally not restricted. F-32 7. Common Stock (continued) During 1990, the Savings Plan Trust, an employee savings plan, acquired common stock from Sprint in exchange for a $75 million promissory note payable to Sprint. The note bears interest at 9% and is to be repaid from common stock dividends received by the plan and contributions made to the plan by Sprint according to plan provisions. The remaining $34 million note receivable balance at year-end 1997 is reflected as a reduction to "Common stock and other shareholders' equity - Other." Class A Common Stock In January 1996, DT and FT acquired shares of a new class of convertible preference stock for a combined total of $3.0 billion. This resulted in DT and FT each holding 7.5% of Sprint's voting power. In April 1996, following the spinoff of Sprint's cellular division (Cellular) (see Note 14), the preference stock was converted into Class A common stock, and DT and FT each acquired additional Class A common shares. Following their combined investment of $3.7 billion, DT and FT each own Class A common shares with 10% of Sprint's voting power. During 1997, Sprint declared and paid Class A common dividends of $1.00 per share. During 1996, preference dividends totaled $0.16 per share, and Class A common dividends totaled $0.75 per share. DT and FT, as Class A common shareholders, have the right in most circumstances to proportionate representation on Sprint's Board of Directors. They may also purchase additional Class A common shares from Sprint to keep their ownership level at 10% each. DT and FT have entered into a standstill agreement with Sprint restricting their ability to acquire Sprint voting shares (other than as intended by their investment agreement with Sprint and related agreements). The standstill agreement also contains customary provisions restricting DT and FT from initiating or participating in any proposal with respect to the control of Sprint. 8. Stock-based Compensation Sprint's Management Incentive Stock Option Plan (MISOP) provides for the granting of 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 Sprint's common stock on the grant date. At year-end 1997, authorized shares under this plan approximated 11 million. This amount increased by approximately 3 million shares on January 1, 1998. The Sprint Corporation Stock Option Plan (SOP) provides for the granting of 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 Sprint's common stock on the grant date. At year-end 1997, authorized shares under this plan approximated 20 million. Every two years, the Employees Stock Purchase Plan (ESPP) offers all employees the election to purchase Sprint common stock at a price equal to 85% of the market value on the grant or exercise date, whichever is less. At year-end 1997, authorized shares under this plan approximated 18 million. In 1996, Sprint adopted the pro forma disclosure requirements under SFAS No. 123, "Accounting for Stock-based Compensation," and continued to apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," to its stock option and employee stock purchase plans. Under APB 25, Sprint has recognized no compensation expense related to these plans. Pro forma net income and earnings per share (EPS) 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. F-33 8. Stock-based Compensation (continued) The following pro forma information will not likely represent the information reported in future years because options granted and ESPP shares elected after 1994 will continue to vest over the next several years. In addition, compensation expense resulting from the spinoff of Cellular (Spinoff) (see Note 14) will decline over the next several years. Sprint's pro forma net income and EPS were as follows:
1997(1) 1996 (1) 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions, except per share data) Pro forma net income $ 908 $ 1,158 $ 388 -- ------------- --- ------------- -- ------------- Pro forma basic EPS $ 2.11 $ 2.74 $ 1.11 -- ------------- --- ------------- -- ------------- (1) Pro forma net income was reduced by $3 million ($0.01 per share) in 1997 and $6 million ($0.01 per share) in 1996 due to additional compensation resulting from modifications to terms of options and ESPP share elections made in connection with the Spinoff.
During 1996, Sprint employees elected to purchase 2.8 million ESPP shares with a weighted average fair value (using the Black-Scholes pricing model) of $10.06 per share. No ESPP shares were offered in 1997 or 1995. The following tables reflect the weighted average fair value per option granted during the year, as well as the significant weighted average assumptions used in determining those fair values using the Black-Scholes pricing model:
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 - ------------------------------------------------------------------------------------------------------------------- 1996 MISOP SOP - ------------------------------------------------------------------------------------------------------------------- Fair value on grant date $ 9.17 $ 10.96 Risk-free interest rate 5.2% 5.2% Expected volatility 23.3% 23.3% Expected dividend yield 2.5% 2.5% Expected life (years) 4 6 - ------------------------------------------------------------------------------------------------------------------- 1995 MISOP SOP - ------------------------------------------------------------------------------------------------------------------- Fair value on grant date $ 6.67 $ 8.73 Risk-free interest rate 6.9% 7.2% Expected volatility 23.3% 23.3% Expected dividend yield 2.5% 2.5% Expected life (years) 4 6 - -------------------------------------------------------------------------------------------------------------------
F-34 8. Stock-based Compensation (continued) Stock option plan activity was as follows:
Weighted Average per Share Exercise Shares (1) Price (1) - --------------------------------------------------- ------------- --- ----------- ------------- --- -------------- (in millions, except per share data) Outstanding, beginning of 1995 9.3 $ 24.67 Granted 4.3 24.69 Exercised (0.8) 19.81 Forfeited / Expired (0.5) 27.06 ------------- Outstanding, year-end 1995 12.3 24.88 Granted 4.9 36.94 Exercised (2.6) 22.28 Forfeited / Expired (1.0) 29.22 ------------- Outstanding, year-end 1996 13.6 29.42 Granted 9.4 46.14 Exercised (3.4) 27.17 Forfeited / Expired (0.9) 38.10 ------------- Outstanding, year-end 1997 18.7 $ 37.85 ------------- -- -----------
(1) Due to the Spinoff, the shares and related exercise prices have been adjusted to maintain both the total fair market value of common stock underlying the options, and the relationship between the market value of Sprint's common stock and the option's exercise price. Outstanding options held by Cellular employees were converted into options and grants to purchase Cellular common stock and are not included in the above table. After adjustment for the Spinoff, options exercisable at year-end 1996 and 1995 were 8.4 and 6.4 million, respectively. At year-end 1996, the weighted average exercise price for exercisable options was $27.77. The following table summarizes outstanding and exercisable options at year-end 1997:
Options Outstanding Options Exercisable ------------------------------------------------ -------------------------------- Weighted Average Remaining Weighted Weighted Average Number Contractual Average Number Exercise Range of Outstanding Life Exercise Exercisable Price Exercise Prices (in millions) (in years) Price (in millions) - ---------------------------- --------------- --------------- -- ------------- --- --------------- -- ------------- $11.92 - $14.96 0.1 2.2 $ 14.31 0.1 $ 14.31 $15.18 - $19.24 0.1 3.7 17.91 0.1 17.91 $20.08 - $24.50 2.7 6.2 23.71 1.7 23.30 $25.11 - $29.96 1.8 4.7 27.38 1.4 26.80 $30.22 - $39.94 5.0 7.6 35.16 3.0 34.28 $40.06 - $49.88 7.3 8.5 44.88 1.9 43.33 $50.31 - $58.38 1.7 7.4 51.92 0.1 51.69 - ---------------------------- --------------- --------------- -- ------------- --- --------------- -- -------------
F-35 9. Commitments and Contingencies Litigation, Claims and Assessments In December 1996, an arbitration panel entered a $61 million award in favor of Network 2000 Communications Corporation (Network 2000) on its breach of contract claim against Sprint. The arbitrators directed Sprint to pay one-half of this award to Network 2000. The remainder was directed to be paid to the Missouri state court in which a proposed class action by Network 2000's independent marketing representatives against Network 2000 and Sprint is pending. Sprint filed an action in federal district court seeking to have the arbitration panel's award struck down, modified, or corrected, and asking the court to enter an order regarding the distribution of the award. In April 1997, the court denied Sprint's request that the arbitration award be struck down and granted Network 2000's request that the award be confirmed. In June 1997, Sprint recorded an additional $20 million charge in connection with the settlement of both the class action lawsuit against Sprint and Network 2000 and the related claims of Network 2000 against Sprint. The court has preliminarily approved the class action settlement and final approval is expected. Sprint believes this will complete the Network 2000 litigation. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not result in a material effect on Sprint's consolidated financial statements. Commitments Sprint expects to invest $200 to $300 million in Sprint PCS in 1998 to continue its network buildout and for operating cash requirements. Sprint also expects Global One to require $200 to $300 million for ongoing operating and capital requirements. Contingencies On January 1, 1998, a "Deadlock Event" occurred due to the failure of the Sprint PCS partnership board to approve the proposed Sprint PCS budget and business plan. Under the partnership agreement, if a partner refers the issue for resolution pursuant to specified procedures and it remains unresolved, buy/sell provisions can be triggered, which could result in Sprint either increasing or selling its partnership interest. Discussions among the partners about restructuring their interests in Sprint PCS are ongoing. However, there is no certainty the discussions will result in a change to the partnership structure. Operating Leases Minimum rental commitments at year-end 1997 for all noncancelable operating leases, consisting mainly of leases for data processing equipment and real estate, are as follows:
- ------------------------------------------------------------------------------------------------------------------- (in millions) 1998 $ 324.1 1999 276.4 2000 174.2 2001 119.1 2002 97.1 Thereafter 243.7 - -------------------------------------------------------------------------------------------------------------------
Gross rental expense totaled $410 million in 1997, $401 million in 1996 and $402 million in 1995. Rental commitments for subleases, contingent rentals and executory costs were not significant. F-36 10. 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 estimated fair values presented at year-end 1997, those amounts have not been comprehensively revalued for purposes of these financial statements since that date. Therefore, estimates of fair value after year-end 1997 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:
1997 1996 ------------------------------ ------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - -------------------------------------------- --- ------------- -- ------------- --- ------------- -- ------------- (in millions) Financial assets Cash and equivalents $ 101.7 $ 101.7 $ 1,150.6 $ 1,150.6 Investment in affiliate debt securities 142.4 142.4 122.5 122.5 Investments in equity securities 303.0 303.0 254.5 254.5 Financial liabilities Short-term borrowings - - 200.0 200.0 Long-term debt Corporate 2,129.3 2,301.8 1,220.2 1,348.9 Long distance division 40.3 41.7 67.9 69.0 Local division 1,710.0 1,812.3 1,785.8 1,846.9 Other financial instruments Interest rate swap agreements - 0.3 - 0.2 Foreign currency contracts (0.6) (0.6) (0.5) (0.5) - -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
The carrying values of Sprint's cash and equivalents approximate fair value at year-end 1997 and 1996. The estimated fair value of Sprint's investments in debt and equity securities is based on quoted market prices. The estimated fair value of Sprint's long-term debt is based on quoted market prices for publicly traded issues. The estimated fair value of all other issues is based on the present value of estimated future cash flows using a discount rate based on the risks involved. The estimated fair value of interest rate swap agreements is the amount Sprint would receive to terminate the swap agreements at year-end 1997 and 1996, taking into account the then-current interest rates. The estimated fair value of foreign currency contracts is the replacement cost of the contracts at year-end 1997 and 1996, taking into account the then-current foreign currency exchange rates. Concentrations of Credit Risk 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 related to these agreements. Interest Rate Swap Agreements Sprint uses interest rate swap agreements as part of its interest rate risk management program. Net interest paid or received related to these agreements is recorded using the accrual method and is recorded as an adjustment to interest expense. Sprint had interest rate swap agreements with notional amounts of $150 and $350 million outstanding at year-end 1997 and 1996, respectively. Net interest expense (income) related to interest rate swap agreements was $(200,000) in 1997, $2 million in 1996 F-37 10. Financial Instruments (continued) and $(400,000) in 1995. There were no deferred gains or losses related to any terminated interest rate swap agreements at year-end 1997, 1996 or 1995. 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 $29 and $46 million of open forward contracts to buy various foreign currencies at year-end 1997 and 1996, respectively. Sprint had $14 and $3 million of outstanding open purchase option contracts to call various foreign currencies at year-end 1997 and 1996, respectively. The premium paid for an option is expensed as incurred. The fair value of an option is recorded as an asset at the end of each period. The forward contracts and options open at year-end 1997 and 1996 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 of $40,000 in 1997, $400,000 in 1996 and $1 million in 1995 were recorded related to foreign currency transactions and contracts. 11. Earnings per Share In February 1997, the Financial Accounting Standards Board issued (FASB) SFAS No. 128, "Earnings per Share." This new standard simplifies the EPS calculation and makes the U.S. standard for computing EPS more consistent with international accounting standards. Sprint adopted SFAS 128 at year-end 1997. EPS for prior years has been restated to comply with SFAS 128. Under SFAS 128, primary EPS was replaced with a simpler calculation called basic EPS. Basic EPS is calculated by dividing income available to common shareholders by the weighted average common shares outstanding. Previously, primary EPS was based on the weighted average of both outstanding and issuable shares assuming all dilutive options had been exercised. Under SFAS 128, fully diluted EPS has not changed significantly, but has been renamed diluted EPS. Diluted EPS includes the effect of all potentially dilutive securities, such as options and convertible preferred stock. Sprint's convertible preferred stock dividends were $0.5 million in 1997, 1996 and 1995. Dilutive securities, such as options (see Note 8), included in the calculation of diluted weighted average common shares were 6.3 million shares in 1997, 5.3 million shares in 1996 and 2.6 million shares in 1995. 12. Paranet Acquisition On September 30, 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. Sprint could pay up to an additional $70 million if Sprint Paranet meets certain financial targets through 1998. The transaction was accounted for using the purchase method of accounting. As a result, Sprint's financial statements reflect Sprint Paranet's results of operations beginning in October 1997. The excess of the purchase price over the tangible net assets acquired was $357 million. This excess was allocated to noncompete agreements and goodwill, and will be amortized on a straight-line basis over four to 10 years. F-38 13. Adoption of Accounting Principles for a Competitive Marketplace At year-end 1995, Sprint determined that its local division no longer met the criteria necessary for the continued use of SFAS 71. As a result, 1995 operating results included a noncash, extraordinary charge of $565 million, net of income tax benefits of $437 million. The decision to discontinue using SFAS 71 was based on changes in the regulatory framework and the convergence of competition in the telecommunications industry. The 1995 extraordinary charge recognized when Sprint discontinued using SFAS 71 consisted of the following:
Pretax After-Tax - ------------------------------------------------------------------------- -- ----------------- -- ----------------- (in millions) Increase in accumulated depreciation $ 979.1 $ 607.9 Recognition of switch software asset (99.5) (61.7) Elimination of other net regulatory asset 123.1 76.3 -- ----------------- -- ----------------- Total $ 1,002.7 622.5 -- ----------------- Tax-related net regulatory liabilities (43.9) Accelerated amortization of investment tax credits (13.3) -- ----------------- Extraordinary charge $ 565.3 -- -----------------
14. Spinoff of Cellular Division In March 1996, Sprint completed the tax-free spinoff of Cellular to Sprint common shareholders. To complete the Spinoff, Sprint distributed all Cellular common shares at a rate of one share for every three Sprint common shares held. In addition, Cellular repaid $1.4 billion of its intercompany debt owed to Sprint. Sprint also contributed to Cellular's equity capital $185 million of debt owed by Cellular in excess of the amount repaid. Cellular's net operating results, as summarized below, were separately classified as a discontinued operation in the Consolidated Statements of Income. Interest expense was allocated to Cellular based on the assumed repayment of intercompany debt to Sprint by Cellular. The operating expenses as presented below do not include Cellular's share of Sprint's general corporate overhead expenses. These expenses, totaling $2 million in 1996 and $13 million in 1995, were reallocated to Sprint's other operating segments.
1996 (1) 1995 - ------------------------------------------------------------------------------------------------------------------- (in millions) Net operating revenues $ 190.2 $ 834.4 Operating expenses 156.0 675.6 - ------------------------------------------------------------------------------------------------------------------- Operating income 34.2 158.8 Interest expense (21.5) (124.0) Other income (expense), net (8.3) 10.9 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 4.4 45.7 Income taxes (7.0) (31.2) - ------------------------------------------------------------------------------------------------------------------- Income (Loss) from cellular division $ (2.6) $ 14.5 ----------------------------------- (1) 1996 reflects Cellular's operating results only through the date of the Spinoff.
F-39 15. Additional Financial Information Segment Information Information related to Sprint's operating business segments is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segmental Results of Operations." The net operating revenues and operating expenses shown in those tables include revenues and expenses eliminated in consolidation. The amounts eliminated are as follows:
1997 1996 1995 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- (in millions) Long distance division $ 3.3 $ 30.9 $ 38.9 Local division 309.0 410.5 266.4 Product distribution and directory publishing 570.5 325.9 336.8 Intercompany revenues not eliminated under SFAS 71 - - (262.4) - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Net operating revenues 882.8 767.3 379.7 Operating expenses 845.8 735.7 379.7 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- Operating income $ 37.0 $ 31.6 $ - --- ------------- -- ------------- --- -------------
Capital expenditures and identifiable assets not related to operating segments are as follows:
1997 1996 1995 - ----------------------------------------------------------------- --- ------------- -- ------------- --- ------------- (in millions) Capital expenditures $ 142.3 $ 98.0 $ 37.0 --- ------------- -- ------------- --- ------------- Identifiable assets $ 2,301.2 $ 2,818.9 $ 2,917.9 --- ------------- -- ------------- --- -------------
Sprint's identifiable assets not related to operating segments mainly include investments and loans to affiliates as well as corporate property, plant and equipment. The 1995 amounts include the net assets of the discontinued cellular division. Supplemental Cash Flows Information
1997 1996 1995 - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- (in millions) Cash paid for: Interest (net of amounts capitalized) Continuing operations $ 197.9 $ 212.1 $ 263.5 -- ------------- --- ------------- -- ------------- Cellular division $ - $ 21.5 $ 124.0 -- ------------- --- ------------- -- ------------- Income taxes $ 365.8 $ 695.3 $ 532.8 -- ------------- --- ------------- -- ------------- - -------------------------------------------------------------- -- ------------- --- ------------- -- ------------- Noncash activities: Capital lease obligations $ 30.1 $ - $ - -- ------------- --- ------------- -- ------------- Tax benefit from stock options exercised $ 26.2 $ 14.1 $ 7.5 -- ------------- --- ------------- -- ------------- Net book value of assets and liabilities contributed to Global One $ - $ 73.3 $ - -- ------------- --- ------------- -- ------------- Common stock issued under Sprint's ESPP $ 5.2 $ 65.2 $ 3.0 -- ------------- --- ------------- -- -------------
During 1996, Sprint completed the Spinoff (see Note 14) which had no immediate effect on cash flows other than Cellular's repayment of $1.4 billion in intercompany debt owed to Sprint. F-40 15. Additional Financial Information (continued) Supplemental Related Party Transactions Sprint provided various voice, data and administrative services to Global One totaling $415 million in 1997 and $361 million in 1996. In addition, Global One provided data and administrative services to Sprint totaling $114 million in 1997 and $130 million in 1996. At year-end 1997 and 1996, Sprint's receivable from Global One was $154 and $163 million, respectively, and Sprint's payable to Global One was $104 and $49 million, respectively. Restructuring Charge In 1995, Sprint's local division recorded an $88 million restructuring charge, which reduced income from continuing operations by $55 million ($0.16 per share). The restructuring plan included the planned elimination over several years of approximately 1,600 positions, mainly in the network and finance functions. Through 1997, most of the positions have been eliminated resulting in termination benefit payments of $42 million, with the remainder to be paid in 1998 and 1999. 16. Recently Issued Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income includes all changes in equity during a period except those due to owner investments and distributions. It includes items such as foreign currency translation adjustments, and unrealized gains and losses on available-for-sale securities. This standard does not change the display or components of present-day net income. Sprint will present the required disclosures in its financial statements beginning in the 1998 first quarter. SFAS 130 is not expected to have a material impact on Sprint. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This new standard requires companies to disclose segment data based on how management makes decisions about allocating resources to segments and how it measures segment performance. SFAS 131 requires companies to disclose a measure of segment profit or loss (operating income, for example), segment assets, and reconciliations to consolidated totals. It also requires entity-wide disclosures about a company's products and services, its major customers and the material countries in which it holds assets and reports revenues. Sprint will adopt SFAS 131 in its 1998 year-end financial statements. This statement is not expected to have a significant effect on Sprint's reported segments. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the disclosure requirements for pensions and postretirement benefits where practical. It also eliminates certain disclosures and requires additional information on changes in benefit obligations and fair values of plan assets. Sprint will adopt SFAS 132 in its 1998 year-end financial statements. SFAS 132 is not expected to have a significant effect on Sprint's pension and postretirement benefit plan disclosures. F-41 17. Quarterly Financial Data (Unaudited)
Quarter --- ----------- -- ---------------------------- -- ----------- 1997 1st 2nd 3rd 4th - --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- ----------- (in millions, except per share data) Net operating revenues(1) $ 3,578.5 $ 3,667.5 $ 3,778.9 $ 3,849.0 Operating income(1), (2) 604.7 595.5 640.7 610.5 Income before extraordinary items(2), (3) 290.0 255.9 211.7 194.9 Net income 290.0 255.9 211.7 194.9 EPS from income before extraordinary items(4) Basic $ 0.67 $ 0.59 $ 0.49 $ 0.45 Diluted $ 0.67 $ 0.59 $ 0.49 $ 0.45 - --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- ----------- Quarter --- ----------- -- ------------ -- ------------ -- ----------- 1996 1st 2nd 3rd 4th - --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- ----------- (in millions, except per share data) Net operating revenues(1) $ 3,335.3 $ 3,471.3 $ 3,502.5 $ 3,578.4 Operating income(1), (2) 574.9 580.9 598.9 512.5 Income before extraordinary items(2) 309.3 316.8 316.2 246.0 Net income 309.3 316.8 312.4 245.3 EPS from income before extraordinary items(4) Basic $ 0.78 $ 0.74 $ 0.73 $ 0.57 Diluted $ 0.77 $ 0.73 $ 0.73 $ 0.56 - --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
(1) Consolidated net operating revenues and operating expenses reflect certain reclassifications to conform to the current presentation. These reclassifications had no effect on operating income or net income. (2) In the 1997 second quarter and the 1996 fourth quarter, Sprint recorded nonrecurring charges of $20 and $60 million, respectively, related to litigation within the long distance division. These charges reduced income from continuing operations by $13 million ($0.03 per share) and $36 million ($0.09 per share), respectively (see Note 9). (3) In the 1997 fourth quarter, Sprint recognized gains of $45 million on sales of local exchanges and a $26 million gain on the sale of an equity investment in an equipment provider. These gains increased income from continuing operations by $27 million ($0.06 per share) and $17 million ($0.04 per share), respectively. (4) Sprint adopted SFAS 128 at year-end 1997 (see Note 11). All EPS amounts comply with this new standard. F-42
SPRINT CORPORATION SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1997, 1996 and 1995 Additions --------------------------- Balance Charged to Balance beginning Charged to other Other end of of year income accounts deductions year - ------------------------------------------------------------------------------------------------------------------- (in millions) 1997 Allowance for doubtful accounts $ 117.4 $ 388.9 $ 4.0 $ (363.6) (1) $ 146.7 ----------------------------------------------------------------------------- Valuation allowance - deferred income tax assets $ 13.7 $ 2.6 $ - $ (4.5) $ 11.8 ----------------------------------------------------------------------------- 1996 Allowance for doubtful accounts $ 125.8 $ 248.5 $ (1.5) $ (255.4) (1) $ 117.4 ----------------------------------------------------------------------------- Valuation allowance - deferred income tax assets $ 17.4 $ 1.9 $ - $ (5.6) $ 13.7 ----------------------------------------------------------------------------- 1995 Allowance for doubtful accounts $ 87.5 $ 219.2 $ 7.0 $ (187.9) (1) $ 125.8 ----------------------------------------------------------------------------- Valuation allowance - deferred income tax assets $ 21.1 $ 4.3 $ - $ (8.0) $ 17.4 ----------------------------------------------------------------------------- (1) Accounts written off, net of recoveries.
F-43 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES Consolidated Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 and Independent Auditors' Report F-44 INDEPENDENT AUDITORS' REPORT Partners of Sprint Spectrum Holding Company, L.P. Kansas City, Missouri We have audited the accompanying consolidated balance sheets of Sprint Spectrum Holding Company, L.P. and subsidiaries ("the Partnership") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in partners' capital and cash flows for the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule (Schedule II) listed on page F-68. These financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 consolidated financial position of Sprint Spectrum Holding Company, L.P. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for the three years then ended, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, 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. The Partnership was in the development stage at December 31, 1996; during the year ended December 31, 1997, the Partnership completed its development activities and commenced its planned principal operations. Deloitte & Touche LLP February 3, 1998 F-45
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, December 31, 1997 1996 --------------------- --------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................... $ 117,164 $ 69,988 Accounts receivable, net........................................... 113,507 3,310 Receivable from affiliates......................................... 96,291 12,901 Inventory.......................................................... 101,366 72,414 Prepaid expenses and other assets, net............................. 28,495 14,260 Note receivable--unconsolidated partnership......................... - 226,670 --------------------- --------------------- Total current assets............................................. 456,823 399,543 INVESTMENT IN PCS LICENSES, net....................................... 2,303,398 2,122,908 INVESTMENTS IN UNCONSOLIDATED PARTNERSHIP(S).......................... 273,541 179,085 PROPERTY, PLANT AND EQUIPMENT, net.................................... 3,429,238 1,408,680 MICROWAVE RELOCATION COSTS, net....................................... 264,215 135,802 MINORITY INTEREST .................................................... 56,667 - OTHER ASSETS, net..................................................... 113,127 77,383 ===================== ===================== TOTAL ASSETS.......................................................... $ 6,897,009 $ 4,323,401 ===================== ===================== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Advances from partners............................................. $ - $ 167,818 Accounts payable................................................... 415,944 196,146 Payable to affiliate............................................... 11,933 5,626 Accrued interest................................................... 56,678 34,057 Accrued expenses................................................... 231,429 47,173 Current maturities of long-term debt............................... 34,562 49 --------------------- --------------------- Total current liabilities........................................ 750,546 450,869 CONSTRUCTION OBLIGATIONS.............................................. 705,280 714,934 LONG-TERM DEBT........................................................ 3,533,954 686,192 OTHER NONCURRENT LIABILITIES.......................................... 48,975 11,356 COMMITMENTS AND CONTINGENCIES LIMITED PARTNER INTEREST IN CONSOLIDATED SUBSIDIARY......................................................... 13,722 13,397 PARTNERS' CAPITAL AND ACCUMULATED DEFICIT: Partners' capital.................................................. 3,964,750 3,003,484 Accumulated deficit ............................................... (2,120,218) (556,831) --------------------- --------------------- Total partners' capital.......................................... 1,844,532 2,446,653 ===================== ===================== TOTAL LIABILITIES AND PARTNERS' CAPITAL............................... $ 6,897,009 $ 4,323,401 ===================== =====================
See notes to consolidated financial statements. F-46
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands) For the Years Ended December 31, --------------------------------------------------------------- 1997 1996 1995 ------------------ ------------------ ------------------- OPERATING REVENUES....................... $ 248,607 $ 4,175 $ - OPERATING EXPENSES: Cost of revenues...................... 555,030 36,076 - Selling, general and administrative... 696,911 312,697 66,340 Depreciation and amortization......... 307,400 11,275 211 ------------------ ------------------ ------------------- Total operating expenses............ 1,559,341 360,048 66,551 ------------------ ------------------ ------------------- LOSS FROM OPERATIONS..................... (1,310,734) (355,873) (66,551) OTHER INCOME (EXPENSE): Interest income....................... 26,456 8,593 460 Interest expense...................... (121,844) (323) - Other income.......................... 5,474 1,586 38 Equity in loss of unconsolidated partnerships........................ (168,935) (96,850) (46,206) ------------------ ------------------ ------------------- Total other income (expense)........ (258,849) (86,994) (45,708) ------------------ ------------------ ------------------- NET LOSS BEFORE MINORITY INTEREST (1,569,583) (442,867) (112,259) MINORITY INTEREST........................ 6,196 (227) 1,830 ------------------ ------------------ ------------------- NET LOSS................................. $ (1,563,387) $ (443,094) $ (110,429) ================== ================== ===================
See notes to consolidated financial statements. F-47
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (In Thousands) Partners' Accumulated Capital Deficit Total ------------------- ------------------- -------------------- BALANCE, January 1, 1995........................ $ 123,438 $ (3,308) $ 120,130 Contributions of capital........................ 2,168,368 - 2,168,368 Net loss........................................ - (110,429) (110,429) ------------------- ------------------- -------------------- BALANCE, December 31, 1995...................... 2,291,806 (113,737) 2,178,069 Contributions of capital........................ 711,678 - 711,678 Net loss........................................ - (443,094) (443,094) ------------------- ------------------- -------------------- BALANCE, December 31, 1996...................... 3,003,484 (556,831) 2,446,653 Contributions of capital........................ 973,001 - 973,001 Net loss........................................ - (1,563,387) (1,563,387) Return of capital .............................. (11,735) - (11,735) ------------------- ------------------- -------------------- BALANCE, December 31, 1997...................... $ 3,964,750 $ (2,120,218) $ 1,844,532 =================== =================== ====================
See notes to consolidated financial statements. F-48
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) For the Years Ended December 31, ----------------------------------------------------------------- 1997 1996 1995 -------------------- -------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................ $ (1,563,387) $ (443,094) $ (110,429) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in loss of unconsolidated partnership........... 168,935 96,850 46,206 Minority interest...................................... (6,196) 227 (1,830) Depreciation and amortization.......................... 307,930 11,275 242 Amortization of debt discount and issuance costs...... 49,061 14,008 - Changes in assets and liabilities, net of effects of acquisition of APC: Receivables.......................................... (182,882) (15,871) (340) Inventory............................................ (24,870) (72,414) - Prepaid expenses and other assets.................... (12,497) (21,608) (178) Accounts payable and accrued expenses................ 371,168 231,754 47,503 Other noncurrent liabilities......................... 37,619 9,500 1,856 -------------------- -------------------- ------------------- Net cash used in operating activities.......... (855,119) (189,373) (16,970) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................................... (2,041,313) (1,386,346) (31,763) Proceeds on sale of equipment.......................... - - 37 Microwave relocation costs, net........................ (116,278) (135,828) - Purchase of PCS licenses............................... - - (2,006,156) Purchase of APC, net of cash acquired.................. (6,764) - - Investment in unconsolidated partnerships.............. (191,171) (190,390) (131,752) Loan to unconsolidated partnership..................... (111,468) (231,964) (655) Payment received on loan to unconsolidated partnership. 246,670 5,950 - -------------------- -------------------- ------------------- Net cash used in investing activities.......... (2,220,324) (1,938,578) (2,170,289) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from partners................................. - 167,818 - Net borrowing under revolving credit agreement......... 605,000 - - Proceeds from issuance of long-term debt............... 1,763,045 674,201 - Change in construction obligations..................... (9,654) 714,934 Payments on long-term debt............................. (170,809) (24) - Debt issuance costs.................................... (20,000) (71,791) - Partner capital contributions.......................... 966,772 711,678 2,183,368 Return of capital...................................... (11,735) - - -------------------- -------------------- ------------------- Net cash provided by financing activities...... 3,122,619 2,196,816 2,183,368 -------------------- -------------------- ------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................... 47,176 68,865 (3,891) CASH AND CASH EQUIVALENTS, Beginning of Period.......... 69,988 1,123 5,014 ==================== ==================== =================== CASH AND CASH EQUIVALENTS, End of Period................ $ 117,164 $ 69,988 $ 1,123 ==================== ==================== =================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: .......... Interest paid, net of amount capitalized $ 35,629 $ 323 $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued interest of $51,673 related to vendor financing was converted to long-term debt during the year ended December 31, 1997. A PCS license covering the Omaha MTA and valued at $6,229 was contributed to the Company by Cox Communications during the year ended December 31, 1997.
See notes to consolidated financial statements. F-49 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Sprint Spectrum Holding Company, L.P. ("Holdings" or the "Company") is a limited partnership formed in Delaware on March 28, 1995, by Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Cox Telephony Partnership and Comcast Telephony Services (together the "Partners"). Holdings was formed pursuant to a reorganization of the operations of an existing partnership, WirelessCo, L.P. ("WirelessCo") which transferred certain operating functions to Holdings. The Partners are subsidiaries of Sprint Corporation ("Sprint"), Tele-Communications, Inc. ("TCI"), Cox Communications, Inc. ("Cox"), and Comcast Corporation ("Comcast", and together with Sprint, TCI and Cox, the "Parents"), respectively. The Company and certain other affiliated partnerships offer services as Sprint PCS. The Partners of the Company have the following ownership interests as of December 31, 1997, and 1996: Sprint Enterprises, L.P. 40% TCI Spectrum Holdings, Inc. 30% Cox Telephony Partnership 15% Comcast Telephony Services 15% Each Partner's ownership interest consists of a 99% general partner interest and a 1% limited partnership interest. The Company is consolidated with its subsidiaries, including NewTelco, L.P. ("NewTelco") and Sprint Spectrum L.P., which, in turn, has several subsidiaries. Sprint Spectrum L.P.'s subsidiaries are Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo"), Sprint Spectrum Finance Corporation ("FinCo"), and WirelessCo. RealtyCo and EquipmentCo were organized on May 15, 1996 for the purpose of holding personal communications service ("PCS") network-related real estate interests and assets. FinCo was formed on May 20, 1996 to be a co-obligor of the debt obligations discussed in Note 5. Additionally, the results of American PCS, L.P. ("APC") are consolidated from November 1997, the date the Federal Communications Commission ("FCC") approved Holdings as the new managing partner (Note 4). APC, through subsidiaries, owns a PCS license for and operates a broadband GSM (global system for mobile communications) in the Washington D.C./Baltimore Major Trading Area ("MTA"), and is in the process of building a code division multiple access ("CDMA") overlay for its existing GSM PCS system. APC includes American PCS Communications, LLC, APC PCS, LLC, APC Realty and Equipment Company, LLC and American Personal Communications Holdings, Inc. MinorCo, L.P. ("MinorCo") holds the minority ownership interests in NewTelco, Sprint Spectrum L.P., EquipmentCo, RealtyCo and WirelessCo at December 31, 1997 and 1996, and APC at December 31, 1997. Venture Formation and Affiliated Partnerships - A Joint Venture Formation Agreement (the "Formation Agreement"), dated as of October 24, 1994, and subsequently amended as of March 28, 1995, and January 31, 1996, was entered into by the Parents, pursuant to which the Parents agreed to form certain entities to (i) provide national wireless telecommunications services, including acquisition and development of PCS licenses, (ii) develop a PCS wireless system in the Los Angeles-San Diego MTA, and (iii) take certain other actions. F-50 On October 24, 1994, WirelessCo was formed and on March 28, 1995, additional partnerships were formed consisting of Holdings, MinorCo, NewTelco, and Sprint Spectrum L.P. The Partners' ownership interests in WirelessCo were initially held directly by the Partners as of October 24, 1994, the formation date of WirelessCo, but were subsequently contributed to Holdings and then to Sprint Spectrum L.P. on March 28, 1995. Sprint Spectrum Holding Company, L.P. Partnership Agreement - The Amended and Restated Agreement of Limited Partnership of MajorCo, L.P. (the "Holdings Agreement"), dated as of January 31, 1996, among Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Comcast Telephony Services and Cox Telephony Partnership provides that the purpose of the Company is to engage in wireless communications services. The Holdings Agreement generally provides for the allocation of profits and losses according to each Partner's proportionate percentage interest, after giving effect to special allocations. After special allocations, profits are allocated to partners to the extent of and in proportion to cumulative net losses previously allocated. Losses are allocated, after considering special allocations, according to each Partner's allocation of net profits previously allocated. The Holdings Agreement provides for planned capital contributions by the Partners ("Total Mandatory Contributions") of $4.2 billion, which includes agreed upon values attributable to the contributions of certain additional PCS licenses by a Partner. The Total Mandatory Contributions amount is required to be contributed in accordance with capital contribution schedules to be set forth in approved annual budgets. The partnership board of Holdings may request capital contributions to be made in the absence of an approved budget or more quickly than provided for in an approved budget, but always subject to the Total Mandatory Contributions limit. The proposed budget for fiscal 1998 has not yet been approved by the partnership board, which has resulted in the occurrence of a Deadlock Event (as defined) under the Holdings Agreement as of January 1, 1998. If the 1998 proposed budget is not approved through resolution procedures set forth in the Holdings Agreement, certain specified buy/sell procedures may be triggered which may result in a restructuring of the partners' interest in the Company or, in limited circumstances, liquidation of the Company. As of December 31, 1997, approximately $4.0 billion of the Total Mandatory Contributions had been contributed by the Partners to Holdings and its affiliated partnerships, of which approximately $3.3 billion had been contributed to Sprint Spectrum L.P. Emergence from Development Stage Company - Prior to the third quarter of 1997, the Company reported its operations as a development stage enterprise. The Company has commenced service in all of the MTAs in which it owns a license. As a result, the Company is no longer considered a development stage enterprise, and the balance sheets and statements of operations and of cash flows are no longer presented in development stage format. Management believes that the Company will incur additional losses in 1998 and require additional financial resources to support the current level of operations and the remaining network buildout for the year ended December 31, 1998. Management believes the Company has the ability to obtain the required levels of financing through additional financing arrangements or additional equity funding from the Partners. F-51 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The assets, liabilities, results of operations and cash flows of entities in which the Company has a controlling interest have been consolidated. All significant intercompany accounts and transactions have been eliminated. Minority Interests - MinorCo, the limited partner in NewTelco, has been allocated approximately $0.3 million and $0.2 million in income for the years ended December 31, 1997, and 1996, respectively. Losses of $1.8 million for the year ended December 31, 1995 incurred by NewTelco as losses in excess of the general partner's capital accounts (which consisted of $1,000) are to be allocated to the limited partner to the extent of its capital account. In November 1997, concurrent with the acquisition discussed in Note 4, American Personal Communications II, L.P. ("APC II") became the minority owner in APC. APC II has been allocated approximately $6.5 million in losses in APC since the date of acquisition. Prior to November 1997, APC II, as majority owner, had been allocated approximately $50 million in losses in excess of its investment. At December 31, 1997, after consolidation of APC, the total of such losses, approximately $56.7 million, was recorded as minority interest in the Company's consolidated balance sheet. This treatment reflects that APC II continued to be responsible for funding its share of losses until January 1, 1998 when the Company acquired the remaining interest in APC. Trademark Agreement - Sprint(R) is a registered trademark of Sprint Communications Company L.P. and Sprint(R) and Sprint PCS(R) are licensed to the Company on a royalty-free basis pursuant to a trademark license agreement between the Company and Sprint Communications Company L.P. Revenue Recognition - Operating revenues for PCS services are recognized as service is rendered. Operating revenues for equipment sales are recognized at the time the equipment is delivered to a customer or an unaffiliated agent. Cost of Equipment - The Company uses multiple distribution channels for its inventory, including third-party retailers, Company-owned retail stores, its direct sales force and telemarketing. Cost of equipment varies by distribution channel and includes the cost of multiple models of handsets, related accessory equipment, and warehousing and shipping expenses. Cash and Cash Equivalents - The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company maintains cash and cash equivalents in financial institutions with the highest credit ratings. Accounts Receivable - Accounts receivable are net of an allowance for doubtful accounts of approximately $9.0 million and $0.2 million at December 31, 1997 and 1996, respectively. Inventory - Inventory consists of wireless communication equipment (primarily handsets). Inventory is stated at lower of cost (on a first-in, first-out basis) or replacement value. Any losses on the sales of handsets are recognized at the time of sale. Property, Plant and Equipment - Property, plant and equipment are stated at cost or fair value at the date of acquisition. Construction work in progress represents costs incurred to design and construct the PCS network. Repair and maintenance costs are charged to expense as incurred. When network equipment is retired, or otherwise disposed of, its book value, net of salvage, is charged to accumulated depreciation. When non-network equipment is sold, retired or abandoned, the cost and accumulated depreciation are relieved and any gain or loss is recognized. Property, plant and equipment are depreciated using the straight-line method based on estimated useful lives of the assets. Depreciable lives range from 3 to 20 years. F-52 Equipment under Capital Leases - APC leases certain of its office and other equipment under capital lease agreements. The assets and liabilities under capital leases are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under these capital leases are depreciated over their estimated useful lives of 5 to 7 years. Depreciation related to capital leases is included within depreciation expense. Investment in PCS Licenses - During 1994 and 1995, the Federal Communications Commission ("FCC") auctioned PCS licenses in specific geographic service areas. The FCC grants licenses for terms of up to ten years, and generally grants renewals if the licensee has complied with its license obligations. The Company believes it will be able to secure renewal of the PCS licenses held by its subsidiaries. PCS licenses are amortized over estimated useful lives of 40 years once placed in service. Accumulated amortization for PCS licenses totaled approximately $45.2 million and $1.7 million as of December 31, 1997, and 1996, respectively. There was no amortization in 1995. Microwave Relocation Costs - The Company has also incurred costs associated with microwave relocation in the construction of the PCS network. Microwave relocation costs are amortized over estimated useful lives of 40 years once placed in service. Accumulated amortization for microwave relocation costs totaled approximately $5.2 million as of December 31, 1997. There was no amortization in 1996 or 1995. Intangible Assets - The ongoing value and remaining useful life of intangible assets are subject to periodic evaluation. The Company currently expects the carrying amounts to be fully recoverable. Impairments of intangibles and long-lived assets are assessed based on an undiscounted cash flow methodology. Capitalized Interest - Interest costs associated with the construction of capital assets (including the PCS licenses) incurred during the period of construction are capitalized. The total interest costs capitalized in 1997 and 1996 were approximately $98.6 million and $30.5 million, respectively. There were no amounts capitalized in 1995. Debt Issuance Costs - Included in other assets are costs associated with obtaining financing. Such costs are capitalized and amortized to interest expense over the term of the related debt instruments using the effective interest method. Accumulated amortization for the years ended December 31, 1997 and 1996 were approximately $13.4 million and $1.9 million, respectively. There was no amortization in 1995. Operating Leases - Rent expense is recognized on the straight-line basis over the life of the lease agreement, including renewal periods. Lease expense recognized in excess of cash expended is included in non-current liabilities in the consolidated balance sheet. Major Customer - The Company markets its products through multiple distribution channels, including Company-owned retail stores and third-party retail outlets. The Company's subscribers are disbursed throughout the United States. Sales to one third-party retail customer represented approximately 21% and 88% of operating revenue in the consolidated statements of operations for the years ended December 31, 1997 and 1996, respectively. The Company reviews the credit history of retailers prior to extending credit and maintains allowances for potential credit losses. The Company believes that its risk from concentration of credit is limited. Income Taxes - The Company has not provided for federal or state income taxes since such taxes are the responsibility of the individual Partners. F-53 Financial Instruments - The carrying value of the Company's short-term financial instruments, including cash and cash equivalents, receivables from customers and affiliates and accounts payable approximates fair value. The fair value of the Company's long-term debt is based on quoted market prices for the same issues or current rates offered to the Company for similar debt. A summary of the fair value of the Company's long-term debt at December 31, 1997 and 1996 is included in Note 5. The fair value of the interest rate contracts is the estimated net amount that APC would pay to terminate the contracts at the balance sheet date. The fair value of the fixed rate loans is estimated using discounted cash flow analysis based on APC's current incremental borrowing rate at which similar borrowing agreements would be made under current conditions. Derivative Financial Instruments - Derivative financial instruments (interest rate contracts) are utilized by APC to reduce interest rate risk. APC has established a control environment which includes risk assessment and management approval, reporting and monitoring of derivative financial instrument activities. APC does not hold or issue derivative financial instruments for trading purposes. The differentials to be received or paid under interest rate contracts that are matched against underlying debt instruments and qualify for settlement accounting are recognized in income over the life of the contracts as adjustments to interest expense. Gains and losses on terminations of interest rate contracts are recognized as other income or expense when terminated in conjunction with the retirement of associated debt. Gains and losses on terminations of interest rate contracts not associated with the retirement of debt are deferred and amortized to interest expense over the remaining life of the associated debt to the extent that such debt remains outstanding. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform to the 1997 consolidated financial statement presentation. F-54 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, 1997 and 1996 (in thousands):
1997 1996 ---- ---- Land $ 1,444 $ 905 Buildings and leasehold improvements 618,281 86,467 Fixtures and office furniture 165,998 68,210 Network equipment 2,265,213 255,691 Telecommunications plant - construction work in progress 632,922 1,006,990 ------------------ ------------------ 3,683,858 1,418,263 Less accumulated depreciation (254,620) (9,583) ------------------ ------------------ $ 3,429,238 $ 1,408,680 ================== ==================
Depreciation expense on property, plant and equipment was approximately $244.9 million, $ 9.6 million, and $0.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. 4. INVESTMENTS IN PARTNERSHIPS APC - On January 9, 1995, WirelessCo acquired a 49% limited partnership interest in APC. In September 1997, Holdings increased its ownership in APC to a 58.3% through additional capital contributions of $30 million, and became the managing partner upon FCC approval in November, 1997. As of January 1, 1998, Holdings and MinorCo increased their ownership percentages to 99.75% and 0.25%, respectively, of the partnership interests for approximately $30 million. The acquisition increasing ownership to 58.3% was accounted for as a purchase and, accordingly, the operating results of APC has been included in the Company's consolidated financial statements since the date of the FCC's approval of the acquisition. The purchase price was allocated to the assets acquired and the liabilities assumed based on a preliminary estimate of fair value. The following table reflects the total of APC's assets and liabilities at the date of acquisition: Assets acquired $ 503 Cash paid (30) Minority interest 50 ------------- Liabilities assumed $ 523 ============== The ultimate allocation of the purchase price may differ from the initial estimate. F-55 The following unaudited pro forma financial information assumes the acquisition had occurred on January 1 of each year and that the Company had owned 100% of APC and consolidated its results in the financial statements: Proforma - Sprint Spectrum Holding Company, L.P. 1997 1996 ------------------- ------------------- Net sales...................... $ 355,038 $ 76,013 Net loss (before minority interest). (1,646,551) (553,274) Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. Prior to acquisition of controlling interest, the Company's investment in APC was accounted for under the equity method. The partnership agreement between the Company and APC II specified that losses were allocated based on percentage ownership interests and certain other factors. In January 1997, the Company and APC II amended the APC partnership agreement with respect to the allocation of profits and losses. For financial reporting purposes, profits and losses were allocated in proportion to Holdings' and APC II's respective partnership interests, except for costs related to stock appreciation rights and interest expense attributable to the FCC interest payments which were allocated entirely to APC II. Losses of approximately $60 million, $97 million and $46 million for the years ended December 31, 1997, 1996 and 1995, respectively, are included in equity in losses of unconsolidated subsidiaries during the period prior to the acquisition of controlling interest. Cox Communications PCS, L.P. - On December 31, 1996, the Company acquired a 49% limited partner interest in Cox Communications PCS, L.P. ("Cox PCS"). Cox Pioneer Partnership ("CPP") holds a 50.5% general and a 0.5% limited partner interest and is the general and managing partner. The investment in Cox PCS is accounted for under the equity method. Under the terms of the partnership agreement, CPP and the Company are obligated to, among other things: (a) upon FCC consent to the assumption and recognition of the license payment obligations by Cox PCS, CPP is obligated to make capital contributions in an amount equal to such liability and related interest (the PCS license covering the Los Angeles-San Diego MTA was contributed to Cox PCS in March 1997) (b) the Company is obligated to make capital contributions of approximately $368.9 million to Cox PCS; (c) the Company is not obligated to make any cash capital contributions upon the assumption by Cox PCS of the FCC payment obligations until CPP has contributed cash in an amount equal to the aggregate principal and interest of such obligations; and, (d) CPP and the Company are obligated to make additional capital contributions in an amount equal to such partner's percentage interest times the amount of additional capital contributions being requested. As of December 31, 1997, approximately $348.2 million in equity, including $2.45 million to PCS Leasing Co, L.P. ("LeasingCo"), a subsidiary of Cox PCS, had been contributed to Cox PCS by the Company. Through December 31, 1996, $168 million had been contributed to Cox PCS. Losses are allocated to the partners based on their ownership percentages. Subsequent to December 31, 1997, the Company completed its funding obligation to Cox PCS under the partnership agreement. Concurrent with this funding, the Company paid approximately $33.2 million in interest that had accrued on the unfunded capital obligation. Additionally, the Company acquired a 49% limited partner interest in LeasingCo. LeasingCo was formed to acquire, construct or otherwise develop equipment and other personal property to be leased to Cox PCS. The Company is not obligated to make additional capital contributions to LeasingCo beyond the initial funding of approximately $2.45 million . F-56 Under the partnership agreement, CPP has the right to require that Holdings acquire all or part of CPP's interest in Cox PCS based on fair market value at the time of the transaction. Subsequent to December 31, 1997, CPP elected to exercise this right. As a result, the Company intends to acquire 10.2% of Cox PCS, subject to FCC approval, which will give the Company controlling interest. The purchase price, currently estimated at $80 million, will be based on the fair market value of Cox PCS as determined by independent appraisals. Through December 2008, CPP may put any remaining interest in Cox PCS to the Company. 5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consists of the following as of December 31, 1997 and 1996 (in thousands):
1997 1996 ----------------- ----------------- 11% Senior Notes due in 2006 $ 250,000 $ 250,000 121/2% Senior Discount Notes due in 2006, net of unamortized discount of $177,720 and $214,501 at December 31, 1997 and 1996, respectively 322,280 285,499 Credit Facility - term loans 300,000 150,000 Credit Facility - revolving credit 605,000 - Vendor Financing 1,612,914 - APC Senior Secured Term Loan Facility 220,000 - APC Senior Secured Reducing Revolving Credit Facility - 141,429 Due To FCC, net of unamortized discount of $11,989 - 90,355 Other 26,538 742 ----------------- ----------------- Total debt 3,568,516 686,241 Less current maturities 34,562 49 ----------------- ----------------- Long-term debt $ 3,533,954 $ 686,192 ================= =================
Senior Notes and Senior Discount Notes - In August 1996, Sprint Spectrum L.P. and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250 million aggregate principal amount of 11% Senior Notes due 2006 ("the Senior Notes"), and $500 million aggregate principal amount at maturity of 12 1/2% Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with the Senior Notes, the "Notes"). The Senior Discount Notes were issued at a discount to their aggregate principal amount at maturity and generated proceeds of approximately $273 million. Cash interest on the Senior Notes will accrue at a rate of 11% per annum and is payable semi-annually in arrears on each February 15 and August 15, commencing February 15, 1997. Cash interest will not accrue or be payable on the Senior Discount Notes prior to August 15, 2001. Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of 12 1/2% per annum and will be payable semi-annually in arrears on each February 15 and August 15, commencing February 15, 2002. On August 15, 2001, the Issuers will be required to redeem an amount equal to $384.772 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding ($192 million in aggregate principal amount at maturity, assuming all of the Senior Discount Notes remain outstanding at such date). F-57 The Notes are redeemable at the option of the Issuers, in whole or in part, at any time on or after August 15, 2001 at the redemption prices set forth below, respectively, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12 month period beginning on August 15 of the years indicated below: Senior Discount Senior Notes Notes Redemption Price Redemption Price Year --------- --------------------------------------- 2001 105.500% 110.000% 2002 103.667% 106.500% 2003 101.833% 103.250% 2004 and thereafter 100.000% 100.000% In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the originally issued principal amount of the Notes with the net proceeds of one or more public equity offerings, provided that at least 65% of the originally issued principal amount at maturity of the Senior Notes and Senior Discount Notes would remain outstanding immediately after giving effect to such redemption. The redemption price of the Senior Notes is equal to 111.0% of the principal amount of the Senior Notes so redeemed, plus accrued and unpaid interest, if any, to the redemption date. The redemption price of the Senior Discount Notes is equal to 112.5% of the accreted value at the redemption date of the Senior Discount Notes so redeemed. The Notes contain certain restrictive covenants, including (among other requirements) limitations on additional indebtedness, limitations on restricted payments, limitations on liens, and limitations on dividends and other payment restrictions affecting certain restricted subsidiaries. Bank Credit Facility -Sprint Spectrum L.P. (the "Borrower") entered into an agreement with The Chase Manhattan Bank ("Chase") as agent for a group of lenders for a $2 billion bank credit facility dated October 2, 1996. The proceeds of this facility are to be used to finance working capital needs, subscriber acquisition costs, capital expenditures and other general Borrower purposes. The facility consists of a revolving credit commitment of $1.7 billion and a $300 million term loan commitment. In November 1997, certain terms relating to the financial and operating conditions were amended. As of December 31, 1997, $605 million had been drawn at a weighted average interest rate of 8.42%, with $1.1 billion remaining available. There were no borrowings under the revolving credit commitment as of December 31, 1996. Commitment fees for the revolving portion of the agreement are payable quarterly based on average unused revolving commitments. As of February 15, 1998, the Company had borrowed an additional $225 million under the revolving credit facility. The revolving credit commitment expires July 13, 2005. Availability will be reduced in quarterly installments ranging from $75 million to $175 million commencing January 2002. Further reductions may be required after January 1, 2002 to the extent that the Borrower meets certain financial conditions. The term loans are due in sixteen consecutive quarterly installments beginning January 2002 in aggregate principal amounts of $125,000 for each of the first fifteen payments with the remaining aggregate outstanding principal amount of the term loans due as the last installment. Interest on the term loans and/or the revolving credit loans is at the applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR Loans"), at the Borrower's option. The interest rate may be adjusted downward for improvements in the bond rating and/or leverage ratios. Interest on ABR Loans and Eurodollar Loans with interest period terms in excess of 3 months is payable quarterly. Interest on Eurodollar Loans with interest period terms of less than 3 months is payable on the last day of the interest period. As of December 31, 1997 and 1996, the weighted average interest rate on the term loans was 8.39% and 8.19%, respectively. F-58 Borrowings under the Bank Credit Facility are secured by the Borrower's interests in WirelessCo, RealtyCo and EquipmentCo and certain other personal and real property (the "Shared Lien"). The Shared Lien equally and ratably secures the Bank Credit Facility, the Vendor Financing agreements (discussed below) and certain other indebtedness of the Borrower. The credit facility is jointly and severally guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the Parents and the Partners. The Bank Credit Facility agreement and Vendor Financing agreements contain certain restrictive financial and operating covenants, including (among other requirements) maximum debt ratios (including debt to total capitalization), limitations on capital expenditures, limitations on additional indebtedness and limitations on dividends and other payment restrictions affecting certain restricted subsidiaries. The loss of the right to use the Sprint(R) trademark, the termination or non-renewal of any FCC license that reduces population coverage below specified limits, or certain changes in controlling interest in the Borrower, as defined, among other provisions, constitute events of default. Vendor Financing - As of October 2, 1996, the Company entered into financing agreements with Northern Telecom, Inc. ("Nortel") and Lucent Technologies, Inc. ("Lucent" and together with Nortel, the "Vendors") for multiple drawdown term loan facilities totaling $1.3 billion and $1.8 billion, respectively. The proceeds of such facilities are to be used to finance the purchase of goods and services provided by the Vendors. Additionally, the commitments allow for the conversion of accrued interest into additional principal. Such conversions do not reduce the availability under the commitments. Interest accruing on the debt outstanding at December 31, 1997, can be converted into additional principal through February 8, 1999 and March 30, 1999, for Lucent and Nortel, respectively. On April 30, 1997 and November 20, 1997, the Company amended the terms of its financing agreement with Nortel. The amendments provide for a syndication of the financing commitment between Nortel, several banks and other vendors (the "Nortel Lenders"), and the modification of certain operating and financial covenants. The commitment provides financing in two phases. During the first phase, the Nortel Lenders will finance up to $800 million. Under the second phase, the Nortel Lenders will finance up to an additional $500 million upon the achievement of certain operating and financial conditions, as amended. As of December 31, 1997, $630 million, including converted accrued interest of $18.6 million, had been borrowed at a weighted average interest rate of 8.98% with $189 million remaining available under the first phase. In addition, the Company paid $20 million in origination fees upon the initial drawdown under the first phase and will be obligated to pay additional origination fees on the date of the initial drawdown loan under the second phase. As of February 15, 1998, the Company had borrowed an additional $47.0 million under the Nortel facility. There were no borrowings under the Nortel facility at December 31, 1996. On May 29, 1997 and November 20, 1997, the Company amended the terms of its financing agreement with Lucent. The amendments provide for a syndication of the financing commitment between Lucent, Sprint and other banks and vendors (the "Lucent Lenders"), and the modification of certain operating and financial covenants. The Lucent Lenders have committed to financing up to $1.5 billion through December 31, 1997, and up to an aggregate of $1.8 billion thereafter. The Company pays a facility fee on the daily amount of certain loans outstanding under the agreement, payable quarterly. The Lucent agreement terminates June 30, 2001. As of December 31, 1997, the Company had borrowed approximately $983 million, including converted accrued interest of $33.1 million, under the Lucent facility at a weighted average interest rate of 8.94%, with $850 million remaining available. As of February 15, 1998, the Company had borrowed an additional $104.1 million under the Lucent facility. There were no borrowings under the Lucent facility at December 31, 1996. F-59 The principal amounts of the loans drawn under both the Nortel and Lucent agreements are due in twenty consecutive quarterly installments, commencing on the date which is thirty-nine months after the last day of such "Borrowing Year" (defined in the agreements as any one of the five consecutive 12-month periods following the date of the initial drawdown of the loan). The aggregate amount due each year is equal to percentages ranging from 10% to 30% multiplied by the total principal amount of loans during each Borrowing Year. The agreements provide two borrowing rate options. During the first phase of the Nortel agreement and throughout the term of the Lucent agreement "ABR Loans" bear interest at the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 2%. "Eurodollar Loans" bear interest at the London interbank (LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the discretion of the Company), plus 3%. During the second phase of the Nortel agreement, ABR Loans bear interest at the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5%; and Eurodollar loans bear interest at the LIBOR rate plus 2.5%. Interest from the date of each loan through one year after the last day of the Borrowing Year is added to the principal amount of each loan. Thereafter, interest is payable quarterly. Borrowings under the Vendor Financing are secured by the Shared Lien. The Vendor Financing is jointly and severally guaranteed by WirelessCo, RealtyCo, and EquipmentCo and is non-recourse to the Parents and the Partners. Certain amounts included under construction obligations on the consolidated balance sheets may be financed under the Vendor Financing agreements. Due to FCC - APC became obligated to the FCC for $102 million upon receipt of the commercial PCS license covering the Washington D.C./Baltimore MTA. In March 1996, the FCC determined that interest on the amount due would begin to accrue on March 8, 1996, at an interest rate of 7.75%. Beginning with the first payment due in April 1996, the FCC granted two years of interest-only payments followed by three years of principal and interest payments. Based on the interest and payment provisions determined by the FCC and APC's incremental borrowing rate for similar debt at the time the debt was issued, APC has accrued interest beginning upon receipt of the license at an effective rate of 13%. In connection with the acquisition discussed in Note 4, Holdings became responsible for making principal and interest payments under the APC's obligation to the FCC. APC Senior Secured Credit Facilities - As of February 7, 1997, American PCS Communications, LLC entered into credit facilities of $420 million, consisting of a term loan facility of $220 million and a reducing revolving credit facility of $200 million (together, the "Credit Agreement"). The Credit Agreement is secured by first priority liens on all the equity interests held by American PCS Communications LLC in its direct subsidiaries, including the equity interests of the subsidiaries which will hold APC's PCS license and certain real property interest and equipment and a first priority security interest in, and mortgages on, substantially all other intangible and tangible assets of APC and subsidiaries. The Credit Agreement matures February 7, 2005, with an interest rate of LIBOR plus 2.25%. The interest rate may be stepped down over the term of the credit agreement based on the ratio of outstanding debt to earnings before interest, tax, depreciation and amortization. Proceeds from the Credit Agreement were used to repay the outstanding financing from Holdings as of the closing date of the credit agreement, capital expenditures for the communications systems, general working capital requirements, and net operating losses. The Credit Agreement contains covenants which require APC to maintain certain levels of wireless subscribers, as well as other financial and non-financial requirements. F-60 In January 1998 APC completed negotiations with its lenders to amend the Credit Agreement. As amended, the Credit Agreement contains certain covenants which, among other things, contain certain restrictive financial and operating covenants including, maximum debt ratios (including debt to total capitalization) and limitations on capital expenditures. The covenants require American PCS Communications, LLC to enter into interest rate contracts on a quarterly basis to protect and limit the interest rate on 40% of its aggregate debt outstanding. Other Debt - At December 31, 1997, other debt included a note payable to Lucent for the financing of debt issuance costs, a note payable for certain leasehold improvements, and capital leases acquired in the purchase of APC. Maturities on the debt range from 3 to 10 years, at interest rates from 8.32% to 21%. Interest Rate Contracts - As of December 31, 1997, APC had entered into nine interest rate contracts (swaps and a collar), with an aggregate notional amount of $122 million. Under the agreements APC pays a fixed rate and receives a variable rate such that it will protect APC against interest rate fluctuations on a portion of its variable rate debt. The fixed rates paid by APC on the interest rate swap contracts range from approximately 5.97% to 6.8%. Option features contained in certain of the swaps operate in a manner such that the interest rate protection in some cases is effective only when rates are outside a certain range. Under the collar arrangement, APC will receive 6.19% when LIBOR falls below 6.19% and pay 8% when LIBOR exceeds 8%. The contracts expire in 2001. The fair value of the interest rate contracts at December 31, 1997 was an unrealized loss of approximately $1.3 million. The notional amounts represent reference balances upon which payments and receipts are based and consequently are not indicative of the level of risk or cash requirements under the contracts. APC has exposure to credit risk to the counterparty to the extent it would have to replace the interest rate swap contract in the market when and if a counterparty were to fail to meet its obligations. The counterparties to all contracts are primary dealers that meet APC's criteria for managing credit exposures. F-61 Fair Value - The estimated fair value of the Company's long-term debt at December 31, 1997 and 1996 is as follows (in thousands):
1997 1996 ---------------------------------- --------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------- --------------- -------------- --------------- 11% Senior Notes $ 250,000 $ 280,650 $ 250,000 $ 270,625 12 1/2% Senior Discount Notes 322,280 389,300 285,499 337,950 Credit facility - term loans 300,000 300,000 150,000 151,343 Credit facility - revolver 605,000 605,000 - - Vendor facility - Lucent 983,299 983,299 - - Vendor facility - Nortel 629,615 629,615 - - APC Senior Secured Term Loan Facility 220,000 220,000 - - APC Senior Secured Reducing Revolving Credit Facility 141,429 141,429 - - FCC debt 90,355 98,470 - -
At December 31, 1997, scheduled maturities of long-term debt and capital leases during each of the next five years are as follows (in thousands):
Long-term Capital mm Debt Leases ------------- ------------- 1998 $ 29,800 $ 5,411 1999 40,425 3,667 2000 53,624 591 2001 395,291 42 2002 583,113 - ------------- 9,711 Less interest (898) ------------- Present value of minimum lease payments 8,813 =============
6. COMMITMENTS AND CONTINGENCIES Operating Leases - Minimum rental commitments as of December 31, 1997, for all noncancelable operating leases, consisting principally of leases for cell and switch sites and office space, for the next five years, are as follows (in thousands): 1998 $ 135,124 1999 131,279 2000 104,658 2001 63,379 2002 21,254 Gross rental expense for cell and switch sites aggregated approximately $92.1 million and $13.1 million for the years ended December 31, 1997 and 1996, respectively. Gross rental expense for office space approximated $33.2 million, $11.4 million, and $0.7 million for the years ended December 31, 1997, 1996, and 1995, respectively. Certain cell and switch site leases contain renewal options (generally for terms of 5 years) that may be exercised from time to time and are excluded from the above amounts. F-62 Procurement Contracts - On January 31, 1996, the Company entered into procurement and services contracts with AT&T Corp. (subsequently assigned to Lucent ) and Nortel for the engineering and construction of a PCS network. Each contract provides for an initial term of ten years with renewals for additional one-year periods. The Vendors must achieve substantial completion of the PCS network within an established time frame and in accordance with criteria specified in the procurement contracts. Pricing for the initial equipment, software and engineering services has been established in the procurement contracts. The procurement contracts provide for payment terms based on delivery dates, substantial completion dates, and final acceptance dates. In the event of delay in the completion of the PCS network, the procurement contracts provide for certain amounts to be paid to the Company by the Vendors. The minimum commitments for the initial term are $0.8 billion and $1.0 billion from Lucent and Nortel, respectively, which include, but are not limited to, all equipment required for the establishment and installation of the PCS network. Handset Purchase Agreements - In June, 1996, the Company entered into a three-year purchase and supply agreement with a vendor for the purchase of handsets and other equipment totaling approximately $500 million. During 1997 and 1996, the Company purchased $332.7 million and $85 million under the agreement, respectively. The total purchase commitment must be satisfied by April 30, 1998. In September, 1996, the Company entered into another three-year purchase and supply agreement with a second vendor for the purchase of handsets and other equipment totaling more than $600 million, with purchases that commenced in April, 1997. During 1997, the Company purchased $147.6 million under the agreement. The total purchase commitment must be satisfied by April 2000. Service Agreements - The Company has entered into an agreement with a vendor to provide PCS call record and retention services. Monthly rates per subscriber are variable based on overall subscriber volume. If subscriber fees are less than specified annual minimum charges, the Company will be obligated to pay the difference between the amounts paid for processing fees and the annual minimum. Annual minimums range from $20 million to $60 million through 2001. The agreement extends through December 31, 2001, with two automatic, two-year renewal periods, unless terminated by the Company. The Company may terminate the agreement prior to the expiration date, but would be subject to specified termination penalties. The Company has also entered into an agreement with a vendor to provide prepaid calling services. Monthly rates per minute of use are based on overall call volume. If the average minutes of use are less than monthly specified minimums, the Company is obligated to pay the difference between the average minutes used at the applicable rates and the monthly minimum. Monthly minimums range from $40,000 to $50,000 during the initial term. Certain installation and setup fees for processing and database centers are also included in the agreement and are dependent upon a need for such centers. The agreement extends through July 1999, with successive one-year term renewals, unless terminated by the Company. The Company may terminate the agreement prior to the expiration date, but would be subject to specified termination penalties. In January 1997, the Company entered into a four and one-half year contract for consulting services. Under the terms of the agreement, consulting services will be provided at specified hourly rates for a minimum number of hours. The total commitment is approximately $125 million over the term of the agreement. Litigation - The Company is involved in various legal proceedings incidental to the conduct of its business. While it is not possible to determine the ultimate disposition of each of these proceedings, the Company believes that the outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial condition or results of operations. F-63 7. EMPLOYEE BENEFITS Employees performing services for the Company were employed by Sprint through December 31, 1995. Amounts paid to Sprint relating to pension expense and employer contributions to the Sprint Corporation 401(k) plan for these employees approximated $0.3 million in 1995. The Company maintains short-term and long-term incentive plans. All salaried employees of Sprint Spectrum L.P. are eligible for the short-term incentive plan commencing at date of hire. Employees of APC are covered by the APC plans. Short-term incentive compensation is based on incentive targets established for each position based on the Company's overall compensation strategy. Targets contain both an objective Company component and a personal objective component. Charges to operations for the short-term plan approximated $20.0 million, $12.3 million, and $3.5 million for the years ended December 31, 1997, 1996, and 1995, respectively. Long-Term Compensation Obligation - The Company has two long-term incentive plans, the 1996 Plan and the 1997 Plan. Employees meeting certain eligibility requirements are considered to be participants in each plan. Participants in the 1996 Plan will receive 100% of the pre-established targets for the period from July 1, 1995 to June 30, 1996 (the "Introductory Term"). Participants in the 1996 Plan elected either a payout of the amount due or converted 50% or 100% of the award to appreciation units. Unless converted to appreciation units, payment for the Introductory Term of the 1996 Plan will be made in the third quarter of 1998. Under the 1996 plan, appreciation units vest 25% per year commencing on the second anniversary of the date of grant and expire after a term of ten years. The 1997 Plan appreciation units vest 25% per year commencing on the first anniversary of the date of the grant and also expire after ten years. For the years ended December 31, 1997, 1996, and 1995, $18.1 million, $9.5 million, and $1.9 million, respectively, has been expensed under both plans. At December 31, 1997 a total of approximately 103 million units have been authorized for grant for both plans. The Company has applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" for 1997 and 1996. No significant difference would have resulted if SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied. Savings Plan - Effective January, 1996, the Company established a savings and retirement program (the "Savings Plan") for certain employees, which qualifies under Section 401(k) of the Internal Revenue Code. Most permanent full-time, and certain part-time, employees are eligible to become participants in the plan after one year of service or upon reaching age 35, whichever occurs first. Participants make contributions to a basic before tax account and supplemental before tax account. The maximum contribution for any participant for any year is 16% of such participant's compensation. For each eligible employee who elects to participate in the Savings Plan and makes a contribution to the basic before tax account, the Company makes a matching contribution. The matching contributions equal 50% of the amount of the basic before tax contribution of each participant up to the first 6% that the employee elects to contribute. Contributions to the Savings Plan are invested, at the participant's discretion, in several designated investment funds. Distributions from the Savings Plan generally will be made only upon retirement or other termination of employment, unless deferred by the participant. Expense under the Savings Plan approximated $4.9 million and $1.1 million in 1997 and 1996, respectively. APC also has an employee savings plan that qualifies under Section 401(k) of the Internal Revenue code. All APC employees completing one year of service are eligible and may contribute up to 15% of their pretax earnings. APC matches 100% of the first 3% of the employee's contribution. Employees are immediately fully vested in APC's contributions. In addition, APC makes discretionary contributions on behalf of eligible participants in the amount of 2% of employee's compensation. Expenses relating to the employee savings plan have not been significant since the date of acquisition. F-64 Profit Sharing (Retirement) Plan - Effective January, 1996, the Company established a profit sharing plan for its employees. Employees are eligible to participate in the plan after completing one year of service. Profit sharing contributions are based on the compensation, age, and years of service of the employee. Profit sharing contributions are deposited into individual accounts of the Company's retirement plan. Vesting occurs once a participant completes five years of service. For the years ended December 31, 1997 and 1996, expense under the profit sharing plan approximated $2.5 million and $0.7 million, respectively. Deferred Compensation Plan for Executives - Effective January, 1997, the Company established a non-qualified deferred compensation plan which permits certain eligible executives to defer a portion of their compensation. The plan allows the participants to defer up to 80% of their base salary and up to 100% of their annual short-term incentive compensation. The deferred amounts earn interest at the prime rate. Payments will be made to participants upon retirement, disability, death or the expiration of the deferral election under the payment method selected by the participant. 8. RELATED PARTY TRANSACTIONS Business Services - The Company reimburses Sprint for certain accounting and data processing services, for participation in certain advertising contracts, for certain cash payments made by Sprint on behalf of the Company and other management services. The Company is allocated the costs of such services based on direct usage. Allocated expenses of approximately $10.5 million, $11.9 million, and $2.6 million are included in selling, general and administrative expense in the consolidated statements of operations for 1997, 1996, and 1995, respectively. In addition to the miscellaneous services agreement described above, the Company has entered into agreements with Sprint for invoicing services, operator services, and switching equipment. The Company is also using Sprint as its interexchange carrier, with the agreement for such services covered under the Holdings partnership agreement. Charges are based on the volume of services provided, and are similar to those that would be incurred with an unrelated third-party vendor. APC - The Company entered into an affiliation agreement with APC in January 1995 which provides for the reimbursement of certain allocable costs and payment of affiliation fees. For the year ended December 31, 1997, the reimbursement of allocable costs of approximately $14.0 million is included in selling, general and administrative expenses. There were no reimbursements recognized in 1996 or 1995. Additionally, affiliation fees are recognized based on a percentage of APC's net revenues. During the year ended December 31, 1997, affiliation fees of $4.2 million are included in other income. Cox PCS - Concurrent with the execution of the partnership agreement, the Company entered into an affiliation agreement with Cox PCS which provides for the reimbursement of certain allocable costs and payment of affiliate fees. For the years ended December 31, 1997 and 1996, allocable costs of approximately $20.0 million and $7.3 million, respectively, are netted against selling, general and administrative expenses in the accompanying consolidated statements of operations. Of these total allocated costs, approximately $1.6 million and $7.3 million were included in receivables from affiliates in the consolidated balance sheets. In addition, the Company purchases certain equipment, such as handsets, on behalf of Cox PCS. Receivables from affiliates for handsets and related equipment were approximately $31.2 million and $6 million at December 31, 1997 and 1996, respectively. F-65 PhillieCo, L.P. - The Company provides various services to PhillieCo, L.P. ("PhillieCo"), a limited partnership organized by and among subsidiaries of Sprint, TCI and Cox. PhillieCo owns a PCS license for the Philadelphia MTA. During the year ended December 31, 1997, costs for services incurred during 1996 and 1997 of $36.3 million were allocated to PhillieCo and are included as a reduction of selling, general and administrative expenses in the accompanying consolidated statements of operations. Additionally, affiliation fees are recognized based on a percentage of PhillieCo's net revenues. During the year ended December 31, 1997, affiliation fees of $0.3 million are included in other income in the accompanying consolidated statements of operations. The allocated costs and affiliate fees of $36.6 million are included in receivable from affiliates at December 31, 1997 and were paid during January 1998. There were no such costs at December 31, 1996. SprintCom, Inc. - The Company provides services to SprintCom, Inc. ("SprintCom"), an affiliate of Sprint. The Company is currently building out the network infrastructure in certain BTA markets where SprintCom was awarded licenses. Such services include engineering, management, purchasing, accounting and other related services. For the year ended December 31, 1997, costs for services provided of $29.1 million were allocated to SprintCom, and are included as a reduction of selling, general and administrative expenses in the accompanying consolidated statements of operations. Of the total allocated costs, approximately $14.0 million are included in receivables from affiliates at December 31, 1997. No such costs were incurred in 1996. Paging Services - In 1996, the Company commenced paging services pursuant to agreements with Paging Network Equipment Company and Sprint Communications Company L.P. ("Sprint Communications"). For the years ended December 31, 1997 and 1996, Sprint Communications received agency fees of approximately $10.6 million and $4.9 million, respectively. Advances from Partners - In December 1996, the Partners advanced approximately $168 million to the Company, which was contributed to Cox PCS (Note 4). The advances were repaid in February 1997. F-66 9. QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data for 1997 and 1996 is as follows (in thousands):
1997 First Second Third Fourth ---- ----- ------ ----- ------ Operating revenues................... $ 9,467 $ 25,386 $ 72,534 $ 141,220 Operating expenses................... 200,281 303,098 455,236 600,726 Net loss............................. 188,884 287,664 420,914 665,925 1996 Operating revenues................... $ - $ - $ - $ 4,175 Operating expenses................... 30,978 46,897 87,135 195,038 Net loss............................. 67,425 90,770 101,497 183,402
10. SUBSEQUENT EVENTS Subsequent to December 31, 1997, the Company reorganized operations under which certain field offices will be consolidated. Costs associated with this reorganization are expected to be recorded in the first quarter of 1998 and will consist primarily of severance pay, write-off of certain leasehold improvements and termination payments under lease agreements. F-67
SCHEDULE II SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996 and 1995 (In Thousands) Additions ------------------------------- Balance at Charged to Charged to Beginning Costs and Other Other Balance at Description of Year Expense Accounts Deductions End of Year - -------- ---------------------------------- ------------ -------------- ------------- ------------- ------------- Receivables 1997 Allowance for doubtful accounts 202 11,277 - 2,447 (1) 9,032 1996 Allowance for doubtful accounts - 202 - - 202 1995 Allowance for doubtful accounts - - - - - (1) Accounts written off, net of recoveries
F-68 EXHIBIT INDEX EXHIBIT NUMBER (3) Articles of Incorporation and Bylaws: (a) Articles of Incorporation, as amended (filed as Exhibit 3(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). (b) Bylaws, as amended (filed as Exhibit 3(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). (4) Instruments defining the Rights of Sprint's Equity 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 June 9, 1997, between Sprint Corporation and UMB Bank, n.a. as Rights Agent (filed as Exhibit 1 to Sprint Corporation Registration Statement on Form 8-A dated June 12, 1997 (File No. 1-4721), and incorporated herein by reference). (c) Standstill Agreement dated as of July 31, 1995, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit (10)(c) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). (d) Amendments to Certain Agreements and Interpretation, dated June 24, 1997, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit 4(d) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). (e) Indenture, dated as of March 1, 1983, between Sprint Corporation (formerly United Telecommunications, Inc.) and The Bank of New York (formerly Irving Trust Company), as Trustee (filed as Exhibit 4-A to United Telecommunications, Inc. Registration Statement No. 33-4563 and incorporated herein by reference). (f) First Supplemental Indenture, dated as of April 1, 1986, between Sprint Corporation (formerly United Telecommunications, Inc.) and The Bank of New York (formerly Irving Trust Company), as Trustee (filed as Exhibit 4(d) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference). (g) Second Supplemental Indenture, dated as of May 1, 1990, between Sprint Corporation (formerly United Telecommunications, Inc.) and The Bank of New York, as Trustee (filed as Exhibit 4(e) to United Telecommunications, Inc. Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (h) Form of Indenture, dated as of July 1, 1992, between Sprint Corporation and The First National Bank of Chicago, as Trustee (filed as Exhibit 4-A to Sprint Corporation Registration Statement No. 33-48689 and incorporated herein by reference). (i) Form of Indenture, dated as of June 15, 1993, among Sprint Capital Corporation, Sprint Corporation and The Bank of New York, as Trustee (filed as Exhibit 4-A to Sprint Corporation Registration Statement No. 33-64564 and incorporated herein by reference). (10) Material Agreements - Joint Ventures: (a) Joint Venture Agreement dated as of June 22, 1995 among Sprint Corporation, Sprint Global Venture, Inc., France Telecom and Deutsche Telekom AG (filed as Exhibit (10)(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). (b) Amendment No. 1 to Joint Venture Agreement, dated as of January 31, 1996, among Sprint Corporation, Sprint Global Venture, Inc., France Telecom, Deutsche Telekom AG and Atlas Telecommunications, S.A. (filed as Exhibit 99A to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (c) Investment Agreement dated as of July 31, 1995 among Sprint Corporation, France Telecom and Deutsche Telekom AG (including as an exhibit the Stockholders' Agreement among France Telecom, Deutsche Telekom AG and Sprint Corporation) (filed as Exhibit (10)(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). (d) Amended and Restated Agreement of Limited Partnership of MajorCo., L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership (filed as Exhibit 99C to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (e) Parents Agreement dated as of January 31, 1996, between Sprint Corporation and Tele-Communications, Inc. (filed as Exhibit 99D to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (f) Parents Agreement dated as of January 31, 1996, between Sprint Corporation and Comcast Corporation (filed as Exhibit 99E to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (g) Parents Agreement dated as of January 31, 1996, between Sprint Corporation and Cox Communications, Inc. (filed as Exhibit 99F to Sprint Corporation Current Report on Form 8-K dated January 31, 1996 and incorporated herein by reference). (10) Executive Compensation Plans and Arrangements: (h) 1985 Stock Option Plan, as amended (filed as Exhibit (10)(a) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). (i) 1990 Stock Option Plan, as amended (filed as Exhibit (99) to Sprint Corporation Registration Statement No. 333-46491 and incorporated herein by reference). (j) 1990 Restricted Stock Plan, as amended (filed as Exhibit (99) to Sprint Corporation Registration Statement No. 333-46487 and incorporated herein by reference). (k) Executive Deferred Compensation Plan, as amended (filed as Exhibit (10)(k) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). (l) Management Incentive Stock Option Plan, as amended (filed as Exhibit (10)(c) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). (m) 1997 Long-Term Stock Incentive Program (filed as Exhibit (99) to Sprint Corporation Registration Statement No. 33-25449 and incorporated herein by reference). (n) 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). (o) Amended and Restated Centel Directors Deferred Compensation Plan (filed as Exhibit (10)(c) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). (p) 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). (q) 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). (r) 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). (s) 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). (t) Short-Term Incentive Compensation Plan (filed as Exhibit 10(k) to United Telecommunications, Inc. Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference). (u) 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). (v) 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). (w) Agreements Regarding Special Compensation and Post Employment Restrictive Covenants between Sprint Corporation and certain of its Executive Officers (filed as Exhibit 10(x) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1993, 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 and Exhibit (10)(w) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). Agreements Regarding Special Compensation and Post Employment Restrictive Covenants between Sprint Corporation and four of its Executive Officers. (x) Director's Deferred Fee Plan, as amended (filed as Exhibit (10)(x) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). (y) Form of Contingency Employment Agreements between Sprint Corporation and certain of its executive officers (filed as Exhibit 10(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference). (z) 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). (aa) Summary of Executive Officer and Board of Directors Benefits (filed as Exhibit (10)(k) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). (bb) Description of Retirement Agreement between Sprint Corporation and one of its executive officers. (cc) 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). (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, 1997 (b) September 30, 1997 Restated (c) June 30, 1997 Restated (d) March 31, 1997 Restated (e) December 31, 1996 Restated (f) September 30, 1996 Restated (g) June 30, 1996 Restated (h) March 31, 1996 Restated (i) December 31, 1995 Restated EX-10 2 AGREEMENT REGARDING SPECIAL COMPENSATION Exhibit (10)(w) AGREEMENT REGARDING SPECIAL COMPENSATION AND POST EMPLOYMENT RESTRICTIVE COVENANTS THIS AGREEMENT made this 9th day of November, 1993, by and between SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation and subsidiary of Sprint Corporation ("Employer"), and KEVIN E. BRAUER ("Executive"). W I T N E S S E T H: WHEREAS, Employer and its parent and affiliates are engaged in the telecommunications business; WHEREAS, Executive has expertise, experience and capability in the business of Employer and the telecommunications business in general; WHEREAS, Executive has been, and/or now is serving Employer as President, Business Market Group; WHEREAS, Employer desires to enter into this Agreement to provide severance and other benefits for Executive and obtain Executive's agreements regarding confidentiality and post- employment restrictive covenants for Employer; and WHEREAS, Executive is willing to provide such agreements to Employer. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration is mutually acknowledged by the parties, it is hereby agreed as follows: 1. Recitals. The recitals hereinbefore set forth constitute an integral part of this Agreement, evidencing the intent of the parties in executing this Agreement, and describing the circumstances surrounding its execution. Said recitals are by express reference made a part of the covenants hereof, and this Agreement shall be construed in light thereof. 2. Duties and Responsibilities. The duties and responsibilities of Executive are and shall continue to be of an executive nature as shall be required by Employer in the conduct of its business. Executive's powers and authority shall include all those presently delegated to him or such other duties and responsibilities as from time to time may be assigned to him. Executive recognizes, that during his employment hereunder, he owes an undivided duty of loyalty to Employer, and agrees to devote his entire business time and attention to the 1 performance of said duties and responsibilities and to use his best efforts to promote and develop the business of Employer. 3. Employment Term. Executive's employment may be terminated by either party in accordance with Sections 5, 6, 7, or 8 herein. 4. Compensation and Benefits. During employment, Executive shall be entitled to receive a base annual salary, shall be reimbursed for reasonable expenses incurred and accounted for in accordance with the policies and procedures of Employer, and shall be entitled to vacation pay and other benefits applicable to employees generally, each as may from time to time be established, amended or terminated. In addition, upon execution of this Agreement, Executive shall be awarded five thousand (5,000) shares of restricted stock as set forth in a restricted stock agreement of even-date herewith, attached hereto and incorporated herein ("Restricted Stock Agreement"), shall be entitled to the Special Compensation set forth in Section 6 hereof in accordance with the terms of this Agreement, and shall be entitled, subject to approval of the Organization and Compensation Committee, to participation in the Key Management Benefit Plan in accordance with the terms of said plan. 5. Termination by Employer: Special Compensation. At any time, Employer may terminate Executive's employment for any reason. If Executive's termination is other than pursuant to Section 6, Executive shall, subject to the other provisions of this Section 5, be entitled to the following Special Compensation (as that term is defined in this Section 5) in lieu of any benefits available under any and all Employer separation plans or policies. If Executive's termination is pursuant to Sections 5, 6 or 7, Executive's obligations under Sections 11, 12, 13, and 14 hereof shall continue. For purposes of this Agreement, "Special Compensation" shall entitle Executive: (a) to continue to receive for a period of eighteen (18) months from the date of termination (the "Severance Period") biweekly compensation at the rate equal to the biweekly amount of his base annual salary in effect at the date of termination of employment; (b) to receive a bonus, based on actual performance results, up to the target amount, under the Management Incentive Plan ("MIP") throughout the Severance Period provided that the amount, if any, payable under such Plan for the award period including the last day of the Severance Period shall be pro 2 rated based upon the number of months of the Severance Period that fall within the award period and the total number of months in such award period; (c) to receive an award under the Long Term Incentive Plan, pro rated based on the Executive's last day worked, exclusive of any Severance Period, determined in accordance with the terms of said Plan; (d) acceleration of vesting of restricted stock in accordance with the relevant provisions of the Restricted Stock Agreement; (e) to continue to receive throughout the Severance Period any executive medical, dental, life, and qualified or nonqualified retirement benefits which the Executive was receiving or was entitled to receive at the time of termination, except that long term disability and short term disability benefits cease on the last day worked; (f) outplacement counseling by a firm selected by Employer to continue until Executive becomes employed; and (g) to continue to receive throughout the Severance Period all applicable executive perquisites (including automobile allowance, long distance services and all miscellaneous services) except country club membership dues and accrual of vacation. Employer shall pay or cause to be paid the amounts payable under paragraph (a) above in equal installments, bi-weekly in arrears, and the amount payable under paragraphs (b) and (c) in accordance with the terms of the Plans. All payments pursuant to this Section shall be subject to applicable federal and state income and other withholding taxes. In addition to the Special Compensation described above, Executive shall also be entitled to any vacation pay for vacation accrued by Executive in the calendar year of termination but not taken at the time of termination. In the event Executive becomes employed full time during the Severance Period, Executive's entitlement to continuation of the benefits described in paragraph (e) shall immediately cease, however, Executive shall retain any rights to continue medical insurance coverage under the COBRA continuation provisions of the group medical insurance plan by paying the applicable premium therefor. The payments and benefits provided for in this Section shall be in addition to all other sums then payable and owing to Executive hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Executive for 3 employment or services provided after termination of employment hereunder, and shall be in full settlement and satisfaction of all of Executive's claims and demands. In all events, Executive's right to receive severance and/or other benefits pursuant to this Section shall cease immediately in the event Executive is re-employed by Employer or an affiliate or Executive breaches his Confidential Information Covenant (as defined in Section 11 hereof), or breaches Sections 12, 13 or 14 hereof. In all cases, Employer's rights under Section 15 shall continue. 6. Voluntary Resignation by Executive; Termination for Cause: Total Disability. Upon termination of Executive's employment by either Voluntary Resignation, Termination for Cause (as those terms are defined in this Section 6), or Total Disability, as that term is defined in the Long Term Disability Plan, Executive shall have no right to compensation, severance pay or other benefits described herein but Executive's obligations under Sections 11, 12, 13 and 14 hereof shall continue. (a) Voluntary Resignation by Executive. At any time, Executive has the right, by written notice to Employer, to terminate his services hereunder ("Voluntary Resignation"), effective as of thirty (30) days after such notice. (b) Termination for Cause by Employer. At any time, Employer has the right to terminate Executive's employment. Termination upon the occurrence of any of the following shall be deemed termination for cause ("Termination for Cause"): (i) Conduct by the Executive which reflects adversely on the Executive's honesty, trustworthiness or fitness as an Executive, or (ii) Executive's willful engagement in conduct which is demonstrably and materially injurious to the Employer. For Termination for Cause, written notice of the termination of Executive's employment by Employer shall be served upon Executive and shall be effective as of the date of such service. Such notice given by Employer shall specify the act or acts of Executive underlying such termination. (c) Total Disability. Upon the total disability of the Executive, as that term is defined in the Long Term Disability Plan, Executive shall have no right to compensation or severance pay described herein but shall be entitled to long term disability and other such benefits afforded under the applicable policies and plans. 4 7. Resignation Following Constructive Discharge. If at any time, except in connection with a termination pursuant to Section 5, 6, or 8 Executive is Constructively Discharged (as that term is defined in this Section 7) then Executive shall have the right, by written notice to Employer within sixty (60) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice. Executive shall in such event be entitled to the compensation and benefits as if such employment were terminated pursuant to Section 5 of this Agreement. For purposes of this Agreement, the Executive shall be "Constructively Discharged" upon the occurrence of any one of the following events: (a) Executive is removed from his position with Employer other than as a result of Executive's appointment to positions of equal or superior scope and responsibility; or (b) Executive's targeted total compensation is reduced by more than 10% (other than across-the-board reductions similarly affecting all officers of the Long Distance Division of Employer). 8. Effect of Change in Control. In the event that within one year of a Change in Control (as that term is defined in this Section 8) Executive's employment is terminated: (a) by the Employer other than pursuant to Section 6 hereof, or (b) by Executive pursuant to Section 7 hereof, then Executive shall be entitled to the Special Compensation described in Section 5 and shall be bound by Section 11, but shall not have any continuing obligations under Sections 12, 13, and 14, except as otherwise required by common law or statute. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than a trustee or other fiduciary holding securities under an employee benefit plan of Sprint Corporation ("Sprint") or any of its affiliates, and other than 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, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), 5 directly or indirectly, of securities of Sprint representing 20% or more of the combined voting power of Sprint's then outstanding securities, or (ii) during any period of two consecutive years (not including any period prior to the date of this Agreement), incumbent members cease for any reason to constitute a majority of the members of the Board of Directors of Sprint. A member of the Board of Directors of Sprint shall be an "incumbent member" if such individual is as of the date of this Agreement or at the beginning of the applicable two consecutive year period a member of the Board of Directors of Sprint, and any new director after the date of this Agreement (other than a director designated by person who has entered into an agreement to effect a transaction described in subparagraph (i) above) whose election to the Board or nomination for election by the stockholders of Sprint was approved by a vote of at least two-thirds (2/3) of the directors still in office who either were directors as of the date hereof or as of the first day of the applicable two consecutive year period or whose election or nomination for election was previously so approved. 9. Dispute Resolution. All disputes arising under this Agreement, other than those disputes relating to Executive's alleged violations of Sections 11 through 14 herein, shall be submitted to arbitration by the American Arbitration Association of Kansas City, Missouri. Costs of arbitration shall be borne equally by the parties. The decision of the arbitrators shall be final and there shall be no appeal from any award rendered. Any award rendered may be entered as a judgment in any court of competent jurisdiction. In any judicial enforcement proceeding, the losing party shall reimburse the prevailing party for its reasonable costs and attorneys' fees for enforcing its rights under this Agreement, in addition to any damages or other relief granted. This Section 9 does not apply to any action by Employer to enforce Sections 11 through 14 of this Agreement and does not in any way restrict Employer's rights under Section 15 herein. 10. Enforcement. In the event Employer shall fail to pay any amounts due to Executive under this Agreement as they come due, Employer agrees to pay interest on such amounts at a rate of prime plus two percent (2%) per annum. Employer agrees that Executive and any successor shall be entitled to recover all costs of successfully enforcing any provision of this Agreement, including reasonable attorney fees and costs of litigation. 6 11. Confidential Information. Executive acknowledges that during the course of his employment he has learned or will learn or develop Confidential Information (as that term is defined in this Section 11). Executive further acknowledges that unauthorized disclosure or use of such Confidential Information, other than in discharge of Executive's duties, will cause Employer irreparable harm. For purposes of this Section, Confidential Information means trade secrets (such as technical and non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process) and other proprietary information concerning the products, processes or services of Employer or its parent, and/or affiliates, including but not limited to: computer programs; unpatented inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development; business plans; sales forecasts; 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 planned or pending acquisitions or divestitures; and information concerning purchases of major equipment or property, which information: (a) has not been made generally available to the public; and (b) 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 (c) has been identified to Employee as confidential by Employer, either orally or in writing. Except in the course of his employment and in the pursuit of the business of Employer or any of its subsidiaries or affiliates, Executive shall not, during the course of his employment, or for a period of eighteen (18) months following termination of his employment for any reason, directly or indirectly, disclose, publish, communicate or use on his behalf or another's behalf, any proprietary information or data of Employer or any of its subsidiaries or affiliates. Executive acknowledges that Employer operates and competes nationally, and that Employer will be harmed by unauthorized disclosure or use of Confidential Information regardless of where such disclosure or use occurs, and that therefore this confidentiality agreement is not limited to any single state or other jurisdiction. 12. Non-Competition. Executive acknowledges that use or disclosure of Confidential Information described in Section 11 is likely if Executive were to perform telecommunications functions relating to long distance services on behalf of a competitor of Employer. Therefore, 7 Executive shall not, for eighteen (18) months following termination of employment for any reason (the "Non-Compete Period"), accept any position, including but not limited to a position in the long distance operations of AT&T or MCI, where the performance of duties in that position will involve managing, controlling, participating in, investing in, acting as consultant or advisor to, rendering services for, or otherwise assisting any person or entity in the long distance business and performing functions relating to long distance services, including all forms of interexchange, interstate, intrastate, interlata and international communications. Executive acknowledges that Employer operates and competes nationally, and that therefore this non-competition agreement is not limited to any single state or other jurisdiction. This section shall not prevent Executive from using general skills and experience developed during employment with Employer or other employers; or from accepting a position of employment with another company, firm, or other organization which competes with Employer, if its business is diversified and Executive is employed in a part of the business that is not related to long distance Services and provided that such position does not require or permit the disclosure or use of Confidential Information. 13. Inducement of Other Employees. For a eighteen (18) month period following termination of employment, Executive will not directly or indirectly solicit, induce or encourage any employee or agent of Employer to terminate his relationship with Employer. 14. Return of Employer's Property. All notes, reports, sketches, plans, published memoranda or other documents created, developed, generated or held by Executive during employment, concerning or related to Employer's business, and whether containing or relating to Confidential Information or not, are the property of Employer and will be promptly delivered to Employer upon termination of Executive's employment for any reason whatsoever. During the course of employment, Executive shall not remove any of the above property containing Confidential Information, or reproductions or copies thereof, or any apparatus from Employer's premises without authorization. 15. Remedies. Executive acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of Sections 11, 12, 13 and 14 will not cause him undue hardship and that said provisions are reasonably necessary and commensurate with the need to protect Employer and its legitimate and proprietary business interests and property from irreparable harm. 8 Executive acknowledges that failure to comply with the terms of this Agreement will cause irreparable damage to Employer. Therefore, Executive agrees that, in addition to any other remedies at law or in equity available to Employer for Executive's breach or threatened breach of this Agreement, Employer is entitled to specific performance or injunctive relief, without bond, against Executive to prevent such damage or breach, and the existence of any claim or cause of action Executive may have against Employer will not constitute a defense thereto. Executive further agrees to pay reasonable attorney fees and costs of litigation incurred by Employer in any proceeding relating to the enforcement of the Agreement or to any alleged breach thereof in which Employer shall prevail in whole or in part. In the event of a breach or a violation by Executive of any of the covenants and provisions of this Agreement, the running of the Non-Compete Period (but not of Executive's obligation thereunder), shall be tolled during the period of the continuance of any actual breach or violation. 16. Confidentiality of Agreement. As a specific condition to Executive's right to Special Compensation or other benefits described herein, Executive agrees that he will not disclose or discuss: the existence of this Agreement; the Special Compensation provided hereunder; or any other terms of the Agreement except: (1) to members of his immediate family; (2) to his financial advisor or attorney but then only to the extent necessary for them to assist him; or (3) as required by law or to enforce legal rights. 17. Entire Understanding. This Agreement constitutes the entire understanding between the parties relating to Executive's employment hereunder and supersedes and cancels all prior written and oral understandings and agreements with respect to such matters, except for the terms and provisions of the Key Management Benefit Plan and any other employee benefit or other compensation plans (or any agreements or awards thereunder) referred to in or contemplated by this Agreement and except for the SPRINT UNITED EMPLOYEE AGREEMENT REGARDING PROPERTY RIGHTS AND BUSINESS PRACTICES which the Executive has signed and by which Executive continues to be bound. 18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Executive's executors, administrators, legal representatives, heirs and legatees and the successors and assigns of Employer. 9 19. 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 made enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Executive hereby agrees that such scope may be judicially modified accordingly. 20. Strict Construction. The language used in this Agreement will be deemed to be the language chosen by Employer and Executive to express their mutual intent and no rule of strict construction shall be applied against any person. 21. Waiver. The waiver of any party hereto 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. 22. Notices. Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party (a) upon delivery to the address of such party specified below if delivered personally or by courier; (b) upon dispatch if transmitted by telecopy or other means of facsimile, provided a copy thereof is also sent by regular mail or courier; or (c) within forty-eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, for delivery as certified mail, return receipt requested, addressed, in any case to the party at the following address(es) or telecopy numbers: If to Executive: Kevin E. Brauer Sprint Communications Company, L.P. 3100 Cumberland Circle Atlanta, GA 30339 10 If to Employer and/or Company: Sprint Corporation 2330 Shawnee Mission Parkway Westwood, KS 66205 Attention: Corporate Secretary or to such other address(es) or telecopy number(s) as any party may designate by Written Notice in the aforesaid manner. 23. Governing Law. This Agreement shall be governed by, and interpreted, construed and enforced in accordance with, the laws of the State of Kansas. 24. Gender and Number. Wherever from the context it appears appropriate, each term stated in either the singular of 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. 25. 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. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed at Westwood, Kansas, on the date above set forth. KEVIN E. BRAUER SPRINT/UNITED MANAGEMENT COMPANY /s/ K. E. Brauer By: /s/ B. Watson 11 AMENDMENT The Agreement Regarding Special Compensation and Post Employment Restrictive Covenants (the "Special Agreement") between Sprint/United Management Company and Kevin E. Brauer (the "Executive") is hereby amended as follows, effective January 21, 1994: 1. The first sentence of Section 8 shall be changed by adding the word "or" at the end of item (b) and by adding the following item (c): (c) by Executive if Executive is required to be based anywhere other than the Kansas City metropolitan area or the Dallas, Texas metropolitan area except for required travel on business to an extent substantially consistent with Executive's business travel obligations immediately prior to the Change in Control; 2. Section 12 shall be changed by: (a) deleting from the second sentence of the first paragraph the words "the performance of duties in that position will involve", and substituting in lieu thereof the words "Executive dedicates his time and efforts principally to"; and (b) changing the last sentence of the Section to read: This section shall not prevent Executive from using general skills and experience developed during employment with Employer or other employers; or from accepting a position of employment with another company, firm, or other organization which competes with Employer, if its business is diversified and Executive is employed in a part of the business that is not related principally to long distance services and provided that such position does not require or permit the disclosure or use of Confidential Information. Except as amended herein, the terms of the Special Agreement shall remain in effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed at Westwood, Kansas, as of the date above set forth. EXECUTIVE SPRINT/UNITED MANAGEMENT COMPANY /s/ K. E. Brauer By: /s/ B. Watson Title: SVP - HR Exhibit (10)(w) AGREEMENT REGARDING SPECIAL COMPENSATION AND POST EMPLOYMENT RESTRICTIVE COVENANTS THIS AGREEMENT made this 9th day of November, 1993, by and between SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation and subsidiary of Sprint Corporation ("Employer"), and PATTI S. MANUEL ("Executive"). W I T N E S S E T H: WHEREAS, Employer and its parent and affiliates are engaged in the telecommunications business; WHEREAS, Executive has expertise, experience and capability in the business of Employer and the telecommunications business in general; WHEREAS, Executive has been, and/or now is serving Employer as President, Business Services Group; WHEREAS, Employer desires to enter into this Agreement to provide severance and other benefits for Executive and obtain Executive's agreements regarding confidentiality and post- employment restrictive covenants for Employer; and WHEREAS, Executive is willing to provide such agreements to Employer. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration is mutually acknowledged by the parties, it is hereby agreed as follows: 1. Recitals. The recitals hereinbefore set forth constitute an integral part of this Agreement, evidencing the intent of the parties in executing this Agreement, and describing the circumstances surrounding its execution. Said recitals are by express reference made a part of the covenants hereof, and this Agreement shall be construed in light thereof. 2. Duties and Responsibilities. The duties and responsibilities of Executive are and shall continue to be of an executive nature as shall be required by Employer in the conduct of its business. Executive's powers and authority shall include all those presently delegated to him or such other duties and responsibilities as from time to time may be assigned to him. Executive recognizes, that during his employment hereunder, he owes an undivided duty of loyalty to Employer, and agrees to devote his entire business time and attention to the 1 performance of said duties and responsibilities and to use his best efforts to promote and develop the business of Employer. 3. Employment Term. Executive's employment may be terminated by either party in accordance with Sections 5, 6, 7, or 8 herein. 4. Compensation and Benefits. During employment, Executive shall be entitled to receive a base annual salary, shall be reimbursed for reasonable expenses incurred and accounted for in accordance with the policies and procedures of Employer, and shall be entitled to vacation pay and other benefits applicable to employees generally, each as may from time to time be established, amended or terminated. In addition, upon execution of this Agreement, Executive shall be awarded five thousand (5,000) shares of restricted stock as set forth in a restricted stock agreement of even-date herewith, attached hereto and incorporated herein ("Restricted Stock Agreement"), shall be entitled to the Special Compensation set forth in Section 6 hereof in accordance with the terms of this Agreement, and shall be entitled, subject to approval of the Organization and Compensation Committee, to participation in the Key Management Benefit Plan in accordance with the terms of said plan. 5. Termination by Employer: Special Compensation. At any time, Employer may terminate Executive's employment for any reason. If Executive's termination is other than pursuant to Section 6, Executive shall, subject to the other provisions of this Section 5, be entitled to the following Special Compensation (as that term is defined in this Section 5) in lieu of any benefits available under any and all Employer separation plans or policies. If Executive's termination is pursuant to Sections 5, 6 or 7, Executive's obligations under Sections 11, 12, 13, and 14 hereof shall continue. For purposes of this Agreement, "Special Compensation" shall entitle Executive: (a) to continue to receive for a period of eighteen (18) months from the date of termination (the "Severance Period") biweekly compensation at the rate equal to the biweekly amount of his base annual salary in effect at the date of termination of employment; (b) to receive a bonus, based on actual performance results, up to the target amount, under the Management Incentive Plan ("MIP") throughout the Severance Period provided that the amount, if any, payable under such Plan for the award period including the last day of the Severance Period shall be pro 2 rated based upon the number of months of the Severance Period that fall within the award period and the total number of months in such award period; (c) to receive an award under the Long Term Incentive Plan, pro rated based on the Executive's last day worked, exclusive of any Severance Period, determined in accordance with the terms of said Plan; (d) acceleration of vesting of restricted stock in accordance with the relevant provisions of the Restricted Stock Agreement; (e) to continue to receive throughout the Severance Period any executive medical, dental, life, and qualified or nonqualified retirement benefits which the Executive was receiving or was entitled to receive at the time of termination, except that long term disability and short term disability benefits cease on the last day worked; (f) outplacement counseling by a firm selected by Employer to continue until Executive becomes employed; and (g) to continue to receive throughout the Severance Period all applicable executive perquisites (including automobile allowance, long distance services and all miscellaneous services) except country club membership dues and accrual of vacation. Employer shall pay or cause to be paid the amounts payable under paragraph (a) above in equal installments, bi-weekly in arrears, and the amount payable under paragraphs (b) and (c) in accordance with the terms of the Plans. All payments pursuant to this Section shall be subject to applicable federal and state income and other withholding taxes. In addition to the Special Compensation described above, Executive shall also be entitled to any vacation pay for vacation accrued by Executive in the calendar year of termination but not taken at the time of termination. In the event Executive becomes employed full time during the Severance Period, Executive's entitlement to continuation of the benefits described in paragraph (e) shall immediately cease, however, Executive shall retain any rights to continue medical insurance coverage under the COBRA continuation provisions of the group medical insurance plan by paying the applicable premium therefor. The payments and benefits provided for in this Section shall be in addition to all other sums then payable and owing to Executive hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Executive for 3 employment or services provided after termination of employment hereunder, and shall be in full settlement and satisfaction of all of Executive's claims and demands. In all events, Executive's right to receive severance and/or other benefits pursuant to this Section shall cease immediately in the event Executive is re-employed by Employer or an affiliate or Executive breaches his Confidential Information Covenant (as defined in Section 11 hereof), or breaches Sections 12, 13 or 14 hereof. In all cases, Employer's rights under Section 15 shall continue. 6. Voluntary Resignation by Executive; Termination for Cause: Total Disability. Upon termination of Executive's employment by either Voluntary Resignation, Termination for Cause (as those terms are defined in this Section 6), or Total Disability, as that term is defined in the Long Term Disability Plan, Executive shall have no right to compensation, severance pay or other benefits described herein but Executive's obligations under Sections 11, 12, 13 and 14 hereof shall continue. (a) Voluntary Resignation by Executive. At any time, Executive has the right, by written notice to Employer, to terminate his services hereunder ("Voluntary Resignation"), effective as of thirty (30) days after such notice. (b) Termination for Cause by Employer. At any time, Employer has the right to terminate Executive's employment. Termination upon the occurrence of any of the following shall be deemed termination for cause ("Termination for Cause"): (i) Conduct by the Executive which reflects adversely on the Executive's honesty, trustworthiness or fitness as an Executive, or (ii) Executive's willful engagement in conduct which is demonstrably and materially injurious to the Employer. For Termination for Cause, written notice of the termination of Executive's employment by Employer shall be served upon Executive and shall be effective as of the date of such service. Such notice given by Employer shall specify the act or acts of Executive underlying such termination. (c) Total Disability. Upon the total disability of the Executive, as that term is defined in the Long Term Disability Plan, Executive shall have no right to compensation or severance pay described herein but shall be entitled to long term disability and other such benefits afforded under the applicable policies and plans. 4 7. Resignation Following Constructive Discharge. If at any time, except in connection with a termination pursuant to Section 5, 6, or 8 Executive is Constructively Discharged (as that term is defined in this Section 7) then Executive shall have the right, by written notice to Employer within sixty (60) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice. Executive shall in such event be entitled to the compensation and benefits as if such employment were terminated pursuant to Section 5 of this Agreement. For purposes of this Agreement, the Executive shall be "Constructively Discharged" upon the occurrence of any one of the following events: (a) Executive is removed from his position with Employer other than as a result of Executive's appointment to positions of equal or superior scope and responsibility; or (b) Executive's targeted total compensation is reduced by more than 10% (other than across-the-board reductions similarly affecting all officers of the Long Distance Division of Employer). 8. Effect of Change in Control. In the event that within one year of a Change in Control (as that term is defined in this Section 8) Executive's employment is terminated: (a) by the Employer other than pursuant to Section 6 hereof, or (b) by Executive pursuant to Section 7 hereof, then Executive shall be entitled to the Special Compensation described in Section 5 and shall be bound by Section 11, but shall not have any continuing obligations under Sections 12, 13, and 14, except as otherwise required by common law or statute. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than a trustee or other fiduciary holding securities under an employee benefit plan of Sprint Corporation ("Sprint") or any of its affiliates, and other than 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, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), 5 directly or indirectly, of securities of Sprint representing 20% or more of the combined voting power of Sprint's then outstanding securities, or (ii) during any period of two consecutive years (not including any period prior to the date of this Agreement), incumbent members cease for any reason to constitute a majority of the members of the Board of Directors of Sprint. A member of the Board of Directors of Sprint shall be an "incumbent member" if such individual is as of the date of this Agreement or at the beginning of the applicable two consecutive year period a member of the Board of Directors of Sprint, and any new director after the date of this Agreement (other than a director designated by person who has entered into an agreement to effect a transaction described in subparagraph (i) above) whose election to the Board or nomination for election by the stockholders of Sprint was approved by a vote of at least two-thirds (2/3) of the directors still in office who either were directors as of the date hereof or as of the first day of the applicable two consecutive year period or whose election or nomination for election was previously so approved. 9. Dispute Resolution. All disputes arising under this Agreement, other than those disputes relating to Executive's alleged violations of Sections 11 through 14 herein, shall be submitted to arbitration by the American Arbitration Association of Kansas City, Missouri. Costs of arbitration shall be borne equally by the parties. The decision of the arbitrators shall be final and there shall be no appeal from any award rendered. Any award rendered may be entered as a judgment in any court of competent jurisdiction. In any judicial enforcement proceeding, the losing party shall reimburse the prevailing party for its reasonable costs and attorneys' fees for enforcing its rights under this Agreement, in addition to any damages or other relief granted. This Section 9 does not apply to any action by Employer to enforce Sections 11 through 14 of this Agreement and does not in any way restrict Employer's rights under Section 15 herein. 10. Enforcement. In the event Employer shall fail to pay any amounts due to Executive under this Agreement as they come due, Employer agrees to pay interest on such amounts at a rate of prime plus two percent (2%) per annum. Employer agrees that Executive and any successor shall be entitled to recover all costs of successfully enforcing any provision of this Agreement, including reasonable attorney fees and costs of litigation. 6 11. Confidential Information. Executive acknowledges that during the course of his employment he has learned or will learn or develop Confidential Information (as that term is defined in this Section 11). Executive further acknowledges that unauthorized disclosure or use of such Confidential Information, other than in discharge of Executive's duties, will cause Employer irreparable harm. For purposes of this Section, Confidential Information means trade secrets (such as technical and non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process) and other proprietary information concerning the products, processes or services of Employer or its parent, and/or affiliates, including but not limited to: computer programs; unpatented inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development; business plans; sales forecasts; 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 planned or pending acquisitions or divestitures; and information concerning purchases of major equipment or property, which information: (a) has not been made generally available to the public; and (b) 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 (c) has been identified to Employee as confidential by Employer, either orally or in writing. Except in the course of his employment and in the pursuit of the business of Employer or any of its subsidiaries or affiliates, Executive shall not, during the course of his employment, or for a period of eighteen (18) months following termination of his employment for any reason, directly or indirectly, disclose, publish, communicate or use on his behalf or another's behalf, any proprietary information or data of Employer or any of its subsidiaries or affiliates. Executive acknowledges that Employer operates and competes nationally, and that Employer will be harmed by unauthorized disclosure or use of Confidential Information regardless of where such disclosure or use occurs, and that therefore this confidentiality agreement is not limited to any single state or other jurisdiction. 12. Non-Competition. Executive acknowledges that use or disclosure of Confidential Information described in Section 11 is likely if Executive were to perform telecommunications functions relating to long distance services on behalf of a competitor of Employer. Therefore, 7 Executive shall not, for eighteen (18) months following termination of employment for any reason (the "Non-Compete Period"), accept any position, including but not limited to a position in the long distance operations of AT&T or MCI, where the performance of duties in that position will involve managing, controlling, participating in, investing in, acting as consultant or advisor to, rendering services for, or otherwise assisting any person or entity in the long distance business and performing functions relating to long distance services, including all forms of interexchange, interstate, intrastate, interlata and international communications. Executive acknowledges that Employer operates and competes nationally, and that therefore this non-competition agreement is not limited to any single state or other jurisdiction. This section shall not prevent Executive from using general skills and experience developed during employment with Employer or other employers; or from accepting a position of employment with another company, firm, or other organization which competes with Employer, if its business is diversified and Executive is employed in a part of the business that is not related to long distance Services and provided that such position does not require or permit the disclosure or use of Confidential Information. 13. Inducement of Other Employees. For a eighteen (18) month period following termination of employment, Executive will not directly or indirectly solicit, induce or encourage any employee or agent of Employer to terminate his relationship with Employer. 14. Return of Employer's Property. All notes, reports, sketches, plans, published memoranda or other documents created, developed, generated or held by Executive during employment, concerning or related to Employer's business, and whether containing or relating to Confidential Information or not, are the property of Employer and will be promptly delivered to Employer upon termination of Executive's employment for any reason whatsoever. During the course of employment, Executive shall not remove any of the above property containing Confidential Information, or reproductions or copies thereof, or any apparatus from Employer's premises without authorization. 15. Remedies. Executive acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of Sections 11, 12, 13 and 14 will not cause him undue hardship and that said provisions are reasonably necessary and commensurate with the need to protect Employer and its legitimate and proprietary business interests and property from irreparable harm. 8 Executive acknowledges that failure to comply with the terms of this Agreement will cause irreparable damage to Employer. Therefore, Executive agrees that, in addition to any other remedies at law or in equity available to Employer for Executive's breach or threatened breach of this Agreement, Employer is entitled to specific performance or injunctive relief, without bond, against Executive to prevent such damage or breach, and the existence of any claim or cause of action Executive may have against Employer will not constitute a defense thereto. Executive further agrees to pay reasonable attorney fees and costs of litigation incurred by Employer in any proceeding relating to the enforcement of the Agreement or to any alleged breach thereof in which Employer shall prevail in whole or in part. In the event of a breach or a violation by Executive of any of the covenants and provisions of this Agreement, the running of the Non-Compete Period (but not of Executive's obligation thereunder), shall be tolled during the period of the continuance of any actual breach or violation. 16. Confidentiality of Agreement. As a specific condition to Executive's right to Special Compensation or other benefits described herein, Executive agrees that he will not disclose or discuss: the existence of this Agreement; the Special Compensation provided hereunder; or any other terms of the Agreement except: (1) to members of his immediate family; (2) to his financial advisor or attorney but then only to the extent necessary for them to assist him; or (3) as required by law or to enforce legal rights. 17. Entire Understanding. This Agreement constitutes the entire understanding between the parties relating to Executive's employment hereunder and supersedes and cancels all prior written and oral understandings and agreements with respect to such matters, except for the terms and provisions of the Key Management Benefit Plan and any other employee benefit or other compensation plans (or any agreements or awards thereunder) referred to in or contemplated by this Agreement and except for the SPRINT UNITED EMPLOYEE AGREEMENT REGARDING PROPERTY RIGHTS AND BUSINESS PRACTICES which the Executive has signed and by which Executive continues to be bound. 18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Executive's executors, administrators, legal representatives, heirs and legatees and the successors and assigns of Employer. 9 19. 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 made enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Executive hereby agrees that such scope may be judicially modified accordingly. 20. Strict Construction. The language used in this Agreement will be deemed to be the language chosen by Employer and Executive to express their mutual intent and no rule of strict construction shall be applied against any person. 21. Waiver. The waiver of any party hereto 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. 22. Notices. Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party (a) upon delivery to the address of such party specified below if delivered personally or by courier; (b) upon dispatch if transmitted by telecopy or other means of facsimile, provided a copy thereof is also sent by regular mail or courier; or (c) within forty-eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, for delivery as certified mail, return receipt requested, addressed, in any case to the party at the following address(es) or telecopy numbers: If to Executive: Patti S. Manuel Sprint Communications Company, L.P. 8140 Ward Parkway Kansas City, MO 64114 10 If to Employer and/or Company: Sprint Corporation 2330 Shawnee Mission Parkway Westwood, KS 66205 Attention: Corporate Secretary or to such other address(es) or telecopy number(s) as any party may designate by Written Notice in the aforesaid manner. 23. Governing Law. This Agreement shall be governed by, and interpreted, construed and enforced in accordance with, the laws of the State of Kansas. 24. Gender and Number. Wherever from the context it appears appropriate, each term stated in either the singular of 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. 25. 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. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed at Westwood, Kansas, on the date above set forth. PATTI S. MANUEL SPRINT/UNITED MANAGEMENT COMPANY /s/ Patti S. Manuel By: /s/ B. Watson 11 AMENDMENT The Agreement Regarding Special Compensation and Post Employment Restrictive Covenants (the "Special Agreement") between Sprint/United Management Company and Patti S. Manuel (the "Executive") is hereby amended as follows, effective January 21, 1994: 1. The first sentence of Section 8 shall be changed by adding the word "or" at the end of item (b) and by adding the following item (c): (c) by Executive if Executive is required to be based anywhere other than the Kansas City metropolitan area or the Dallas, Texas metropolitan area except for required travel on business to an extent substantially consistent with Executive's business travel obligations immediately prior to the Change in Control; 2. Section 12 shall be changed by: (a) deleting from the second sentence of the first paragraph the words "the performance of duties in that position will involve", and substituting in lieu thereof the words "Executive dedicates his time and efforts principally to"; and (b) changing the last sentence of the Section to read: This section shall not prevent Executive from using general skills and experience developed during employment with Employer or other employers; or from accepting a position of employment with another company, firm, or other organization which competes with Employer, if its business is diversified and Executive is employed in a part of the business that is not related principally to long distance services and provided that such position does not require or permit the disclosure or use of Confidential Information. Except as amended herein, the terms of the Special Agreement shall remain in effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed at Westwood, Kansas, as of the date above set forth. EXECUTIVE SPRINT/UNITED MANAGEMENT COMPANY /s/ Patti S. Manuel By: /s/ B. Watson Title: SVP - HR Exhibit (10)(w) Special Compensation and Non-Compete Agreement This Agreement is entered into as of the 12th day of August, 1997 (the "Effective Date"), by and between Sprint Corporation, a Kansas corporation ("Sprint," and it, together with its Subsidiaries, the "Employer"), and MichaelB. Fuller ("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 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 1 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 a sale, merger, divestiture, or other transaction entered into by Employer, 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 of 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. 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 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. 2.07. Confidentiality of Agreement. Employee shall not disclose or discuss the existence of this Agreement, the 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)toa 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. Stock-Based Award. As partial consideration for Employee's agreements hereunder, Employee shall be granted the Stock-Based Award on the terms set forth in this section. 3.01. Award of Restricted Stock. 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. 3.02. 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 100% of the total shares granted, on the fifth anniversary of the Effective Date. 3 3.03. 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 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. 3.04. Provisions Applicable to Stock-Based Award. (a) Acceleration of Stock-Based Award. (1) Conditions to Acceleration. The restrictions on all shares of restricted stock that have not otherwise lapsed shall lapse 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 (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. Inno event shall the restrictions lapse on restricted stock as provided in the prior section upon Employee's ceasing employment with Employer to commence employment with an Affiliate of Sprint. (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 if before such restricted shares vest, (i) Employee ceases employment with Employer and begins employment with an Affiliate of Employer, (ii)Employer terminates Employee's employment with Employer for any 4 reason constituting Termination for Cause or by reason of Employee's Total Disability, or (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. 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. 5 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. 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 or (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 6 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, consolidation, liquidation, or dissolution of Sprint, or a sale of all or substantially all of the assets of Sprint without approval of a majority of the directors described in clause (ii) of this Section 6.02 6.03. Committee. "Committee" means the Organization, Compensation, and Nominating Committee of Sprint's board of directors. 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)inthe 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 7 (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. 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. 8 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. 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 Date 9 (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; (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; 10 (vii)tocontinue 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)tohave 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 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. 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. 11 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 (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: Michael B. Fuller Sprint Corporation 6601 W. 132nd Street Attn: Corporate Secretary Overland Park, KS 66209 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. 12 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. In Witness Whereof, the parties have caused this Agreement to be duly executed and effective as of August 12, 1997. Sprint Corporation by: /s/ Don A. Jensen Don A. Jensen, Vice President and Secretary /s/ Michael B. Fuller Michael B. Fuller, Employee 13 Exhibit (10)(w) AGREEMENT REGARDING SPECIAL COMPENSATION AND POST EMPLOYMENT RESTRICTIVE COVENANTS THIS AGREEMENT made the 30th day of October, 1997, by and among SPRINT CORPORATION, a Kansas corporation ("Sprint"), SPRINT/UNITED MANAGEMENT COMPANY, a Kansas corporation and subsidiary of Sprint ("SUMC") (Sprint, SUMC and the subsidiaries of Sprint are collectively referred to herein as "Employer"), and RONALD T. LEMAY("Executive"). W I T N E S S E T H: WHEREAS, Employer and its affiliates are engaged in the telecommunications business; WHEREAS, Executive has expertise, experience and capability in the business of Employer and the telecommunications business in general; WHEREAS, SUMC provides services for Sprint, its subsidiaries and affiliates, including providing all personnel to Sprint and Sprint's Long Distance Division; and WHEREAS, Executive has been, and now is serving Employer as Sprint's President and Chief Operating Officer; and WHEREAS, Employer desires to enter into this Agreement to provide severance and other benefits for Executive and obtain Executive's agreements regarding confidentiality and post- employment restrictive covenants for Employer; and WHEREAS, Executive is willing to provide such agreements to Employer. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration is mutually acknowledged by the parties, it is hereby agreed as follows: 1. Recitals. The recitals hereinbefore set forth constitute an integral part of this Agreement, evidencing the intent of the parties in executing this Agreement, and describing the circumstances surrounding its execution. Said recitals are by express reference made a part of the covenants hereof, and this Agreement shall be construed in light thereof. 2. Duties and Responsibilities. The duties and responsibilities of Executive are and shall continue to be of an executive nature as shall be required by Employer in the conduct of its business. Executive's powers and authority shall include all those presently delegated to him or such other duties and responsibilities as from time to time may be assigned to him. Executive recognizes, that during his employment hereunder, he owes an undivided duty of loyalty to Employer, and agrees to devote his entire business time and attention to the performance of said duties and responsibilities and to use his best efforts to promote and develop the business of Employer. 3. Employment Term. Executive's employment may be terminated by either party in accordance with Sections 5, 6, 7, or 8 herein. 4. Compensation and Benefits. During employment, Executive shall be entitled to receive a base annual salary, shall be reimbursed for reasonable expenses incurred and accounted for in accordance with the policies and procedures of Employer, and shall be entitled to vacation pay and other benefits applicable to employees generally, each as may from time to time be established, amended or terminated. In addition, upon execution of this Agreement, Executive (a) shall be entitled to 5,668 shares of restricted stock as set forth in a restricted stock agreement of even date herewith (the "Restricted Stock Agreement"), and (b) shall be entitled to the Special Compensation set forth in Section 5 hereof in accordance with the terms of this Agreement. 5. Termination by Employer: Special Compensation. At any time, Employer may terminate Executive's employment for any reason. If Executive's termination is other than pursuant to Section 6, Executive shall, subject to the other provisions of this Section 5, be entitled to the following Special Compensation (as that term is defined in this Section 5) in lieu of any benefits available under any and all Employer separation plans or policies, except as noted in Section 17. If Executive's termination is pursuant to Sections 5, 6 or 7, Executive's obligations under Sections 11, 12, 13, and 14 hereof shall continue. For purposes of this Agreement, "Special Compensation" shall entitle Executive: 2 (a) to continue to receive for a period of eighteen (18) months from the date of termination (the "Severance Period") monthly compensation at the rate equal to the monthly amount of his base annual salary in effect at the date of termination of employment; (b) to receive a bonus, based on actual performance results, up to the target amount, under the Management Incentive Plan ("MIP") throughout the Severance Period provided that the amount, if any, payable under such Plan for the award period including the last day of the Severance Period shall be pro rated based upon the number of months of the Severance Period that fall within the award period and the total number of months in such award period; (c) to receive an award under the Long Term Incentive Plan, pro rated based on the Executive's last day worked, exclusive of any Severance Period, determined in accordance with the terms of said Plan; (d) to an acceleration of vesting of restricted stock in accordance with the relevant provisions of the Restricted Stock Agreement; (e) to continue to receive throughout the Severance Period any executive medical, dental, life, and qualified or nonqualified retirement benefits which the Executive was receiving or was entitled to receive at the time of termination, except that long term disability and short term disability benefits cease on the last day worked; (f) to receive outplacement counseling by a firm selected by Employer to continue until Executive becomes employed; and (g) to continue to receive throughout the Severance Period all applicable executive perquisites (including automobile allowance, long distance services and all miscellaneous services) except country club membership dues and accrual of vacation. Employer shall pay or cause to be paid the amounts payable under paragraph (a) above in equal installments, monthly in arrears, and the amount payable under paragraphs (b) and (c) in accordance with the terms of the Plans. All payments pursuant to this Section shall be subject to applicable federal and state income and other withholding taxes. In addition to the Special Compensation described above, Executive shall also be entitled to any vacation pay for 3 vacation accrued by Executive in the calendar year of termination but not taken at the time of termination. In the event Executive becomes employed full time during the Severance Period, Executive's entitlement to continuation of the benefits described in paragraph (e) shall immediately cease, however, Executive shall retain any rights to continue medical insurance coverage under the COBRA continuation provisions of the group medical insurance plan by paying the applicable premium therefor. The payments and benefits provided for in this Section shall be in addition to all other sums then payable and owing to Executive hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Executive for employment or services provided after termination of employment hereunder, and shall be in full settlement and satisfaction of all of Executive's claims and demands. In all events, Executive's right to receive severance and/or other benefits pursuant to this Section shall cease immediately in the event Executive is reemployed by Employer or an affiliate or Executive breaches his Confidential Information Covenant (as defined in Section 11 hereof), or breaches Sections 12, 13 or 14 hereof. In all cases, Employer's rights under Section 15 shall continue. 6. Voluntary Resignation by Executive; Termination for Cause; Total Disability. Upon termination of Executive's employment by either Voluntary Resignation, Termination for Cause (as those terms are defined in this Section 6), or Total Disability, as that term is defined in the Long Term Disability Plan, Executive shall have no right to compensation, severance pay or other benefits described herein but Executive's obligations under Sections 11, 12, 13 and 14 hereof shall continue. (a) Voluntary Resignation by Executive. At any time, Executive has the right, by written notice to Employer, to terminate his services hereunder ("Voluntary Resignation"), effective as of thirty (30) days after such notice. (b) Termination for Cause by Employer. At any time, Employer has the right to terminate Executive's employment. Termination upon the occurrence of any of the following shall be deemed termination for cause ("Termination for Cause"): 4 (i) Conduct by the Executive which reflects adversely on the Executive's honesty, trustworthiness or fitness as an Executive, or (ii) Executive's willful engagement in conduct which is demonstrably and 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. For Termination for Cause, written notice of the termination of Executive's employment by Employer shall be served upon Executive and shall be effective as of the date of such service. Such notice given by Employer shall specify the act or acts of Executive underlying such termination. (c) Total Disability. Upon the total disability of the Executive, as that term is defined in the Long Term Disability Plan, Executive shall have no right to compensation or severance pay described herein but shall be entitled to long term disability and other such benefits afforded under the applicable policies and plans. 7. Resignation Following Constructive Discharge. If at any time, except in connection with a termination pursuant to Section 5, 6, or 8 Executive is Constructively Discharged (as that term is defined in this Section 7) then Executive shall have the right, by written notice to Employer within sixty (60) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice. Executive shall in such event be entitled to the compensation and benefits as if such employment were terminated pursuant to Section 5 of this Agreement. For purposes of this Agreement, the Executive shall be "Constructively Discharged" upon the occurrence of any one of the following events: (a) Executive is removed from his position with Employer other than as a result of Executive's appointment to positions of equal or superior scope and responsibility; or (b) Executive's targeted total compensation is reduced by more than 10% (other than across-the-board reductions 5 similarly affecting all executive officers of Sprint Corporation). 8. Effect of Change in Control. In the event that within one year of a Change in Control (as that term is defined in this Section 8) Executive's employment is terminated: (a) by the Employer other than pursuant to Section 6 hereof; or (b) by Executive pursuant to Section 7 hereof, then Executive shall be entitled to the Special Compensation described in Section 5 and shall be bound by Section 11, but shall not have any continuing obligations under Sections 12, 13, and 14, except as otherwise required by common law or statute. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than a trustee or other fiduciary holding securities under an employee benefit plan of Sprint or any of its affiliates, and other than 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, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Sprint representing 20% or more of the combined voting power of Sprint's then outstanding securities, or (ii) during any period of two consecutive years (not including any period prior to the date of this Agreement), incumbent members cease for any reason to constitute a majority of the members of the Board of Directors of Sprint; provided, however, that a transaction among Employer, France Telecom ("FT") and Deutsche Bundespost Telekom ("DT") commonly known as Project Phoenix shall not constitute a Change in Control for this Agreement and the related Restricted Stock Agreement, except that an acquisition of 35% or more of Sprint's voting securities by DT and FT collectively shall constitute a Change in Control. A member of the Board of Directors of Sprint shall be an "incumbent member" if such individual is as of the 6 date of this Agreement or at the beginning of the applicable two consecutive year period a member of the Board of Directors of Sprint, and any new director after the date of this Agreement (other than a director designated by person who has entered into an agreement to effect a transaction described in subparagraph (i) above) whose election to the Board or nomination for election by the stockholders of Sprint was approved by a vote of at least two-thirds (2/3) of the directors still in office who either were directors as of the date hereof or as of the first day of the applicable two consecutive year period or whose election or nomination for election was previously so approved. 9. Dispute Resolution. All disputes arising under this Agreement, other than those disputes relating to Executive's alleged violations of Sections 11 through 14 herein, shall be submitted to arbitration by the American Arbitration Association of Kansas City, Missouri. Costs of arbitration shall be borne equally by the parties. The decision of the arbitrators shall be final and there shall be no appeal from any award rendered. Any award rendered may be entered as a judgment in any court of competent jurisdiction. In any judicial enforcement proceeding, the losing party shall reimburse the prevailing party for its reasonable costs and attorneys' fees for enforcing its rights under this Agreement, in addition to any damages or other relief granted. This Section 9 does not apply to any action by Employer to enforce Sections 11 through 14 of this Agreement and does not in any way restrict Employer's rights under Section 15 herein. 10. Enforcement. In the event Employer shall fail to pay any amounts due to Executive under this Agreement as they come due, Employer agrees to pay interest on such amounts at a rate of prime plus two percent (2%) per annum. Employer agrees that Executive and any successor shall be entitled to recover all costs of successfully enforcing any provision of this Agreement, including reasonable attorney fees and costs of litigation. 11. Confidential Information. Executive acknowledges that during the course of his employment he has learned or will learn or develop Confidential Information (as that term is defined in this Section 11). Executive further acknowledges that unauthorized disclosure or use of such Confidential Information, other than in discharge of Executive's duties, will cause Employer irreparable harm. For purposes of this Section, Confidential Information means trade secrets (such as technical and non-technical data, a 7 formula, pattern, compilation, program, device, method, technique, drawing, process) and other proprietary information concerning the products, processes or services of Employer, or its affiliates, including but not limited to: computer programs; unpatented inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development; business plans; sales forecasts; 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 planned or pending acquisitions or divestitures; and information concerning purchases of major equipment or property, which information: (a) has not been made generally available to the public; and (b) 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 (c) has been identified to Executive as onfidential by Employer, either orally or in writing. Except in the course of his employment and in the pursuit of the business of Employer or any of its subsidiaries or affiliates, Executive shall not, during the course of his employment, or for a period of eighteen (18) months following termination of his employment for any reason, directly or indirectly, disclose, publish, communicate or use on his behalf or another's behalf, any proprietary information or data of Employer or any of its subsidiaries or affiliates. Executive acknowledges that Employer operates and competes nationally, and that Employer will be harmed by unauthorized disclosure or use of Confidential Information regardless of where such disclosure or use occurs, and that therefore this confidentiality agreement is not limited to any single state or other jurisdiction. 12. Non-Competition. Executive acknowledges that use or disclosure of Confidential Information described in Section 11 is likely if Executive were to perform services relating to the long-distance business on behalf of a competitor of Employer. Therefore, Executive shall not, for eighteen (18) months following termination of employment for any reason (the "Non-Compete Period"), accept any position, including but not limited to a position in the long-distance operations of AT&T or MCI, where the performance of duties in that position will involve managing, controlling, participating in, investing in, acting as consultant or advisor to, rendering services for, or otherwise assisting any person or entity that engages in or owns any business that is in the long-distance business. For purposes of 8 this Agreement, "long-distance business" includes all forms of interexchange, interstate, intrastate, interlata, and international communications, together with related activities such as information services. Executive acknowledges that Employer operates and competes nationally, and that therefore this non-competition agreement is not limited to any single state or other jurisdiction. This section shall not prevent Executive from using general skills and experience developed during employment with Employer or other employers; or from accepting a position of employment with another company, firm, or other organization which competes with Employer, if its business is diversified and Executive is employed in a part of the business that is not related to the long-distance business and provided that such position does not require or permit the disclosure or use of Confidential Information. 13. Inducement of Other Employees. For an eighteen (18) month period following termination of employment, Executive will not directly or indirectly solicit, induce or encourage any employee or agent of Employer to terminate his relationship with Employer. 14. Return of Employer's Property. All notes, reports, sketches, plans, published memoranda or other documents created, developed, generated or held by Executive during employment, concerning or related to Employer's business, and whether containing or relating to Confidential Information or not, are the property of Employer and will be promptly delivered to Employer upon termination of Executive's employment for any reason whatsoever. During the course of employment, Executive shall not remove any of the above property containing Confidential Information, or reproductions or copies thereof, or any apparatus from Employer's premises without authorization. 15. Remedies. Executive acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of Sections 11, 12, 13 and 14 will not cause him undue hardship and that said provisions are reasonably necessary and commensurate with the need to protect Employer and its legitimate and proprietary business interests and property from irreparable harm. 9 Executive acknowledges that failure to comply with the terms of this Agreement will cause irreparable damage to Employer. Therefore, Executive agrees that, in addition to any other remedies at law or in equity available to Employer for Executive's breach or threatened breach of this Agreement, Employer is entitled to specific performance or injunctive relief, without bond, against Executive to prevent such damage or breach, and the existence of any claim or cause of action Executive may have against Employer will not constitute a defense thereto. Executive further agrees to pay reasonable attorney fees and costs of litigation incurred by Employer in any proceeding relating to the enforcement of the Agreement or to any alleged breach thereof in which Employer shall prevail in whole or in part. In the event of a breach or a violation by Executive of any of the covenants and provisions of this Agreement, the running of the Non-Compete Period (but not of Executive's obligation thereunder), shall be tolled during the period of the continuance of any actual breach or violation. 16. Confidentiality of Agreement. As a specific condition to Executive's right to Special Compensation or other benefits described herein, Executive agrees that he will not disclose or discuss: the existence of this Agreement; the Special Compensation provided hereunder; or any other terms of the Agreement except: (1) to members of his immediate family; (2) to his financial advisor or attorney but then only to the extent necessary for them to assist him; (3) 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 (4) as required by law or to enforce legal rights. 17. Entire Understanding. This Agreement constitutes the entire understanding between the parties relating to Executive's employment hereunder and supersedes and cancels all prior written and oral understandings and agreements with respect to such matters, except for the terms and provisions of any employee benefit or other compensation plans (or any agreements or awards thereunder) referred to in or contemplated by this Agreement, Executive's Contingency Employment Agreement, and except for the SPRINT UNITED EMPLOYEE AGREEMENT REGARDING PROPERTY RIGHTS AND BUSINESS PRACTICES which the Executive has signed and by which Executive continues to be bound. 10 18. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Executive's executors, administrators, legal representatives, heirs and legatees and the successors and assigns of Employer. 19. 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 made enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Executive hereby agrees that such scope may be judicially modified accordingly. 20. Strict Construction. The language used in this Agreement will be deemed to be the language chosen by Employer and Executive to express their mutual intent and no rule of strict construction shall be applied against any person. 21. Waiver. The waiver of any party hereto 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. 22. Notices. Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party (a) upon delivery to the address of such party specified below if delivered personally or by courier; (b) upon dispatch if transmitted by telecopy or other means of facsimile, provided a copy thereof is also sent by regular mail or courier; or (c) within forty-eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, for delivery as certified mail, return receipt requested, addressed, in any case to the party at the following address(es) or telecopy numbers: 11 If to Executive: Ronald T. LeMay c/o Sprint Corporation 2330 Shawnee Mission Parkway Westwood, KS 66205 If to Employer: Sprint Corporation 2330 Shawnee Mission Parkway Westwood, KS 66205 Attention: Corporate Secretary or to such other address(es) or telecopy number(s) as any party may designate by Written Notice in the aforesaid manner. 23. Governing Law. This Agreement shall be governed by, and interpreted, construed and enforced in accordance with, the laws of the State of Kansas. 24. Gender. Wherever from the context it appears appropriate, each term stated in either the singular of 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. 25. 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. 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date above set forth. RONALD T. LEMAY SPRINT/UNITED MANAGEMENT COMPANY /s/ Ronald T. LeMay By: /s/ Don A. Jensen Authorized Officer SPRINT CORPORATION By: /s/ B. Watson Authorized Officer 13 EX-10 3 DESCRIPTION OF RETIREMENT AGREEMENT Exhibit (10) (bb) DESCRIPTION OF RETIREMENT AGREEMENT BETWEEN SPRINT CORPORATION AND D. WAYNE PETERSON, formerly President National Integrated Services The agreement provides that Mr. Peterson will continue to receive his base salary and be able to participate in employee benefit plans as an active employee through December 31, 1998. Mr. Peterson will not incur any early retirement pension reduction penalty. The noncompete period under his Agreement Regarding Special Compensation and Post Employment Restrictive Covenants has been shortened to end December 31, 1998. EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT (12) SPRINT CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- (in millions) Earnings Income from continuing operations before taxes $ 1,583.0 $ 1,911.9 $ 1,480.4 $ 1,387.9 $ 813.1 Capitalized interest (93.0) (104.0) (57.0) (7.5) (7.3) Equity in losses of less than 50 percent owned entities 764.4 269.0 32.9 - - - ------------------------------------------------------------------------------------------------------------------- Subtotal 2,254.4 2,076.9 1,456.3 1,380.4 805.8 ------------------------------------------------------------------ Fixed charges Interest charges 280.2 300.7 317.7 308.2 374.3 Interest factor of operating rents 136.1 119.2 120.1 111.5 117.4 Pre-tax cost of preferred stock dividends of subsidiaries 0.3 0.4 0.7 0.9 1.6 - ------------------------------------------------------------------------------------------------------------------- Total fixed charges 416.6 420.3 438.5 420.6 493.3 ------------------------------------------------------------------ Earnings, as adjusted $ 2,671.0 $ 2,497.2 $ 1,894.8 $ 1,801.0 $ 1,299.1 ------------------------------------------------------------------ Ratio of earnings to fixed charges 6.41 (1) 5.94 (2) 4.32 (3) 4.28 2.63 (4) ------------------------------------------------------------------
(1) 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 6.29 for 1997. (2) 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 6.08 for 1996. (3) 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 4.52 for 1995. (4) Earnings as computed for the ratio of earnings to fixed charges includes the nonrecurring merger, integration and restructuring costs of $293 million recorded in 1993. Excluding these costs, the ratio of earnings to fixed charges would have been 3.23 for 1993. 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 5 LIST OF SUBSIDIARIES OF REGISTRANT
EXHIBIT (21) SPRINT CORPORATION SUBSIDIARIES OF REGISTRANT Sprint Corporation is the parent. The subsidiaries of Sprint Corporation are as follows: Ownership Interest Held Jurisdiction of By Its Incorporation or Immediate Parent Name Organization - ---------------------------------------------------------------------- --------------------------- ----------------- 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 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 97.9(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 - ---------------------------- (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. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Ownership Interest Held Jurisdiction of By Its Incorporation or Immediate Name Organization Parent - ---------------------------------------------------------------------- --------------------------- ---------------- North Supply Company Ohio 100 Northstar Transportation, Inc. Kansas 100 North Supply Chile, S.A. Chile 18 North Supply Company of Lenexa Delaware 100 North Supply International, Ltd. Kansas 100 NSC Advertising, Inc. Kansas 100 Sprint Products Group, Inc. Kansas 100 Sprint Asian American, Inc. Kansas 100 Asian American Communications, L.L.C. Kansas 25.5 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 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 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 Payphone Services, Inc. Florida 100 Sprint TELECENTERs Inc. Florida 100 Sprint/United Management Company Kansas 100 Sprint Ventures, Inc. Kansas 100 Telmex/Sprint Communications, L.L.C. Delaware 50 EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Ownership Interest Held Jurisdiction of By Its Incorporation or Immediate Parent Name Organization - ---------------------------------------------------------------------- --------------------------- ----------------- UCOM, Inc. Missouri 100 Sprint Communications Company L.P. Delaware Partnership 34 Asian American Communications, L.L.C. Kansas 23.5 Call-Net Enterprises, Inc. Canada 25 Sprint Communications Company of New Hampshire,Inc. New Hampshire 100 Sprint Communications Company of Virginia, Inc. Virginia 100 Sprint Licensing, Inc. Kansas 100 USST of Texas, Inc. Texas 100 SprintCom Equipment Company L.P. Delaware Partnership 49 Sprint Enterprises, L.P. Delaware Partnership 32 Sprint Spectrum Holding Company, L.P. Delaware Partnership 40 American PCS, L.P. Delaware Partnership 99(3) American PCS Communications, LLC Delaware 99(4) APC PCS, LLC Delaware 99(5) APC Realty and Equipment Company, LLC Delaware 99(5) American Personal Communications Holdings, Inc. Delaware 100 American PCS Communications, LLC Delaware (6) APC PCS, LLC Delaware (6) APC Realty and Equipment Company, LLC Delaware (6) Cox Communication PCS, L.P. Delaware Partnership 49 NewTelco, L.P. Delaware Partnership 99(3) Sprint Spectrum L.P. Delaware Partnership 99(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) MinorCo, L.P. Delaware Partnership 40 American PCS, L.P. Delaware Partnership (8) NewTelco, L.P Delaware Partnership (8) Sprint Spectrum Equipment Company, L.P. Delaware Partnership (8) Sprint Spectrum L.P. Delaware Partnership (8) Sprint Spectrum Realty Company, L.P. Delaware Partnership (8) WirelessCo, L.P. Delaware Partnership (8) PhillieCo, L.P. Delaware Partnership 47 Sprint Global Venture, Inc. Kansas (9) Global One Communications Europe, L.L.C. Delaware 33 Global One Communications GBN Holding, Ltd. Ireland 50 Global One Communications Holding, B.V. Netherlands 33 Global One Communications, Ltd. Bulgaria 100 Global One Communications, L.L.C. Delaware 50 Global One Communications Operations, Ltd. Ireland 33 Global One Communications Service, B.V. Netherlands 33 Global One Communications World Holding, B.V. Netherlands 50 Global One Communications World Operations, Ltd. Ireland 50 Global One Communications World Service, B.V. Netherlands 50 UC PhoneCo, Inc. Kansas 100 Sprint Enterprises, L.P. Delaware Partnership 17 - ---------------------------------- (3) Sprint Spectrum Holding Company, L.P. holds the general partnership interest of greater than 99%. (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) MinorCo, L.P. holds a limited and preferred partnership interest of less than 1%. (9) Ucom, Inc., US Telecom, Inc., and Utelcom, Inc. each holds less than 1% of the common stock. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Ownership Interest Held Jurisdiction of By Its Incorporation or Immediate Parent Name Organization - ---------------------------------------------------------------------- --------------------------- ----------------- United Telephone Company of the Carolinas South Carolina 100 SC Two Company Kansas 100 United Telephone Long Distance, Inc. South Carolina 100 United Telephone Company of Eastern Kansas Delaware 100 Sprint/United Midwest Management Services Company Kansas 20 United Teleservices, Inc. Kansas 100 United Telephone Company of Florida Florida 100 Vista-United Telecommunications Florida 49 United Telephone Company of Indiana, Inc. Indiana 100 SC Four Company Kansas 100 United Telephone Company of Kansas Kansas 99(10) 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 Long Distance, Inc. Ohio 100 Sprint Alarm Monitoring Services, Inc. Ohio 100 United Telephone Long Distance of Indiana, Inc. Indiana 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 - ---------------------------------- (10) Sprint Corporation owns all of the common stock. The voting preferred stock is held by Sprint Communications Company L.P. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Ownership Interest Held Jurisdiction of By Its Incorporation or Immediate Parent Name Organization - ---------------------------------------------------------------------- --------------------------- ----------------- United Telephone-Southeast, Inc. Virginia 100 SC Three Company Kansas 100 United Telephone Long Distance, Inc. Tennessee 100 UTLD, Inc. Virginia 100 Valley Network Partnership Virginia Partnership 20 US Telecom, Inc. Kansas 100 ASC Telecom, Inc. Kansas 100 LCF, Inc. California 100 SC Seven Company Kansas 50 Sprint Communications Company L.P. Delaware Partnership 59 SprintCom Equipment Company L.P. Delaware Partnership 51 Sprint Enterprises, L.P. Delaware Partnership 33 Sprint Global Venture, Inc. Kansas (9) Sprint Iridium, Inc. Kansas 100 Iridium U.S., L.P. Delaware Partnership 27 United Telecommunications, Inc. Delaware 100 US Telecom of New Hampshire, Inc. New Hampshire 100 UST PhoneCo, Inc. Kansas 100 Sprint Enterprises, L.P. Delaware Partnership 18 Utelcom, Inc. Kansas 100 Private TransAtlantic Telecommunications System, Inc. Delaware 100 Private Trans-Atlantic Telecommunications System (N.J.), Inc. New Jersey 100 Sprint Communications Company L.P. Delaware Partnership 4 Sprint Global Venture, Inc. Kansas (9) 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 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 - ------------------------------------------ (9) Ucom, Inc., US Telecom, Inc., and Utelcom, Inc. each holds less than 1% of the common stock. EXHIBIT (21) SUBSIDIARIES OF REGISTRANT (continued) Ownership Interest Held Jurisdiction of By Its Incorporation or Immediate Parent Name Organization - ---------------------------------------------------------------------- --------------------------- ----------------- Utelcom, Inc. (continued) 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
EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT (23)(a) SPRINT CORPORATION CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3, No. 33-34567; Form S-3, No. 33-48689; Form S-3, No. 33-58488; Form S-3, No. 33-64564; Form S-8, No. 33-35173; Form S-8, No. 33-44255; Form S-8, No. 33-38761; Form S-8, No. 33-21662; Form S-8, No. 33-28544; Form S-8, No. 33-31802; Form S-8, No. 2-97322; Form S-8, No.2-71704; Form S-8, No. 2-62061; 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. 33-59328; Form S-8, No. 33-53695; Form S-8, No. 33-57785; Form S-8, No.33-57911; Form S-8, No. 33-59349; Form S-8, No. 33-65147; Form S-8, No. 33-65149; Form S-8, No. 33-25449; Form S-8, No.333-42077; Form S-8, No. 333-46487; and Form S-8, No. 333-46491) of Sprint Corporation and in the related Prospectuses of our report dated February 3, 1998, with respect to the consolidated financial statements and schedule of Sprint Corporation included in this Annual Report (Form 10-K)for the year ended December 31, 1997. /s/ERNST & YOUNG LLP ERNST & YOUNG LLP Kansas City, Missouri March 2, 1998 EX-23 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT (23)(b) SPRINT SPECTRUM HOLDING COMPANY, L.P. INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements (Nos. 33-34567, 33-48689, 33-58488 and 33-64564) on Form S-3 and the Registration Statements (Nos. 33-35173, 33-44255, 33-38761, 33-21662, 33-28544, 33-31802, 2-97322, 2-71704, 2-62061, 33-59316, 33-59318, 33-59322, 33-59324, 33-59326, 33-59328, 33-53695, 33-57785, 33-57911, 33-59349, 33-65147, 33-65149, 33-25449, 333-42077, 333-46487, 333-46491) on Form S-8 of Sprint Corporation of our report dated February 3, 1998 on the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries (which expresses an unqualified opinion and includes an explanatory paragraph referring to the emergence from the developmental stage of Sprint Spectrum Holding Company, L.P. and subsidiaries) for each of the three years in the period ended December 31, 1997 appearing in the Annual Report on Form 10-K of Sprint Corporation for the year ended December 31, 1997. /s/Deloitte & Touche LLP Deloitte & Touche LLP Kansas City, Missouri March 2, 1998 EX-27 8 FDS 12/31/97 - EXHIBIT 27(A)
5 1,000 YEAR Dec-31-1997 Dec-31-1997 101,700 0 2,642,300 146,700 352,000 3,772,600 23,210,900 11,716,800 18,184,800 3,076,800 3,748,600 11,500 0 1,091,300 7,933,900 18,184,800 0 14,873,900 0 9,177,300 0 0 187,200 1,583,000 630,500 952,500 0 0 0 952,500 2.21 2.18
EX-27 9 RESTATED FDS 9/30/97 - EXHIBIT 27(B)
5 1,000 9-MOS Dec-31-1997 Sep-30-1997 109,400 0 2,779,100 167,100 345,400 3,686,700 22,962,400 11,851,600 17,621,700 3,476,500 2,851,200 11,400 0 1,091,300 7,824,000 17,621,700 0 11,024,900 0 6,788,900 0 0 135,100 1,260,500 502,900 757,600 0 0 0 757,600 1.76 1.74
EX-27 10 RESTATED FDS 6/30/97 - EXHIBIT 27(C)
5 1,000 6-MOS Dec-31-1997 Jun-30-1997 391,700 0 2,670,700 130,300 329,200 3,687,300 22,445,000 11,533,900 17,039,500 3,039,300 2,918,800 11,800 0 1,091,300 7,751,900 17,039,500 0 7,246,000 0 4,474,600 0 0 85,500 900,200 354,300 545,900 0 0 0 545,900 1.27 1.25
EX-27 11 RESTATED FDS 3/31/97 - EXHIBIT 27(D)
5 1,000 3-MOS Dec-31-1997 Mar-31-1997 1,060,200 0 2,685,000 128,900 325,000 4,298,500 21,870,300 11,256,000 16,955,000 3,157,100 2,931,700 11,800 0 1,091,300 7,618,400 16,955,000 0 3,578,500 0 2,205,800 0 0 44,800 485,200 195,200 290,000 0 0 0 290,000 .67 .67
EX-27 12 RESTATED FDS 12/31/96 - EXHIBIT 27(E)
5 1,000 YEAR Dec-31-1996 Dec-31-1996 1,150,600 0 2,461,000 117,400 305,300 4,232,900 21,410,800 10,946,700 16,826,400 3,194,300 2,974,800 11,800 0 1,091,300 7,428,600 16,826,400 0 13,887,500 0 8,503,900 0 0 196,700 1,911,900 721,000 1,190,900 (2,600) (4,500) 0 1,183,800 2.80 2.77
EX-27 13 RESTATED FDS 9/30/96 - EXHIBIT 27(F)
5 1,000 9-MOS Dec-31-1996 Sep-30-1996 1,582,000 0 2,505,300 123,200 278,100 4,658,900 20,996,100 11,028,000 16,743,200 3,194,300 3,047,400 13,200 0 1,091,300 7,295,900 16,743,200 0 10,309,100 0 6,309,900 0 0 145,200 1,524,500 579,600 944,900 (2,600) (3,800) 0 938,500 2.24 2.21
EX-27 14 RESTATED FDS 6/30/96 - EXHIBIT 27(G)
5 1,000 6-MOS Dec-31-1996 Jun-30-1996 1,756,600 0 2,421,200 123,400 266,200 4,646,300 20,567,300 10,771,200 16,456,500 2,988,100 3,159,000 14,100 0 1,091,300 7,125,600 16,456,500 0 6,806,600 0 4,166,900 0 0 97,200 1,014,700 386,000 628,700 (2,600) 0 0 626,100 1.52 1.50
EX-27 15 RESTATED FDS 3/31/96 - EXHIBIT 27(H)
5 1,000 3-MOS Dec-31-1996 Mar-31-1996 1,718,200 0 2,232,900 117,500 273,800 4,538,600 20,109,900 10,430,000 16,127,600 3,246,700 3,178,000 14,100 0 875,900 6,736,000 16,127,600 0 3,335,300 0 2,033,200 0 0 47,700 506,300 194,100 312,200 (2,900) 0 0 309,300 .78 .77
EX-27 16 RESTATED FDS 12/31/95 - EXHIBIT 27(I)
5 1,000 YEAR Dec-31-1995 Dec-31-1995 124,200 0 1,536,400 125,800 244,400 3,506,300 19,915,900 10,200,100 15,074,300 5,029,000 3,244,500 32,500 0 872,900 3,769,700 15,074,300 0 12,735,300 0 7,971,300 0 0 260,700 1,480,400 534,300 946,100 14,500 (565,300) 0 395,300 1.13 1.12
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