- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-K/A
Amendment No. 1
to Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the fiscal year ended
DECEMBER 31, 1997
------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
COMCAST CORPORATION
[GRAPHIC OMITTED - LOGO]
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1709202
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1500 Market Street, Philadelphia, PA 19102-2148
(Address of principal executive offices) (Zip Code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The undersigned registrant hereby amends the following exhibits of its 1997
Annual Report on Form 10-K as set forth herein:
ITEM 14 AND EXHIBIT INDEX.
The list of exhibits set forth in the Exhibit Index, is amended to include the
following additional exhibits, filed herewith:
23.1(b) Consent of Deloitte & Touche LLP.
99.2 Consolidated financial statements of Sprint Spectrum
Holdings Company, L.P. and subsidiaries for each of the
three years in the period ended December 31, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Comcast Corporation
By: /s/ Lawrence S. Smith
----------------------------
Lawrence S. Smith
Executive Vice President
(Principal Accounting Officer)
March 11, 1998
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Comcast Corporation and its subsidiaries on Forms S-3 and S-8 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 ended December 31, 1997 appearing
in the Annual Report on Form 10-K of Comcast Corporation and its subsidiaries
for the year ended December 31, 1997.
Title of Securities Registered Registration Registration
Statement Form Statement Number
The Comcast Corporation Retirement Investment Plan S-8 33-41440
The Comcast Corporation Retirement Investment Plan S-8 33-63223
Storer Communications Retirement Savings Plan S-8 33-54365
Stock Option Plans S-8 33-25105
Stock Option Plans S-8 33-56903
The 1996 Comcast Corporation Stock Option Plan S-8 333-08577
The 1996 Comcast Corporation Deferred Compensation Plan S-8 333-18715
Senior Debentures; Senior Subordinated Debentures; S-3 33-50785
Subordinated Debentures; Preferred Stock, without par
value; Depository Shares representing Preferred Stock;
Class A Common Stock, $1.00 par value; Class A Special
Common Stock, $1.00 par value and Warrants
Class A Special Common Stock, par value $1.00 per share S-3 333-06161
/s/ Deloitte & Touche LLP
Kansas City, Missouri
March 9, 1998
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
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. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements 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.
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.
/s/ Deloitte & Touche LLP
February 3, 1998
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
2
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
3
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
4
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.
* 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
5
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.
6
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.
7
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.
8
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.
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
9
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.
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.
10
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.
11
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.
12
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 .
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
12 1/2% 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
13
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).
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.
14
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.
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
15
$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.
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%.
16
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.
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.
17
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
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
18
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.
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.
19
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.
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%
20
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
onlyupon 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.
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.
21
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.
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.
22
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.
23
