-----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, MN1ZWGrQM11QFfpWzuPiYWvnGuPLt5K9g4sZ11+kRfXIuIly+pQwdgVZgmrNhjr7 3jpmOh/M1P8jSaW2GuW58g== 0000101830-01-500025.txt : 20010815 0000101830-01-500025.hdr.sgml : 20010815 ACCESSION NUMBER: 0000101830-01-500025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04721 FILM NUMBER: 1710413 BUSINESS ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY CITY: WESTWOOD STATE: KS ZIP: 66205 BUSINESS PHONE: 9136243000 MAIL ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY CITY: WESTWOOD STATE: KS ZIP: 66205 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TELECOMMUNICATIONS INC DATE OF NAME CHANGE: 19920316 FORMER COMPANY: FORMER CONFORMED NAME: UNITED UTILITIES INC DATE OF NAME CHANGE: 19731011 10-Q 1 spr2q01.txt SPRINT CORPORATION 2Q01 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ------------------------- Commission file number 1-04721 --------------------------------------------------------- SPRINT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) KANSAS 48-0457967 - ----------------------------------------- ------------------------------ (State or other jurisdiction of (IRS Employer 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 ---------------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file these reports), and (2) has been subject to these filing requirements for the past 90 days. Yes X No ----------- ------- COMMON SHARES OUTSTANDING AT JULY 31, 2001: FON COMMON STOCK 887,125,136 PCS COMMON STOCK 938,240,379 CLASS A COMMON STOCK 86,236,036
TABLE OF CONTENTS Page Reference Part I - Financial Information Item 1. Financial Statements Consolidated Financial Statements (including Consolidating Information) Consolidated Statements of Operations 1 Consolidated Statements of Comprehensive Income (Loss) 5 Consolidated Balance Sheets 9 Consolidated Statements of Cash Flows 13 Consolidated Statement of Shareholders' Equity 15 Condensed Notes to Consolidated Financial Statements 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 38 Part II - Other Information Item 1. Legal Proceedings 39 Item 2. Changes in Securities 39 Item 3. Defaults Upon Senior Securities 39 Item 4. Submission of Matters to a Vote of Security Holders 40 Item 5. Other Information 41 Item 6. Exhibits and Reports on Form 8-K 41 Signature 43 Exhibits (12) Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends (99) Supplementary Information (a) Annex I - FON Group Combined Financial Information (b) Annex II - PCS Group Combined Financial Information
Part I. Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation ------------------------------- ------------------------------- (millions) Consolidated - --------------------------------------------- --- ------------- -- -------------- -- ------------------------------- - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended June 30, 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 6,420 $ 5,821 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 3,096 2,859 Selling, general and administrative 1,730 1,646 Depreciation 1,047 856 Amortization 116 151 Merger related costs - 187 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 5,989 5,699 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income (Loss) 431 122 Interest expense (310) (230) Other income (expense), net (22) 13 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income (Loss) before income taxes 99 (95) Income tax benefit (expense) (56) 4 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income (Loss) 43 (91) Preferred stock dividends (paid) received (2) (1) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Earnings (Loss) applicable to common stock $ 41 $ (92) -- ------------- --- ------------- Diluted Earnings (Loss) per Common Share - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Diluted weighted average common shares Basic Earnings (Loss) per Common Share - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Basic weighted average common shares DIVIDENDS PER COMMON SHARE See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ---------------------------------- ---------------------------------- - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ (154) $ (101) $ 4,310 $ 4,446 $ 2,264 $ 1,476 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (154) (101) 2,089 2,023 1,161 937 - - 1,118 1,118 612 528 - - 609 534 438 322 - - 6 17 110 134 - - - 163 - 24 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (154) (101) 3,822 3,855 2,321 1,945 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 488 591 (57) (469) 6 5 (16) (11) (300) (224) (6) (5) (1) 27 (15) (9) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 471 607 (372) (702) - - (181) (242) 125 246 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 290 365 (247) (456) - - 1 2 (3) (3) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 291 $ 367 $ (250) $ (459) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 0.33 $ 0.41 $ (0.26) $ (0.48) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 887.5 895.8 980.0 962.8 --- ------------- -- ------------- -- ------------- --- ------------- $ 0.33 $ 0.42 $ (0.26) $ (0.48) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 886.3 879.5 980.0 962.8 --- ------------- -- ------------- -- ------------- --- ------------- $ 0.125 $ 0.125 $ - $ - --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) (Unaudited) Sprint Corporation ------------------------------- ------------------------------- (millions) Consolidated - --------------------------------------------- --- ------------- -- -------------- -- ------------------------------- - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Year-to-Date June 30, 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 12,700 $ 11,350 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 6,206 5,606 Selling, general and administrative 3,529 3,306 Depreciation 2,028 1,673 Amortization 256 300 Merger related costs - 187 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 12,019 11,072 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income (Loss) 681 278 Interest expense (617) (484) Other income (expense), net (42) 41 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income (Loss) from continuing operations before income taxes 22 (165) Income tax benefit (expense) (56) 9 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income (Loss) from Continuing Operations (34) (156) Discontinued operation, net - 675 Extraordinary items, net (1) (3) Cumulative effect of changes in accounting principles, net 2 (2) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income (Loss) (33) 514 Preferred stock dividends (paid) received (4) (3) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Earnings (Loss) applicable to common stock $ (37) $ 511 -- ------------- --- ------------- Diluted Earnings (Loss) per Common Share Continuing operations Discontinued operation - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total Diluted weighted average common shares Basic Earnings (Loss) per Common Share Continuing operations Discontinued operation - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total Basic weighted average common shares DIVIDENDS PER COMMON SHARE See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ---------------------------------- ---------------------------------- - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ (283) $ (196) $ 8,668 $ 8,850 $ 4,315 $ 2,696 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (283) (196) 4,194 3,971 2,295 1,831 - - 2,253 2,271 1,276 1,035 - - 1,189 1,062 839 611 - - 12 34 244 266 - - - 163 - 24 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (283) (196) 7,648 7,501 4,654 3,767 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 1,020 1,349 (339) (1,071) 11 10 (43) (50) (585) (444) (11) (10) 4 34 (35) 17 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 981 1,333 (959) (1,498) - - (375) (523) 319 532 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 606 810 (640) (966) - - - 675 - - - - (1) - - (3) - - - (2) 2 - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 605 1,483 (638) (969) - - 3 4 (7) (7) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 608 $ 1,487 $ (645) $ (976) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 0.68 $ 0.91 $ (0.66) $ (1.02) - 0.75 - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 0.68 $ 1.66 $ (0.66) $ (1.02) --- ------------- -- ------------- -- ------------- --- ------------- 887.6 895.2 979.0 959.5 --- ------------- -- ------------- -- ------------- --- ------------- $ 0.69 $ 0.92 $ (0.66) $ (1.02) - 0.77 - - - ----- ------------- --- ------------- --- ------------- -- ------------- --- -- ------------- --- ------------- $ 0.69 $ 1.69 $ (0.66) $ (1.02) --- ------------- -- ------------- -- ------------- --- ------------- 885.8 877.5 979.0 959.5 --- ------------- -- ------------- -- ------------- --- ------------- $ 0.25 $ 0.25 $ - $ - --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Sprint Corporation ------------------------------- ------------------------------- (millions) Consolidated ------------------------------- - --------------------------------------------- ----------------- ----------------- -- ------------- --- ------------- Quarters Ended June 30, 2001 2000 - --------------------------------------------- ----------------- ----------------- -- ------------- --- ------------- Net Income (Loss) $ 43 $ (91) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income (Loss) Unrealized holding gains (losses) on securities 22 (33) Income tax benefit (expense) (8) 12 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding gains (losses) on securities 14 (21) Foreign currency translation adjustments (8) 3 - ------------------------------------------------- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income (loss) 6 (18) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Income (Loss) $ 49 $ (109) -- ------------- --- ------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ------------------------------- -- ---------------------------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 290 $ 365 $ (247) $ (456) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (3) 2 25 (35) - - 1 - (9) 12 - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (2) 2 16 (23) - - - - (7) - (1) 3 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (2) 2 9 (23) (1) 3 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ (2) $ 2 $ 299 $ 342 $ (248) $ (453) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (continued) (Unaudited) Sprint Corporation ------------------------------- ------------------------------- (millions) Consolidated ------------------------------- - --------------------------------------------- ----------------- ----------------- -- ------------- --- ------------- Year-to-Date June 30, 2001 2000 - --------------------------------------------- ----------------- ----------------- -- ------------- --- ------------- Net Income (Loss) $ (33) $ 514 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income (Loss) Unrealized holding gains (losses) on securities 28 (33) Income tax benefit (expense) (10) 12 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding gains (losses) on securities during the period 18 (21) Reclassification adjustment for gains included in net income - (32) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total net unrealized holding gains (losses) on securities 18 (53) Net unrealized losses on qualifying cash flow hedges (6) - Cumulative effect of change in accounting principle (9) - Foreign currency translation adjustments (12) 3 - ------------------------------------------------- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income (loss) (9) (50) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Income (Loss) $ (42) $ 464 -- ------------- --- ------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ------------------------------- -- ---------------------------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 605 $ 1,483 $ (638) $ (969) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 4 3 24 (39) - 3 (1) (1) (9) 14 - (1) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 3 2 15 (25) - 2 - - - (32) - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 3 2 15 (57) - 2 - - (6) - - - - - (9) - - - - - (11) - (1) 3 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 3 2 (11) (57) (1) 5 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 3 $ 2 $ 594 $ 1,426 $ (639) $ (964) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS Sprint Corporation ----------------------------------- ----------------------------------- (millions) Consolidated - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 176 $ 239 Accounts receivable, net of consolidated allowance for doubtful accounts of $417 and $389 4,064 4,028 Inventories 961 949 Prepaid expenses 441 366 Current tax benefit receivable from the FON Group - - Receivables from the PCS Group - - Other 309 391 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 5,951 5,973 Property, plant and equipment FON Group 33,358 30,998 PCS Group 13,563 12,117 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 46,921 43,115 Accumulated depreciation (19,337) (17,799) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 27,584 25,316 Investments in and advances to affiliates 390 607 Intangible assets Goodwill 5,427 5,425 PCS licenses 3,059 3,059 PCS customer base 746 747 PCS microwave relocation costs 400 411 Other intangibles 435 430 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 10,067 10,072 Accumulated amortization (1,386) (1,134) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 8,681 8,938 Other assets 1,978 1,767 - ------------------------------------------------------------------------------------------------------------------------- Total $ 44,584 $ 42,601 ----------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ----------------------------------- ----------------------------------- June 30, December 31, June 30, December 31, June 30, December 31, 2001 2000 2001 2000 2001 2000 - ------------------------------------- ----------------------------------- ----------------------------------- (Unaudited) (Unaudited) (Unaudited) $ - $ - $ 40 $ 122 $ 136 $ 117 - - 2,966 3,126 1,098 902 - - 420 434 541 515 - - 303 276 138 90 - (26) - - - 26 (150) (361) 150 361 - - - (2) 183 193 126 200 - ---------------------------------------- ------------------------------- ----------------------------------- (150) (389) 4,062 4,512 2,039 1,850 - - 33,358 30,998 - - - - - - 13,563 12,117 - ------------------------------------- ----------------------------------- ----------------------------------- - - 33,358 30,998 13,563 12,117 (45) (39) (16,117) (15,165) (3,175) (2,595) - ------------------------------------- ----------------------------------- ----------------------------------- (45) (39) 17,241 15,833 10,388 9,522 (405) (383) 636 842 159 148 - - 879 877 4,548 4,548 - - - - 3,059 3,059 - - - - 746 747 - - - - 400 411 - - 389 384 46 46 - ------------------------------------- ----------------------------------- ----------------------------------- - - 1,268 1,261 8,799 8,811 - - (69) (57) (1,317) (1,077) - ------------------------------------- ----------------------------------- ----------------------------------- - - 1,199 1,204 7,482 7,734 - - 1,461 1,258 517 509 - ------------------------------------- ----------------------------------- ----------------------------------- $ (600) $ (811) $ 24,599 $ 23,649 $ 20,585 $ 19,763 - ------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued) Sprint Corporation ----------------------------------- ----------------------------------- (millions, except per share data) Consolidated - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Liabilities and Shareholders' Equity Current liabilities Short-term borrowings including current maturities of long-term debt $ 5,278 $ 1,205 Accounts payable 1,547 2,285 Construction obligations 881 997 Accrued interconnection costs 559 547 Accrued taxes 494 440 Advance billings 666 607 Payroll and employee benefits 461 498 Accrued interest 287 255 Payables to the FON Group - - Other 1,176 1,134 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 11,349 7,968 Long-term debt and capital lease obligations 16,214 17,514 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,409 1,360 Postretirement and other benefit obligations 1,083 1,077 Other 711 710 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 3,203 3,147 Redeemable preferred stock 256 256 Shareholders' equity Common stock Class A common stock, par value $0.50 and $2.50 per share, 200.0 shares authorized, 86.2 shares issued and outstanding 43 216 FON, par value $2.00 per share, 4,200.0 shares authorized, 886.6 and 798.8 shares issued and 886.6 and 798.4 shares outstanding 1,773 1,598 PCS, par value $1.00 per share, 4,600.0 and 2,350.0 shares authorized, 937.4 and 933.1 shares issued and outstanding 937 933 Capital in excess of par or stated value 9,483 9,380 Retained earnings 1,314 1,578 Treasury stock, at cost, 0.0 and 0.4 shares - (10) Accumulated other comprehensive income 12 21 Combined attributed net assets - - - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 13,562 13,716 - ------------------------------------------------------------------------------------------------------------------------- Total $ 44,584 $ 42,601 ----------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------ ----------------------------------- ----------------------------------- June 30, December 31, June 30, December 31, June 30, December 31, 2001 2000 2001 2000 2001 2000 - ------------------------------------ ----------------------------------- ----------------------------------- (Unaudited) (Unaudited) (Unaudited) $ (69) $ (65) $ 2,351 $ 1,026 $ 2,996 $ 244 - - 1,067 1,598 480 687 - - - - 881 997 - - 559 547 - - - (27) 272 264 222 203 - - 471 462 195 145 - - 386 377 75 121 - - 92 136 195 119 (81) (296) - - 81 296 (45) (40) 595 594 626 580 - ------------------------------------ ----------------------------------- ----------------------------------- (195) (428) 5,793 5,004 5,751 3,392 (111) (104) 3,262 3,482 13,063 14,136 (5) (6) 1,401 1,276 13 90 - - 1,083 1,077 - - - - 419 457 292 253 - ------------------------------------ ----------------------------------- ----------------------------------- (5) (6) 2,903 2,810 305 343 (280) (280) 10 10 526 526 43 216 - - - - 1,773 1,598 - - - - 937 933 - - - - 9,483 9,380 - - - - 1,314 1,578 - - - - - (10) - - - - 12 21 - - - - (13,571) (13,709) 12,631 12,343 940 1,366 - ------------------------------------ ----------------------------------- ----------------------------------- (9) 7 - - - - - ------------------------------------ ----------------------------------- ----------------------------------- $ (600) $ (811) $ 24,599 $ 23,649 $ 20,585 $ 19,763 - ------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (millions) Sprint Corporation ---------------------------------- ---------------------------------- Consolidated - ------------------------------------------------------------------ ----------------- ---------------------------------- - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Year-to-Date June 30, 2001 2000 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net income (loss) $ (33) $ 514 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Discontinued operation, net - (675) Equity in net losses of affiliates 89 61 Depreciation and amortization 2,284 1,973 Deferred income taxes and investment tax credits 44 104 Changes in assets and liabilities: Accounts receivable, net (36) (232) Inventories and other current assets (76) 440 Accounts payable and other current liabilities (589) (294) Current tax benefit receivable from the FON Group - - Affiliate receivables and payables, net - - Noncurrent assets and liabilities, net (34) 100 Other, net (27) (82) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by operating activities 1,622 1,909 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (4,314) (3,186) Investments in and loans to affiliates, net (49) (849) Proceeds from sales of assets 58 217 Other, net 33 3 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by continuing operations (4,272) (3,815) Proceeds from sale of investment in Global One - 1,403 - ------------------------------------------------------------------------------------ --- ------------- -- ------------- Net cash used by investing activities (4,272) (2,412) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from debt 4,647 1,558 Payments on debt (1,879) (1,050) Proceeds from common stock issued 13 203 Dividends paid (226) (221) Other, net 32 92 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by financing activities 2,587 582 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents (63) 79 Cash and Equivalents at Beginning of Period 239 120 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 176 $ 199 --- ------------- -- ------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 605 $ 1,483 $ (638) $ (969) - - - (675) - - - - 42 47 47 14 - - 1,201 1,096 1,083 877 - - 140 336 (96) (232) - - 160 (130) (196) (102) (2) 411 (21) 44 (53) (15) 28 (118) (466) (209) (151) 33 (26) (293) - - 26 293 - - 221 (357) (221) 357 - - (71) 56 37 44 - - (35) (76) 8 (6) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 1,776 1,615 (154) 294 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - (2,602) (1,751) (1,712) (1,435) - - (32) (649) (17) (200) - - 15 51 43 166 - - 33 1 - 2 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - (2,586) (2,348) (1,686) (1,467) - - - 1,403 - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - (2,586) (945) (1,686) (1,467) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 1,324 150 3,323 1,408 - - (226) (669) (1,653) (381) - - 5 137 8 66 - - (219) (214) (7) (7) - - (156) (64) 188 156 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 728 (660) 1,859 1,242 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - (82) 10 19 69 - - 122 104 117 16 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 40 $ 114 $ 136 $ 85 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation - ---------------------------------------------------------------------------------------------------------------------- (millions) - ---------------------------------------------------------------------------------------------------------------------- Year-to-Date June 30, 2001 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Capital Class A FON PCS In Excess Common Common Common of Par or Retained Treasury Stock Stock Stock Stated Earnings Stock Other Total Value - ---------------------------------------------------------------------------------------------------------------------- Beginning 2001 balance $ 216 $ 1,598 $ 933 $ 9,380 $ 1,578 $ (10) $ 21 $ 13,716 Net loss - - - - (33) - - (33) FON common stock dividends - - - - (211) - - (211) Class A common stock dividends - - - - (11) - - (11) PCS preferred stock dividends - - - - (3) - - (3) Conversion of FON common stock underlying Class A common stock (172) 172 - - - - - - FON Series 1 common stock issued - 3 - 28 - - - 31 PCS Series 1 common stock issued - - 4 62 - - - 66 Treasury stock issued - - - - (2) 10 - 8 Tax benefit from stock compensation - - - 11 - - - 11 Other, net (1) - - 2 (4) - (9) (12) - ---------------------------------------------------------------------------------------------------------------------- June 2001 balance $ 43 $ 1,773 $ 937 $ 9,483 $ 1,314 $ - $ 12 $ 13,562 -------------------------------------------------------------------------------------- Shares Outstanding - ------------------------------------------------------------------ Beginning 2001 balance 86.2 798.4 933.1 Conversion of FON common stock underlying Class A common stock - 86.2 - FON Series 1 common stock issued - 1.6 - PCS Series 1 common stock issued - - 4.3 Treasury stock issued - 0.4 - ------------------------------- June 2001 balance 86.2 886.6 937.4 ------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
PART I. Item 1. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Sprint Corporation - -------------------------------------------------------------------------------- The information in this Form 10-Q has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the consolidated interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present Sprint Corporation's consolidated financial position, results of operations, cash flows and comprehensive income (loss). Certain information and footnote disclosures normally included in consolidated financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 2000 Form 10-K/A. Operating results for the 2001 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- 1. Basis of Consolidation and Presentation - -------------------------------------------------------------------------------- The consolidated financial statements include the accounts of Sprint, its wholly owned subsidiaries and subsidiaries it controls. Investments in entities in which Sprint exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). FON common stock and PCS common stock are intended to reflect the performance of the FON and PCS groups. However, they are classes of common stock of Sprint, not of the group they are intended to track. Accordingly, the PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division, and the product distribution and directory publishing businesses. Investors in FON and PCS common stock are shareholders of Sprint and are subject to the risks related to an equity investment in Sprint and all of Sprint's businesses, assets and liabilities. The assets and liabilities allocated by Sprint's Board of Directors to the groups remain assets and liabilities of Sprint Corporation and are therefore subject to the claims of Sprint's creditors generally. In the event of the liquidation or winding up of Sprint Corporation, assets of Sprint remaining for distribution to Sprint's common shareholders will be distributed to holders of FON and PCS common stock based on the liquidation value of such shares as provided in Sprint's articles of incorporation, which may differ from the Board's allocation of assets and liabilities among the groups. The Board of Directors of Sprint may, subject to the restrictions in Sprint's articles of incorporation, change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The consolidated financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or shareholders' equity as previously reported. Allocations Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each group. Cost allocation methods other than time studies include factors (general, marketing or headcount) derived from the operating unit's relative share of the predefined category referenced (e.g. headcount). Sprint believes that the costs allocated are comparable to the costs that would be incurred if the groups would have been operating on a stand-alone basis. Allocated costs totaled approximately $129 million and $157 million in the 2001 and 2000 second quarters and $270 and $317 million in the 2001 and 2000 year-to-date periods, respectively. The percentage of these costs allocated to the PCS Group were approximately 20% and 15% in the 2001 and 2000 second quarters and 20% and 13% in the 2001 and 2000 year-to-date periods, respectively, with the balance remaining in the FON Group. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Group Financing Financing activities for the groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the groups is specifically allocated to and reflected in the financial statements of the applicable group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense and totaled $73 million and $58 million in the 2001 and 2000 second quarters and $137 million and $116 million in the 2001 and 2000 year-to-date periods, respectively. Under Sprint's centralized cash management program, one group may advance funds to the other group. These advances are accounted for as short-term borrowings between the groups and bear interest at a market rate that is substantially equal to the rate that group would be able to obtain from third parties on a short-term basis. The allocation of group financing activities may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to continue to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. - -------------------------------------------------------------------------------- 2. Investments - -------------------------------------------------------------------------------- At the end of June 2001, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance operation in Brazil, the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico, and other strategic investments. In 2000, investments accounted for using the equity method also included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long-distance provider in Canada. Combined, unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows:
Quarters Ended Year-to-Date June 30, June 30, --- ------------------------------- -- ------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) Results of operations Net operating revenues $ 122 $ 563 $ 350 $ 1,044 --- ------------- -- -------------- -- ------------- --- ------------- Operating loss $ (118) $ (107) $ (286) $ (167) --- ------------- -- -------------- -- ------------- --- ------------- Net loss $ (99) $ (225) $ (308) $ (362) --- ------------- -- -------------- -- ------------- --- ------------- Equity in net losses of affiliates $ (28) $ (36) $ (73) $ (61) --- ------------- -- -------------- -- ------------- --- -------------
- -------------------------------------------------------------------------------- 3. Income Taxes - -------------------------------------------------------------------------------- The differences that caused Sprint's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Year-to-Date June 30, ----------------------- 2001 2000 - --------------------------------------------------------- (millions) Income tax expense (benefit) at the federal statutory rate $ 8 $ (58) Effect of: State income taxes, net of federal income tax effect 11 6 Equity in losses of foreign joint ventures 18 23 Goodwill amortization 24 24 Other, net (5) (4) - --------------------------------------------------------- Income tax expense (benefit) $ 56 $ (9) ----------------------- - -------------------------------------------------------------------------------- 4. Accounting for Derivative Instruments - -------------------------------------------------------------------------------- Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement became effective for Sprint on January 1, 2001 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management 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's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating rate debt to a fixed rate. In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transactions and are not designated as hedging instruments. Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Forward contracts, which function as natural hedges, are used to offset the impact of foreign currency fluctuations in these payments. Derivative Accounting under the Standard The derivative instruments Sprint holds are interest rate swaps, stock warrants and foreign currency forward contracts. The interest rate swaps meet all the required criteria of SFAS No. 133 for the assumption of perfect effectiveness resulting in no recognition of changes in their fair value in earnings upon adoption or during the life of the swaps. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Forward contracts held during the period are not designated as hedges and, accordingly, not affected by the adoption of SFAS No. 133. Upon adoption of SFAS No. 133, Sprint recorded a cumulative adjustment to net income of $2 million (net of tax of $1 million) and a cumulative reduction in other comprehensive income of $9 million. The $2 million cumulative adjustment was due to changes in the fair value of the stock warrants that are not designated as hedging instruments and is recorded in "Cumulative effect of changes in accounting principles, net" in Sprint's Consolidated Statements of Operations. The reduction in other comprehensive income results from a decrease in fair value of cash flow hedges resulting from interest rate fluctuations. The decrease is recorded in "Net unrealized losses on qualifying cash flow hedges" in Sprint's Consolidated Statements of Comprehensive Income (Loss). The net derivative losses included in other comprehensive income as of January 1, 2001 are not expected to be reclassified into earnings within the next 12-month period because Sprint intends to hold the qualifying cash flow hedges until maturity in 2002. Sprint recorded a net derivative loss in earnings of $0.1 million (net of tax benefit of $0.1 million) for the 2001 second quarter and a net derivative gain in earnings of $0.4 million (net of tax of $0.2 million) for the year-to-date period due to changes in the fair value of the stock warrants that are not designated as hedging instruments. The net derivative gain and loss are included in Other income (expense), net on the Consolidated Statements of Operations. Sprint recorded a $6 million reduction in other comprehensive income in the 2001 year-to-date period resulting from losses on cash flow hedges. There was not a material fluctuation in valuation of the cash flow hedges during the 2001 second quarter. - -------------------------------------------------------------------------------- 5. Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of June 2001, short-term borrowings exceeded the long-term portions of those unused credit facilities. Accordingly, the amount of commercial paper borrowings and other bank notes reclassified to long-term debt was limited to $2.1 billion. Conversely, $2 billion of commercial paper borrowings remained in current liabilities. In February 2001, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss. In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2 billion of unissued securities under its existing shelf registration statement with the SEC, and registered an additional $400 million prior to the issuance. These borrowings have interest rates ranging from 7.1% to 7.6% and have scheduled maturities in 2006 and 2011. The proceeds were used mainly to repay existing debt. - -------------------------------------------------------------------------------- 6. Conversion of FON Common Stock Underlying Class A Common Stock - -------------------------------------------------------------------------------- On June 4, 2001, Sprint completed a registered secondary offering on behalf of France Telecom (FT) and Deutsche Telekom AG (DT) in which they sold 174.8 million shares of FON common stock (including 22.8 million shares to cover over-allotments), which represented an approximate 10% voting interest in Sprint. Sprint did not receive any proceeds from this offering. The 86.2 million shares of FON common stock underlying Class A common stock and 88.6 million shares of Series 3 FON common stock were converted into Series 1 FON common stock upon the sale. After this conversion, a Class A common stock share represents the right to 1/2 share of PCS common stock. - -------------------------------------------------------------------------------- 7. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to Sprint's consolidated financial statements. - -------------------------------------------------------------------------------- 8. Segment Information - -------------------------------------------------------------------------------- Sprint is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses and the PCS wireless telephony products and services business, also known as the PCS Group. Sprint manages its segments to the operating income (loss) level of reporting. Items below operating income (loss) are held at a corporate level and only attributed to the group level. The reconciliation from operating income to net income is shown on the face of the Consolidated Statements of Operations in the consolidating information. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value.
Segment financial information was as follows: - ---------------------------------------------------------------------------------------------------------------- Product Global Distribution Corporate Quarters Ended Markets Local & Directory PCS and June 30, Division Division Publishing Group Eliminations(1) Consolidated - ---------------------------------------------------------------------------------------------------------------- (millions) 2001 Net operating revenues $ 2,563 $ 1,552 $ 474 $ 2,264 $ (433) $ 6,420 Affiliated revenues 153 67 200 13 (433) - Operating income (loss) (47) 466 79 (57) (10) 431 2000 Net operating revenues $ 2,687 $ 1,523 $ 471 $ 1,476 $ (336) $ 5,821 Affiliated revenues 105 44 174 13 (336) - Operating income (loss) 240 456 68 (469) (173) 122 - ----------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------- Product Global Distribution Corporate Year-to-Date Markets Local & Directory PCS and June 30, Division Division Publishing Group Eliminations(1) Consolidated - ---------------------------------------------------------------------------------------------------------------- (millions) 2001 Net operating revenues $ 5,130 $ 3,105 $ 968 $ 4,315 $ (818) $ 12,700 Affiliated revenues 283 123 388 24 (818) - Operating income (loss) (22) 904 157 (339) (19) 681 2000 Net operating revenues $ 5,314 $ 3,052 $ 932 $ 2,696 $ (644) $ 11,350 Affiliated revenues 200 93 334 17 (644) - Operating income (loss) 505 889 135 (1,071) (180) 278 - ---------------------------------------------------------------------------------------------------------------- (1) Revenues eliminated in consolidation consist principally of local access charged to the global markets division, equipment purchases from the product distribution business, interexchange services provided to the local division, long-distance services provided to the PCS Group for resale to PCS customers and for internal business use, Caller ID services provided by the local division to the PCS Group and access to the PCS network. In the 2000 second quarter, corporate operating loss includes a $163 million charge for the FON Group costs associated with the terminated WorldCom merger. The PCS Group operating loss includes a $24 million charge for merger termination costs.
Net operating revenues by product and services were as follows: - --------------------------------------------------------------------------------------------------------------------- Product Global Distribution Quarters Ended Markets Local & Directory PCS June 30, Division Division Publishing Group Eliminations(1) Consolidated - --------------------------------------------------------------------------------------------------------------------- (millions) 2001 Voice $ 1,708 $ - $ - $ - $ (153) $ 1,555 Data 513 - - - - 513 Internet 262 - - - - 262 Local service - 735 - - (1) 734 Network access - 509 - - (52) 457 Long distance - 177 - - - 177 Product distribution - - 334 - (200) 134 Directory publishing - - 140 - - 140 Wireless services - - - 2,264 (13) 2,251 Other 80 131 - - (14) 197 ------------------------------------------------------------------------------- Total net operating revenues $ 2,563 $ 1,552 $ 474 $ 2,264 $ (433) $ 6,420 ------------------------------------------------------------------------------- 2000 Voice $ 1,795 $ - $ - $ - $ (105) $ 1,690 Data 485 - - - - 485 Internet 235 - - - - 235 Local service - 705 - - - 705 Network access - 500 - - (32) 468 Long distance - 178 - - - 178 Product distribution - - 367 - (175) 192 Directory publishing - - 104 - - 104 Wireless services - - - 1,476 (13) 1,463 Other 172 140 - - (11) 301 ------------------------------------------------------------------------------- Total net operating revenues $ 2,687 $ 1,523 $ 471 $ 1,476 $ (336) $ 5,821 ------------------------------------------------------------------------------- (1) Revenues eliminated in consolidation consist principally of local access charged to the global markets division, equipment purchases from the product distribution business, interexchange services provided to the local division, long-distance services provided to the PCS Group for resale to PCS customers and for internal business use, Caller ID services provided by the local division to the PCS Group and access to the PCS network.
- --------------------------------------------------------------------------------------------------------------------- Product Global Distribution Year-to-Date Markets Local & Directory PCS June 30, Division Division Publishing Group Eliminations(1) Consolidated - --------------------------------------------------------------------------------------------------------------------- (millions) 2001 Voice $ 3,444 $ - $ - $ - $ (283) $ 3,161 Data 1,015 - - - - 1,015 Internet 511 - - - - 511 Local service - 1,467 - - (2) 1,465 Network access - 1,014 - - (95) 919 Long distance - 363 - - - 363 Product distribution - - 693 - (388) 305 Directory publishing - - 275 - - 275 Wireless services - - - 4,315 (24) 4,291 Other 160 261 - - (26) 395 ------------------------------------------------------------------------------- Total net operating revenues $ 5,130 $ 3,105 $ 968 $ 4,315 $ (818) $ 12,700 ------------------------------------------------------------------------------- 2000 Voice $ 3,575 $ - $ - $ - $ (200) $ 3,375 Data 959 - - - - 959 Internet 453 - - - - 453 Local service - 1,401 - - (1) 1,400 Network access - 1,011 - - (62) 949 Long distance - 349 - - - 349 Product distribution - - 722 - (334) 388 Directory publishing - - 210 - - 210 Wireless services - - - 2,696 (17) 2,679 Other 327 291 - - (30) 588 ------------------------------------------------------------------------------- Total net operating revenues $ 5,314 $ 3,052 $ 932 $ 2,696 $ (644) $ 11,350 ------------------------------------------------------------------------------- (1) Revenues eliminated in consolidation consist principally of local access charged to the global markets division, equipment purchases from the product distribution business, interexchange services provided to the local division, long-distance services provided to the PCS Group for resale to PCS customers and for internal business use, Caller ID services provided by the local division to the PCS Group and access to the PCS network.
- -------------------------------------------------------------------------------- 9. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- Sprint's cash paid (received) for interest and income taxes was as follows: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 562 $ 478 ------------------------- Income taxes $ 2 $ (415) ------------------------- Sprint's noncash activities included the following: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 93 $ 102 ------------------------- Tax benefit from stock compensation $ 11 $ 285 ------------------------- Stock received for stock options exercised $ - $ 44 ------------------------- Debt redeemed with investments in equity securities $ - $ 275 ------------------------- - -------------------------------------------------------------------------------- 10. Discontinued Operation - -------------------------------------------------------------------------------- In the 2000 first quarter, Sprint sold its interest in Global One to FT and DT. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, Sprint's gain on the sale has been reported as a discontinued operation. Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million in the first quarter of 2000. - -------------------------------------------------------------------------------- 11. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187 million for costs associated with the terminated merger. - -------------------------------------------------------------------------------- 12. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 supercedes the Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and Statement No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises." This statement requires accounting for all business combinations using the purchase method and changes the criteria for recognizing intangible assets apart from goodwill. This statement is effective for all business combinations initiated after June 30, 2001. Statement No. 142 supercedes APB Opinion No. 17, "Intangible Assets," and addresses how purchased intangibles should be accounted for upon acquisition. The statement proscribes the necessary accounting for both identifiable intangibles and goodwill after initial recognition. Amortization of goodwill will cease upon adoption of this statement and periodic impairment testing of all intangibles will be required. Sprint is currently assessing the impact of this standard and expects to complete that assessment by year-end 2001. This statement is effective for fiscal years beginning after December 15, 2001. - -------------------------------------------------------------------------------- 13. Subsequent Events - -------------------------------------------------------------------------------- In July 2001, Sprint's Board of Directors declared a dividend of 12.5 cents per share on the Sprint FON common stock. Dividends will be paid September 28, 2001. In August 2001, Sprint issued 20.4 million shares of PCS common stock and received net proceeds of $488 million. Sprint also issued $1.7 billion of equity units yielding 7.125%, which consist of a 3-year forward purchase agreement to purchase PCS common stock and a 5-year senior note. Along with these transactions, DT sold 49.6 million shares of PCS common stock, including PCS shares underlying the Class A common stock. DT received the related proceeds from the sale of its stock. Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Corporation - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: o the effects of vigorous competition in the markets in which Sprint operates; o the costs and business risks associated with providing new services and entering new markets necessary to provide nationwide or global services; o the ability of the PCS Group to continue to grow a significant market presence; o the effects of mergers and consolidations within the telecommunications industry; o the uncertainties related to Sprint's strategic investments; o the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; o unexpected results of litigation filed against Sprint; o the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes including the impact of the Telecommunications Act of 1996, or other external factors over which Sprint has no control; and o other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- Sprint is a global communications company and a leader in integrating long-distance, local service and wireless communications. Sprint is also one of the largest carriers of Internet traffic using its tier one Internet protocol network, which provides connectivity to any point on the Internet either through its own network or via direct connections with another backbone provider. Sprint is the nation's third-largest provider of long distance services and operates nationwide, all-digital long distance and tier one Internet protocol networks using fiber-optic and electronic technology. In addition, Sprint's local division currently serves approximately 8.3 million access lines in 18 states. Sprint also operates the only 100% digital personal communications service, or PCS, wireless network in the United States with licenses to provide service nationwide using a single frequency band and a single technology. Sprint owns PCS licenses to provide service to the entire United States population, including Puerto Rico and the U.S. Virgin Islands. In November 1998, Sprint's shareholders approved the allocation of all of Sprint's assets and liabilities into two groups, the FON Group and the PCS Group, as well as the creation of the FON common stock and the PCS common stock. At the same time, Sprint reclassified each share of its publicly traded common stock into one share of FON common stock and 1/2 share of PCS common stock. Operating Segments Sprint's business is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses and the PCS wireless telephony products and services business. The FON Group includes the global markets division, the local division and the product distribution and directory publishing businesses, and the PCS Group includes the PCS wireless telephony products and services business. The PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division and the product distribution and directory publishing businesses. For financial information relating to Sprint's segments, see Note 8 of Sprint's Condensed Notes to Consolidated Financial Statements. Board Discretion Regarding Tracking Stocks Sprint's Board of Directors has the discretion to, among other things, make operating and financial decisions that could favor one group over the other and, subject to the restrictions in Sprint's articles of incorporation, to change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Under the applicable corporate law, Sprint's Board owes its fiduciary duties to all of Sprint's shareholders and there is no board of directors that owes separate duties to the holders of either the FON common stock or the PCS common stock. The Tracking Stock Policies, adopted by Sprint's Board, provide that the Board, in resolving material matters in which the holders of FON common stock and PCS common stock have potentially divergent interests, will act in the best interests of Sprint and all of its common shareholders after giving fair consideration to the potentially divergent interests of the holders of the separate classes of Sprint common stock. These policies may be changed by the Board without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The FON Group and PCS Group are part of Sprint and, as a result, separate financial statements for the groups are not required. Sprint has, however, included as Annex I and Annex II to this Form 10-Q additional financial information relating to each group to help investors assess the financial performance of the tracked businesses. - -------------------------------------------------------------------------------- General Overview of the Sprint FON Group - -------------------------------------------------------------------------------- Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; Internet; data communications such as frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(R). Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). Digital Subscriber Line technology enables high-speed transmission of data over existing copper telephone lines between the customer and the service provider, and MMDS is a fixed wireless network that distributes signals through microwave from a single transmission point to multiple receiving points. Sprint is currently reevaluating its high-speed integrated communications strategy. This reevaluation may impact the valuation of certain assets and other resources deployed in pursuit of this strategy, as well as service plans offered by the company. Sprint anticipates this valuation analysis will be concluded this year. The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies. During 2000 and 2001, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed data services. Global markets division's operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. - -------------------------------------------------------------------------------- General Overview of the Sprint PCS Group - -------------------------------------------------------------------------------- The PCS Group includes Sprint's PCS wireless telephony products and services business. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency band and a single technology. The PCS Group has licenses to provide service to the entire United States population including Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including affiliates, now reaches nearly 239 million people. The PCS Group provides nationwide service through: o operating its own digital network in major U.S. metropolitan areas, o affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, o roaming on other providers' analog cellular networks using dual-band/dual-mode handsets, and o roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS Group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of customer acquisition and service. The wireless industry, including the PCS Group, typically generates a higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions. - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Consolidated Total net operating revenues were as follows:
Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) FON Group $ 4,310 $ 4,446 $ 8,668 $ 8,850 PCS Group 2,264 1,476 4,315 2,696 Intergroup eliminations (154) (101) (283) (196) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net operating revenues $ 6,420 $ 5,821 $ 12,700 $ 11,350 --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues increased 10% in the 2001 second quarter and 12% in the 2001 year-to-date period compared to the same 2000 periods mainly reflecting growth in the PCS Group.
Income (Loss) from continuing operations was as follows: Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) FON Group $ 290 $ 365 $ 606 $ 810 PCS Group (247) (456) (640) (966) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income (Loss) from continuing operations $ 43 $ (91) $ (34) $ (156) --- ------------- -- -------------- -- ------------- --- -------------
In the 2001 first quarter, loss from continuing operations includes a nonrecurring gain of $9 million from investment activities. In the 2000 first quarter, loss from continuing operations includes net nonrecurring gains of $17 million from investment activities as well as an $18 million nonrecurring gain from the sale of network infrastructure and the right to manage customers to a PCS affiliate. Additionally, the 2000 second quarter includes a $121 million charge for costs associated with the terminated WorldCom merger and a $27 million nonrecurring gain from the sale of an independent directory publishing operation. Excluding nonrecurring items, income (loss) from continuing operations was $(43) million in the 2001 year-to-date period, $3 million in the 2000 second quarter and $(97) million in the 2000 year-to-date period. - -------------------------------------------------------------------------------- Segmental Results of Operations - --------------------------------------------------------------------------------
Global Markets Division Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Voice $ 1,708 $ 1,795 $ (87) (4.8)% Data 513 485 28 5.8% Internet 262 235 27 11.5% Other 80 172 (92) (53.5)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total net operating revenues 2,563 2,687 (124) (4.6)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,528 1,417 111 7.8% Selling, general and administrative 748 763 (15) (2.0)% Depreciation and amortization 334 267 67 25.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,610 2,447 163 6.7% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income (loss) $ (47) $ 240 $ (287) NM -- ------------- -- -------------- -- ------------- Operating margin NM 8.9% -- ------------- -- --------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Voice $ 3,444 $ 3,575 $ (131) (3.7)% Data 1,015 959 56 5.8% Internet 511 453 58 12.8% Other 160 327 (167) (51.1)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total net operating revenues 5,130 5,314 (184) (3.5)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 3,017 2,739 278 10.1% Selling, general and administrative 1,499 1,538 (39) (2.5)% Depreciation and amortization 636 532 104 19.5% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 5,152 4,809 343 7.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income (loss) $ (22) $ 505 $ (527) NM -- ------------- -- -------------- -- ------------- Operating margin NM 9.5% -- ------------- -- -------------- NM = Not meaningful
Net Operating Revenues Net operating revenues decreased 5% in the 2001 second quarter and 3% in the 2001 year-to-date period from the same 2000 periods. Minute growth was 18% in the 2001 second quarter and 20% in the 2001 year-to-date period compared to the same 2000 periods. The calling volume growth, driven in part by the increase in wholesale minutes sold to the PCS Group, was more than offset by a highly competitive pricing environment. The decreases in net operating revenues reflect cable capacity sales in the 2000 second quarter and year-to-date period with no corresponding capacity sales in the same 2001 periods. These decreases also reflect a decline in network management services, professional services and legacy data services, partly offset by growth in Internet communications and data services revenues. Revenue and operating income growth will likely continue to be impacted by pricing pressures and increased spending to support the growth of Internet Protocol services. Voice Revenues Voice revenues decreased 5% in the 2001 second quarter and 4% in the 2001 year-to-date period from the same 2000 periods due to a decline in consumer and business voice revenues resulting from a more competitive pricing environment. Consumer voice revenues were also impacted by lower calling card usage partly offset by increased prepaid and international services. The decline in business voice revenues mainly reflects decreased inbound and outbound toll-free calls. Data Revenues Data revenues increased 6% in the 2001 second quarter and year-to-date period from the same 2000 periods due to increased sales in current-generation data services, including asynchronous transfer mode and frame relay services, largely offset by a decline in network management services. Internet Revenues Internet revenues increased 11% in the 2001 second quarter and 13% in the 2001 year-to-date period from the same 2000 periods due to strong growth in dedicated service revenues partly offset by a slight decline in dial-up Internet service provider-related revenues. Other Revenues Other revenues decreased 53% in the 2001 second quarter and 51% in the 2001 year-to-date period from the same 2000 periods. The decreases reflect cable capacity sales in the 2000 second quarter and year-to-date period with no corresponding cable capacity sales in the same 2001 periods. The decreases also reflect a decline in professional services and legacy data services. Costs of Services and Products Costs of services and products include interconnection costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers, costs to operate and maintain the long distance network and the Internet protocol network, costs of equipment and transmission capacity sales, and costs related to the development and deployment of Sprint ION. These costs increased 8% in the 2001 second quarter and 10% in the 2001 year-to-date period from the same 2000 periods. Interconnection costs increased 15% in the 2001 second quarter and 16% in the 2001 year-to-date period from the same 2000 periods due to increased calling volumes. All other costs of services and products decreased 3% in the 2001 second quarter and remained flat in the 2001 year-to-date period compared to the same 2000 periods due to decreases in costs related to sales of transoceanic cable in 2000 with no corresponding sales in 2001. These decreases were largely offset by increased network costs of the long distance operation and costs associated with Sprint ION. Total costs of services and products for global markets were 59.6% of net operating revenues in the 2001 second quarter and 58.8% in the 2001 year-to-date period compared to 52.7% and 51.5% for the same periods a year ago. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense decreased 2% in the 2001 second quarter and 3% in the 2001 year-to-date period from the same 2000 periods due to a reduction in advertising and promotion costs in both the consumer and business markets and a strong emphasis on cost control, partly offset by increased marketing and promotions of Internet services and an increase in bad debt expense related to wholesale customers. SG&A expense was 29.2% of net operating revenues in the 2001 second quarter and year-to-date periods compared to 28.4% and 29.0% for the same periods a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 25% in the 2001 second quarter and 20% in the 2001 year-to-date period from the same periods a year ago due to an increased asset base to enhance network reliability and meet increased demand for voice and data-related services as well as an increasing asset base for growth of Internet Protocol services and other growth initiatives. Depreciation and amortization expense was 13.0% of net operating revenues in the 2001 second quarter and 12.4% in the 2001 year-to-date period compared to 9.9% and 10.0% for the same periods a year ago.
Local Division Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Local service $ 735 $ 705 $ 30 4.3% Network access 509 500 9 1.8% Long distance 177 178 (1) (0.6)% Other 131 140 (9) (6.4)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total net operating revenues 1,552 1,523 29 1.9% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 484 471 13 2.8% Selling, general and administrative 327 313 14 4.5% Depreciation and amortization 275 283 (8) (2.8)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 1,086 1,067 19 1.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 466 $ 456 $ 10 2.2% --- ------------- -- -------------- -- ------------- Operating margin 30.0% 29.9% --- ------------- -- --------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Local service $ 1,467 $ 1,401 $ 66 4.7% Network access 1,014 1,011 3 0.3% Long distance 363 349 14 4.0% Other 261 291 (30) (10.3)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total net operating revenues 3,105 3,052 53 1.7% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 980 951 29 3.0% Selling, general and administrative 665 650 15 2.3% Depreciation and amortization 556 562 (6) (1.1)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 2,201 2,163 38 1.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 904 $ 889 $ 15 1.7% --- ------------- -- -------------- -- ------------- Operating margin 29.1% 29.1% --- ------------- -- --------------
Net Operating Revenues At the beginning of the 2000 third quarter, Sprint changed its transfer pricing for certain transactions between FON Group entities. The main effect of this change was a reduction in the local division's "Net Operating Revenues - Other Revenues." In addition, Sprint's local division transferred a customer service and telemarketing organization to the PCS Group at the beginning of the 2000 second quarter. For comparative purposes, the following discussion of local division results assumes the transfer pricing change and the transfer of the customer service and telemarketing organization occurred at the beginning of 2000. Adjusting for the transfer pricing change and this transfer, operating margin would have been 29.3% for the 2000 second quarter and 28.7% for the 2000 year-to-date period. Net operating revenues increased 3% in the 2001 second quarter and year-to-date periods from the same 2000 periods. These increases mainly reflect increased special access service revenues and increased sales of network-based services such as Caller ID and Call Waiting. Sales of network-based services increased due to strong demand for bundled services which combine local service, network-based features and long distance calling. The local division ended the 2001 second quarter with approximately 8.3 million switched access lines, a 1% increase during the past 12 months. Access line growth was impacted by a slower economy, increases in subscriber line prices and wireless, cable and DSL substitution. On a voice-grade equivalent basis, which includes both traditional switched services and high capacity lines, access lines grew 17% during the past 12 months. This growth reflects many business customers switching from individual lines to high capacity dedicated circuits. Local Service Revenues Local service revenues, derived from local exchange services, grew 4% in the 2001 second quarter and 5% in the 2001 year-to-date period from the same 2000 periods because of continued demand for network-based services, as well as increased equipment maintenance and private line revenues. Network Access Revenues Network access revenues, derived from long distance phone companies using the local network to complete calls, increased 2% in the 2001 second quarter and remained flat in the 2001 year-to-date period compared to the same 2000 periods. Strong growth in special access services in the 2001 second quarter and year-to-date periods was largely offset by a 3% decline in minutes of use and FCC-mandated access rate reductions which took effect in July 2000. Long Distance Revenues Long distance revenues are mainly derived from providing consumer long distance services to customers within Sprint's local franchise territories and other long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues decreased 1% in the 2001 second quarter and increased 4% in the 2001 year-to-date period from the same 2000 periods. In the 2001 year-to-date period, sales of consumer long distance services increased reflecting the success of bundled services, but were largely offset by a decline in intra-LATA long distance services. In the 2001 second quarter, increased sales of consumer long distance service were more than offset by a decline in intra-LATA long distance services. Other Revenues Other revenues increased 3% in the 2001 second quarter and 7% in the 2001 year-to-date period from the same 2000 periods mainly because of an increase in collocation revenues. Equipment sales were flat in the 2001 second quarter and increased 3% in the 2001 year-to-date period compared to the same 2000 periods. Costs of Services and Products Costs of services and products include costs to operate and maintain the local network and costs of equipment sales. These costs increased 3% in the 2001 second quarter and 5% in the 2001 year-to-date period compared to the same 2000 periods due to increased reciprocal compensation costs resulting from calling traffic exchanged with wireless and competitive local exchange carriers, increased access costs associated with consumer long distance revenues and increased costs of equipment sales. Costs of services and products were 31.2% of net operating revenues in the 2001 second quarter and 31.6% in the 2001 year-to-date period compared to 31.2% for the same periods a year ago. Selling, General and Administrative Expense SG&A expense increased 4% in the 2001 second quarter and 3% in the 2001 year-to-date period compared to the same 2000 periods mainly due to an increase in bad debt expense related to retail and wholesale customer accounts. SG&A expense was 21.1% of net operating revenues in the 2001 second quarter and 21.4% in the 2001 year-to-date period compared to 20.7% and 21.4% for the same periods a year ago. Depreciation and Amortization Expense Depreciation and amortization expense decreased 3% in the 2001 second quarter and 1% in the 2001 year-to-date period compared to the same 2000 periods reflecting an increase to the depreciable lives for certain assets partly offset by higher property balances. Depreciation and amortization expense was 17.7% of net operating revenues in the 2001 second quarter and 17.9% in the 2001 year-to-date period compared to 18.8% and 18.7% for the same periods a year ago.
Product Distribution and Directory Publishing Businesses Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 474 $ 471 $ 3 0.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 344 359 (15) (4.2)% Selling, general and administrative 46 40 6 15.0% Depreciation and amortization 5 4 1 25.0% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 395 403 (8) (2.0)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 79 $ 68 $ 11 16.2% --- ------------- -- -------------- -- ------------- Operating margin 16.7% 14.4% --- ------------- -- --------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 968 $ 932 $ 36 3.9% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 708 710 (2) (0.3)% Selling, general and administrative 94 79 15 19.0% Depreciation and amortization 9 8 1 12.5% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 811 797 14 1.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 157 $ 135 $ 22 16.3% --- ------------- -- -------------- -- ------------- Operating margin 16.2% 14.5% --- ------------- -- --------------
Net operating revenues increased 1% in the 2001 second quarter and 4% in the 2001 year-to-date period compared to the same 2000 periods. Nonaffiliated revenues accounted for approximately 60% of revenues in both the 2001 and 2000 second quarters and year-to-date periods. Nonaffiliated revenues decreased 8% in the 2001 second quarter and 3% in the 2001 year-to-date period compared to the same 2000 periods reflecting an industry slow down in capital spending, partly offset by increased revenues due to the consolidation of a directory publishing partnership. Beginning in the 2000 third quarter, the directory publishing partnership, previously accounted for as an equity method investment, was fully consolidated due to a restructuring in the partnership, which resulted in transfer of control to Sprint. Affiliated revenues increased 15% in the 2001 second quarter and 16% in the 2001 year-to-date period compared to the same 2000 periods reflecting a change in the mix of the local division's capital program to more network equipment and components. In the 2000 second quarter and year-to-date periods, affiliate sales were lower because the local division generally purchased electronics and software directly from manufacturers. Operating expenses decreased 2% in the 2001 second quarter and increased 2% in the 2001 year-to-date period compared to the same 2000 periods. The decrease in the 2001 second quarter reflects decreased costs of services and products due to a decline in equipment sales, partly offset by increased costs of services and products and SG&A expense due to the consolidation of the directory publishing partnership. The increase in the 2001 year-to-date period reflects an increase of SG&A expense due to the consolidation of the directory publishing partnership.
PCS Group Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 2,264 $ 1,476 $ 788 53.4% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,161 937 224 23.9% Selling, general and administrative 612 528 84 15.9% Depreciation and amortization 548 456 92 20.2% Merger related costs - 24 (24) (100.0)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,321 1,945 376 19.3% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (57) $ (469) $ 412 87.8% -- ------------- -- -------------- -- ------------- Operating income before depreciation and amortization and merger related costs $ 491 $ 11 $ 480 NM -- ------------- -- -------------- -- -------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 4,315 $ 2,696 $ 1,619 60.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 2,295 1,831 464 25.3% Selling, general and administrative 1,276 1,035 241 23.3% Depreciation and amortization 1,083 877 206 23.5% Merger related costs - 24 (24) (100.0)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 4,654 3,767 887 23.5% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (339) $ (1,071) $ 732 68.3% -- ------------- -- -------------- -- ------------- Operating income (loss) before depreciation and amortization and merger related costs $ 744 $ (170) $ 914 NM -- ------------- -- -------------- -- ------------- NM = Not meaningful
The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 23% of net operating revenues in the 2001 second quarter and year-to-date periods. These revenues were 24% of net operating revenues in the 2000 second quarter and year-to-date periods.
Net Operating Revenues Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Customers (millions) 11.2 7.4 11.2 7.4 --- ------------- -- -------------- -- ------------- --- ------------- Average monthly service revenue per user (ARPU) $ 61 $ 59 $ 60 $ 58 --- ------------- -- -------------- -- ------------- --- ------------- Customer churn rate 2.2% 2.6% 2.3% 2.7% --- ------------- -- -------------- -- ------------- --- -------------
The PCS Group's net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges, usage charges and activation fees. Subscriber revenues increased 63% in the 2001 second quarter and 69% in the 2001 year-to-date period from the same 2000 periods mainly reflecting an increase in the average number of customers and an increase in ARPU. In the second quarter of 2001, the PCS Group began reporting contract cancellation fees on a net basis, reducing reported ARPU by about $2 in the 2001 second quarter and reducing reported monthly cash costs per user (CCPU) by a corresponding amount. ARPU on a proforma restated basis would be $62 for the 2001 second quarter and $59 in the 2001 first quarter and year-to-date periods and the 2000 second quarter, and $58 in the 2000 year-to-date period. Before reporting contract cancellation fees on a net basis, ARPU was $63 for the 2001 second quarter and $61 in the year to date period, compared to $60 in the 2001 first quarter, $59 in the 2000 second quarter and $58 in the 2000 year-to-date period. The improvement in ARPU was mainly due to customers subscribing to higher usage service plans. The PCS Group added 843,000 customers in the 2001 second quarter ending the period with nearly 11.2 million customers compared to 7.4 million customers at the end of the 2000 second quarter. Although the companies that the PCS Group serves on a wholesale basis reported a decline of 11,000 customers for the quarter, wholesale revenues increased from the 2001 first quarter. The PCS Group affiliates added approximately 220,000 customers for the 2001 second quarter bringing the total number of customers added in the quarter by the PCS Group and its affiliates to nearly 1.1 million and over 12.8 million total customers served on the PCS network. In the 2001 second quarter, the customer churn rate improved reflecting expanded network coverage, increased percentage of customers under contract and the success of several customer retention initiatives. Revenues from sales of handsets and accessories were approximately 10% of net operating revenues in the 2001 second quarter and year-to-date period. These revenues as a percentage of net operating revenues were approximately 15% in the 2000 second quarter and year-to-date period. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost.
Operating Expenses Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Acquisition costs per gross customer addition (CPGA) $ 340 $ 350 $ 350 $ 370 --- ------------- -- -------------- -- ------------- --- ------------- Monthly cash costs per user $ 32 $ 35 $ 33 $ 36 --- ------------- -- -------------- -- ------------- --- -------------
The PCS Group's costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 24% in the 2001 second quarter and 25% in the 2001 year-to-date period from the same 2000 periods reflecting an increase in the average number of customers and expanded market coverage. SG&A expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 16% in the 2001 second quarter and 23% in the 2001 year-to-date period from the same 2000 periods reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. CPGA, including equipment subsidies and marketing costs, have improved approximately 3% in the 2001 second quarter and 6% in the 2001 year-to-date period from the same 2000 periods. Lower equipment and marketing and selling costs have contributed to the improvement. CCPU consists of costs of service revenues, service delivery and other general and administrative costs. Reporting contract cancellations fees on a net basis impacted 2001 second quarter reported CCPU by approximately $2. CCPU on a proforma restated basis would be $33 in both the first and second quarters of 2001 and $32 for the year-to-date period, compared to $35 for the 2000 second quarter and $36 for the 2000 year-to-date period. Before reporting these fees on a net basis, CCPU was $34 in the 2001 first and second quarters and in the year-to-date period, compared to $35 in the 2000 second quarter and $36 in the 2000 year-to-date period. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 20% in the 2001 second quarter and 23% in the 2001 year-to-date period from the same 2000 periods mainly reflecting depreciation of the network assets placed in service during 2001 and 2000. Additionally, depreciation of certain network assets was increased in the 2001 second quarter to reflect the accelerated replacement of the assets to accommodate network technology upgrades. In May 2001, a significant portion of the value assigned to acquired customer base became fully amortized which caused a $24 million decrease in 2001 amortization expense compared to 2000. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense Sprint's effective interest rate on long-term debt was 6.9% in the 2001 second quarter and year-to-date period, 6.8% in the 2000 second quarter and 6.9% in the 2000 year-to-date period. Interest costs on short-term borrowings classified as long-term debt, deferred compensation plans and customer deposits have been excluded so as not to distort the effective interest rate on long-term debt.
Other Income (Expense), Net Other income (expense) consisted of the following: Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) Dividend and interest income $ 8 $ 4 $ 17 $ 11 Equity in net losses of affiliates (28) (36) (73) (61) Net gains (losses) from investments (2) (3) (2) 23 Gains on sales of assets - 51 10 79 Other, net - (3) 6 (11) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total $ (22) $ 13 $ (42) $ 41 --- ------------- -- -------------- -- ------------- --- -------------
Dividend and interest income for both the 2001 and 2000 second quarter and year-to-date periods reflect dividends earned on cost method investments and interest earned on temporary investments. In the 2001 second quarter and year-to-date period, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance operation in Brazil, the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico, and other strategic investments. In the 2000 second quarter, investments accounted for using the equity method included the FON Group's investments in EarthLink, Inc., an Internet service provider, Call-Net, a long distance provider in Canada, and the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V. Net gains from investments in the 2000 year-to-date period mainly include a gain associated with equity securities used to retire debt instruments offset by net losses on miscellaneous investment activities. Gains on sales of assets in the 2000 second quarter and year-to-date period mainly include the sale of an independent directory publishing operation and the sale of PCS network infrastructure and the right to manage customers. Income Taxes See Note 3 of Condensed Notes to Consolidated Financial Statements for information about the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Discontinued Operation, Net In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, Sprint's gain on sale has been reported as a discontinued operation. Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million in the first quarter of 2000. Extraordinary Items, Net In the 2001 first quarter, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss. In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- Total consolidated assets were as follows: June 30, December 31, 2001 2000 - ----------------------------------------------------- (millions) FON Group $ 24,599 $ 23,649 PCS Group 20,585 19,763 Intergroup eliminations (600) (811) - ----------------------------------------------------- Consolidated assets $ 44,584 $ 42,601 -------------------------------- Sprint's consolidated assets increased $2 billion in the 2001 year-to-date period. Net property, plant and equipment increased $2.3 billion reflecting capital expenditures to support the PCS network build-out and expansion, the build-out of the Internet protocol network, long distance and local network enhancements, and Sprint ION development and hardware deployment, partly offset by depreciation and network asset sales. See "Liquidity and Capital Resources" for more information about changes in Sprint's Consolidated Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Sprint's Board of Directors has the power to make determinations that may impact the financial and liquidity position of each of the tracking stock groups. This power includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding the timing and amount of capital expenditures. The actions of the Board of Directors are subject to its fiduciary duties to all shareholders of Sprint, and not just to the holders of a particular class of common stock. Given the above, it may be difficult to assess each group's liquidity and capital resources and in turn the future prospects of each group based on past performance. Operating Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) FON Group $ 1,776 $ 1,615 PCS Group (154) 294 - ------------------------------------------------------ Cash flows provided by operating activities $ 1,622 $ 1,909 ------------------------------- In the 2001 year-to-date period, operating cash flows decreased $287 million from the same 2000 period. This was primarily driven by the PCS Group's increased working capital requirements partly offset by its improved operating results. The FON Group increased operating cash flows through decreased working capital requirements partly offset by a decline in operating results. Investing Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) FON Group $ (2,586) $ (945) PCS Group (1,686) (1,467) - ------------------------------------------------------ Cash flows used by investing activities $ (4,272) $ (2,412) ------------------------------- The FON Group's capital expenditures totaled $2.6 billion in the 2001 year-to-date period and $1.8 billion in the same 2000 period. Global markets division capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services, upgrade capabilities for providing new products and services and to continue development and hardware deployment of Sprint ION. The local division incurred capital expenditures to accommodate voice grade equivalent growth, expand capabilities for providing enhanced services and continue the build-out of high-speed DSL services. Other FON Group capital expenditures were incurred mainly for Sprint's World Headquarters Campus. PCS Group capital expenditures were $1.7 billion in the 2001 year-to-date period and $1.4 billion in the same 2000 period. Capital expenditures in both years were mainly for the continued buildout and expansion of the PCS network. In February 2000, Sprint received $1.4 billion from the sale of its interest in Global One. The proceeds were used to repay existing debt and fund the PCS Group's capital expenditures. "Investments in and loans to affiliates, net" consisted mainly of Sprint's investments in EarthLink, Intelig and Pegaso. Financing Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) FON Group $ 728 $ (660) PCS Group 1,859 1,242 - ------------------------------------------------------ Cash flows provided by financing activities $ 2,587 $ 582 ------------------------------- Financing activities mainly reflect net borrowings of $2.8 billion in the 2001 year-to-date period and $508 million in the 2000 year-to-date period. Sprint paid cash dividends of $226 million in the 2001 year-to-date period and $221 million in the 2000 year-to-date period. Additionally, Sprint received $203 million from the issuance of common stock in the 2000 year-to-date period. Capital Requirements Sprint's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be $9.7 to $10 billion. FON Group capital expenditures are expected to be $5.9 billion, and PCS Group capital expenditures are expected to be between $3.3 and $3.5 billion. Investments in affiliates are expected to be between $450 and $550 million. Dividend payments are expected to approximate $455 million in 2001. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group losses. The tax sharing agreement applies to tax years ending on or before December 31,2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to continue to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Liquidity In order to fund the capital requirements detailed in the previous section, about $5 billion of external funding is needed. In January 2001, Sprint issued $2.4 billion of debt securities. See Note 5 of Condensed Notes to Consolidated Financial Statements for more details on this issuance. Additionally, in August 2001, Sprint issued $488 million of PCS common stock and $1.7 billion of equity units yielding 7.125%, which consist of a 3-year forward purchase agreement to purchase PCS common stock and a 5-year senior note. Sprint is evaluating alternatives for the remaining funds needed. Any borrowings Sprint may incur are ultimately limited by certain debt covenants. Sprint could borrow up to an additional $6.7 billion at the end of June 2001 under the most restrictive of its debt covenants. - -------------------------------------------------------------------------------- Financial Strategies - -------------------------------------------------------------------------------- General Risk Management 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 principally for hedging purposes and comply with Board-approved policies. Senior management receives frequent status updates of all outstanding derivative positions. Interest Rate Risk Management Fair Value Hedges Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed-rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed-rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Cash Flow Hedges Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating-rate debt to a fixed-rate. Other Derivatives In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transaction and are not designated as hedging instruments. Foreign Exchange Risk Management Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. These international operations were not material to the consolidated financial position at June 30, 2001 or results of operations or cash flows for the quarter ended June 30, 2001. Sprint has not entered into any significant foreign currency forward contracts or other derivative instruments to reduce the effects of adverse fluctuations in foreign exchange rates. As a result, Sprint was not subject to material foreign exchange risk. PART I. Item 3 Item 3. Quantitative and Qualitative Disclosures about Market Risk The risk inherent in Sprint's market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. Sprint is susceptible to certain risks related to changes in interest rates and foreign currency exchange rate fluctuations. Sprint does not purchase or hold any derivative financial instruments for trading purposes. Interest Rate Risk The communications industry is a capital intensive, technology driven business. Sprint is subject to interest rate risk primarily associated with its borrowings. Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Approximately 63% of Sprint's debt at June 30, 2001 is fixed rate debt. While changes in interest rates impact the fair value of this debt, there is no impact to earnings and cash flows because Sprint intends to hold these obligations to maturity unless refinancing conditions are favorable. Sprint performs interest rate sensitivity analyses on its variable rate debt. These analyses indicate that a 75 basis point change in interest rates would have a $51 million pre-tax impact on the income statement and cash flows at June 30, 2001. While Sprint's variable rate debt is subject to earnings and cash flows impacts as interest rates change, it is not subject to changes in fair values. Sprint also prepared a value-at-risk analysis to assess the worst-case impact of past market movements on Sprint's 2001 long-term debt portfolio. Based on that analysis, which used average interest rates from 1980 to present, Sprint is 95% confident that the fair value of outstanding debt would not increase above Sprint's book value over the next six months. Foreign Currency Risk Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint uses foreign currency derivatives to hedge its net foreign currency payable related to settlement of international telecommunications access charges. The dollar equivalent of Sprint's net foreign currency payables was $7 million at June 30, 2001. The potential immediate pre-tax loss to Sprint that would result from a hypothetical 10% change in foreign currency exchange rates based on these positions would be approximately $1 million. PART II. Other Information PART II. - Other Information Item 1. Legal Proceedings There were no reportable events during the quarter ended June 30, 2001. Item 2. Changes in Securities At the Annual Meeting of Shareholders of Sprint held on April 17, 2001, the shareholders approved an amendment to Sprint's Articles of Incorporation to -increase the authorized shares of Series 1 PCS common stock from 1,250,000,000 shares to 3,000,000,000 shares, -increase the authorized shares of Series 2 PCS common stock from 500,000,000 shares to 1,000,000,000 shares, and -increase the total number of shares of authorized capital stock from 6,770,000,000 shares to 9,020,000,000 shares. The increase in authorized shares allows the Sprint Board to issue additional shares of Series 1 PCS common stock for corporate purposes which the Board deems advisable, such as financings, acquisitions and employee benefit plans, without further action by the shareholders, except as may be required in a specific case by Kansas law or by the New York Stock Exchange. At the Annual Meeting of Shareholders, the shareholders also approved an amendment to Sprint's Articles of Incorporation reducing the minimum number of directors to constitute the Board of Directors from ten to eight. On May 11, 2001, Sprint issued to employees options to purchase approximately 16.2 million shares of FON Stock and 13.1 million shares of PCS Stock as replacements for options to purchase the same number of shares that were cancelled in November 2000. The exercise price of the newly granted options for FON Stock is $21.925 per share and the exercise price of the options for PCS Stock is $24.585 per share. The exercise prices were based on the average of the high and low trading price per share of the respective stocks on the date the options were granted. The options vest at varying times. The issuance of options as replacements for cancelled options was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) of that Act. No commission or other remuneration was paid or given directly or indirectly to the employees in connection with the exchange. The shares issuable upon exercise of the options have been registered with the Securities and Exchange Commission. Item 3. Defaults Upon Senior Securities There were no reportable events during the quarter ended June 30, 2001. Item 4. Submission of Matters to a Vote of Security Holders On April 17, 2001, Sprint held its Annual Meeting of Shareholders. In addition to the election of three Class III Directors to serve a term of three years, the shareholders approved two amendments to Sprint's Articles of Incorporation, an amendment to the 1988 Employees Stock Purchase Plan, and the appointment of Ernst & Young LLP as independent auditors of Sprint for 2001. The shareholders did not approve two shareholder proposals. The following votes were cast for each of the following nominees for Director or were withheld with respect to such nominees:
For Withheld William T. Esrey 1,384,518,689 17,377,804 Linda Koch Lorimer 1,385,687,454 16,209,039 Stewart Turley 1,385,507,775 16,388,718
The following votes were cast with respect to the proposal to amend the Articles of Incorporation to reduce the minimum number of Directors required to eight: For 1,379,078,131 Against 15,289,452 Abstain 7,528,911 The following votes were cast with respect to the proposal to amend the Articles of Incorporation to increase the number of authorized shares of Series 1 PCS common stock, Series 2 PCS common stock and total authorized capital stock. Votes cast by all shareholders voting as a single class: For 1,187,065,754 Against 206,796,574 Abstain 8,034,165 Votes cast by the holders of Series 1 PCS common stock, Series 2 PCS common stock and Series 3 PCS common stock, voting as a class: For 764,523,462 Against 59,219,573 Abstain 3,570,807 Votes cast by the holders of Series 1 PCS common stock, Series 2 PCS common stock, Series 3 PCS common stock and Class A common stock, voting as a class: For 807,641,480 Against 59,219,573 Abstain 3,570,807 The following votes were cast with respect to the proposal to amend the 1988 Employees Stock Purchase Plan to increase the number of shares of Series 1 PCS common stock that may be issued under the plan: For 1,355,000,849 Against 38,445,527 Abstain 8,450,117 The following votes were cast with respect to the proposal to approve the appointment of Ernst & Young LLP as independent auditors of Sprint for 2001: For 1,382,717,756 Against 12,197,937 Abstain 6,980,800 The following votes were cast with respect to a shareholder proposal urging the Sprint Board to seek shareholder approval for future severance agreements with senior executives that provide benefits in an amount exceeding two times the sum of the executive's base salary and bonus: For 386,201,348 Against 738,593,077 Abstain 28,835,894 Broker non-votes 248,266,174 The following votes were cast with respect to a shareholder proposal urging the Sprint Board to adopt a policy that Sprint will not reprice, or terminate and regrant, to a lower exercise price any stock option granted to any employee or director of Sprint without the prior approval of the holders of a majority of Sprint's outstanding shares of common stock: For 528,791,583 Against 606,542,832 Abstain 18,295,904 Broker non-votes 248,266,173 Item 5. Other Information Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends Sprint's ratio of earnings to fixed charges was 1.19 in the 2001 second quarter and 1.03 in the 2001 year-to-date period. Sprint's ratio of earnings to combined fixed charges and preferred stock dividends was 1.18 in the 2001 second quarter and 1.02 in the 2001 year-to-date period. Sprint's earnings, as adjusted, were inadequate to cover fixed charges by $100 million in the 2000 second quarter and $172 million in the 2000 year-to-date period. Sprint's earnings, as adjusted, were inadequate to cover combined fixed charges and preferred stock dividends by $102 million in the 2000 second quarter and $177 million in the 2000 year-to-date period. The ratio of earnings to fixed charges was computed by dividing fixed charges into the sum of earnings, after certain adjustments, and fixed charges. The ratio of earnings to combined fixed charges and preferred stock dividends was computed by dividing the sum of fixed charges and the pre-tax cost of preferred stock dividends into the sum of earnings, after certain adjustments, and fixed charges. Earnings include loss from continuing operations before income taxes, plus equity in the net losses of less-than-50%-owned entities, less capitalized interest. Fixed charges include interest on all debt of continuing operations, including amortization of debt issuance costs, and the interest component of operating rents. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: (3) Articles of Incorporation and Bylaws: (a) Articles of Incorporation, as amended (filed as Exhibit 3.1 to Amendment No. 3 to Sprint Corporation's Registration Statement on Form 8-A registering Sprint's PCS Common Stock, filed April 18, 2001, and incorporated herein by reference). (b) Bylaws, as amended (filed as Exhibit 3(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference). (4) Instruments defining the Rights of Sprint's 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 November 23, 1998, between Sprint Corporation and UMB Bank, n.a. (filed as Exhibit 4.1 to Amendment No. 1 to Sprint Corporation's Registration Statement on Form 8-A relating to Sprint's PCS Group Rights, filed November 25, 1998, and incorporated herein by reference). (c) Amended and Restated Standstill Agreement dated November 23, 1998, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit 4E to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference), as amended by the Master Transfer Agreement dated January 21, 2000 between and among France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH, Atlas Telecommunications, S.A., Sprint Corporation, Sprint Global Venture, Inc. and the JV Entities set forth in Schedule II thereto (filed as Exhibit 2 to Sprint Corporation's Current Report on Form 8-K dated January 26, 2000 and incorporated herein by reference). (d) Tracking Stock Policies of Sprint Corporation (filed as Exhibit 4D to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference). (10) Executive Compensation Plans and Arrangements: (a) Amendment No. 1 to Special Compensation and Non-Compete Agreement between Sprint Corporation and one of its Executive Officers, amending a Special Compensation and Non-Compete Agreement filed as part of Exhibit 10(b) to Sprint Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, which Special Compensation and Non-Compete Agreement is incorporated herein by reference. (12) Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends (99) Supplemental Information (a) Annex I - Sprint FON Group Combined Financial Information (b) Annex II - Sprint PCS Group Combined Financial Information (b) Reports on Form 8-K Sprint filed a Current Report on Form 8-K dated April 17, 2001 in which it reported that it had announced first quarter 2001 results. The news release regarding first quarter 2001 results, which was included in the Current Report, included the following financial information: FON Group Combined Statements of Operations FON Group Selected Operating Results FON Group Condensed Combined Balance Sheets FON Group Condensed Combined Cash Flow Information PCS Group Combined Statements of Operations PCS Group Condensed Combined Balance Sheets PCS Group Condensed Combined Cash Flow Information PCS Group Net Customer Additions Sprint Corporation Consolidated Statements of Operations Sprint Corporation Condensed Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information Sprint filed a Current Report on Form 8-K dated May 15, 2001 in which it reported that it had announced revised performance expectations for the quarter ended June 30, 2001 and the year ended December 31, 2001 for its FON Group operations. Sprint filed a Current Report on Form 8-K dated July 19, 2001 in which it reported that it had announced second quarter 2001 results. The news release regarding second quarter 2001 results, which was included in the Current Report, included the following financial information: Sprint Corporation Consolidated Statements of Operations Sprint Corporation Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information Sprint Corporation Selected Operating Results Sprint Corporation PCS Group Net Customer Additions Sprint filed Current Reports on Form 8-K dated August 6, 2001 and August 8, 2001 to file with the Securities and Exchange Commission certain items to be incorporated by reference in Sprint's registration statement relating to the sale of PCS common stock and equity units. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPRINT CORPORATION ----------------------------------- (Registrant) By /s/ John P. Meyer ----------------------------------- John P. Meyer Senior Vice President -- Controller Principal Accounting Officer Dated: August 13, 2001 EX-10 3 spr2q01_exh10a.txt LAUER AGREEMENT Exhibit 10(a) AMENDMENT NO. 1 TO SPECIAL COMPENSATION AND NON-COMPETE AGREEMENT THIS AMENDMENT is entered into as of the 14th day of May, 2001 (the "New Grant Date"), by and between SPRINT CORPORATION, a Kansas corporation ("Sprint," and it, together with its Subsidiaries, the "Employer"), and Len Lauer ("Employee"). Recitals 1. Employer and Employee entered into a Special Compensation and Non-Compete Agreement, dated April 13, 1998 (the "Agreement" and as amended hereby, the "Amended Agreement"). 2. Employer has agreed to the grant of additional shares of restricted stock or stock options as set forth herein as further consideration to Employee for entering into the Agreement and this Amendment. 3. Employer and Employee agree to amend the Agreement in certain respects as set forth in this Amendment. Capitalized terms are defined in the Amended 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. Amendment to Agreement 1.01. Definition of Competitive Employment Employer and Employee hereby agree to the following definition of "Competitive Employment" to govern the Amended Agreement. "Competitive Employment" means the performance of duties or responsibilities, or the supervision of individuals performing such duties or responsibilities, for a Competitor of Employer (i) (A) that are of a similar nature or employ similar professional or technical skills (for example, executive, managerial, marketing, engineering, legal, etc.) to those employed by Employee in his performance of services for Employer at any time during the two years before the Severance Date, and (B) 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 1 (ii) in the performance of which Proprietary Information to which Employee had access at any time during the two-year period before the Severance Date could be of substantial economic value to the Competitor of Employer. 1.02. Definition of Competitor of Employer. Employer and Employee hereby agree to the following definition of "Competitor of Employer" to govern the Amended Agreement. 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 Amended Agreement. A Sprint Affiliate shall not be a Competitor of Employer. "Competitor of Employer" means any one or more of the following: (i) any Person doing business in the United States or any of its Divisions employing Employee if the Person or its Division receives at least 15% of its gross operating revenues from providing communications services of any type (for example, voice, data, including Internet, and video), employing any transmission medium (for example, wireline, wireless, or any other technology), over any distance (for example, local, long-distance, and distance insensitive services), using any protocol (for example, circuit-switched, or packet-based, such as Internet Protocol), or services or capabilities ancillary to such communications services (for example, web hosting and network security services); (ii) any Person doing business in the United States or its Division employing Employee if the Person or its Division receives at least 15% of its gross operating revenue from a line of business in which Employer receives at least 3% of its gross operating revenues; (iii) any Person doing business in the United States, or its Division employing Employee, operating for less than 5 years a line of business from which Employer derives at least 3% of its gross operating revenues, notwithstanding such Person's or Division's lack of substantial revenues in such line of business; or (iv) any Person doing business in the United States, or its Division employing Employee, if the Person or its Division receives at least 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. For purposes of the foregoing, gross operating revenues of Employer and such other Person shall be those of the Employer or such Person, together with their Consolidated Affiliates, but those of any Division employing or proposing to employ Employee shall be on a stand-alone basis, all measured by the most 2 recent available financial information of both Employer and such other Person or Division at the time Employee accepts, or proposes to accept, employment with or to otherwise perform services for such Person. If financial information is not publicly available or is inadequate for purposes of applying this definition, the burden shall be on the Employee to demonstrate that such Person is not a Competitor of Employer. 1.03. Definition of Change in Control Employer and Employee hereby agree to the following definition of "Change in Control" to govern the Amended Agreement. "Change in Control" means the occurrence of any of the following events: (i) the acquisition, directly or indirectly, by any "person" or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules thereunder, including, without limitation, Rule 13d-5(b)) of "beneficial ownership" (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities entitled to vote generally in the election of directors ("voting securities") of Sprint that represent 30% or more of the combined voting power of Sprint's then outstanding voting securities, other than (A) an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by Sprint or any person controlled by Sprint or by any employee benefit plan (or related trust) sponsored or maintained by Sprint or any person controlled by Sprint, or (B) an acquisition of voting securities by Sprint or a corporation owned, directly or indirectly, by the stockholders of Sprint in substantially the same proportions as their ownership of the stock of Sprint, or (C) an acquisition of voting securities pursuant to a transaction described in clause (iii) below that would not be a Change in Control under clause (iii); (ii) a change in the composition of the Board that causes less than a majority of the directors of Sprint to be directors that meet one or more of the following descriptions: (A) a director who has been a director of Sprint for a continuous period of at least 24 months, or (B) a director whose election or nomination as director was approved by a vote of at least 2/3's of the then directors described in clauses (ii)(A), (B), or (C) by prior nomination or election, but excluding, for the purpose of this subclause (B), any director whose initial assumption of office occurred as a result of an actual or threatened (y) election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on be-half of a person or group other than the Board or (z) tender offer, 3 merger, sale of substantially all of Sprint's assets, consolidation, reorganization, or business combination that would be a Change in Control under clause (iii) on consummation thereof, or (C) who were serving on the Board as a result of the consummation of a transaction described in clause (iii) that would not be a Change in Control under clause (iii); (iii) the consummation by Sprint (whether directly involving Sprint or indirectly involving Sprint through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of Sprint's assets or (z) the acquisition of assets or stock of another entity, in each case, other than in a transaction (A) that results in Sprint's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of Sprint or the person that, as a result of the transaction, controls, directly or indirectly, Sprint or owns, directly or indirectly, all or substantially all of Sprint's assets or otherwise succeeds to the business of Sprint (Sprint or such person, the "Successor Entity")) directly or indirectly, at least 50% of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and (B) after which more than 50% of the members of the board of directors of the Successor Entity were members of the Board at the time of the Board's approval of the agreement providing for the transaction or other action of the Board approving the transaction (or whose election or nomination was approved by a vote of at least 2/3's of the members who were members of the Board at that time), and (C) after which no person or group beneficially owns voting securities representing 30% or more of the combined voting power of the Successor Entity; provided, however, no person or group shall be treated for purposes of this clause (C) as beneficially owning 30% or more of combined voting power of the Successor Entity solely as a result of the voting power held in Sprint prior to the consummation of the transaction; or (iv) a liquidation or dissolution of Sprint. For purposes of clarification, (x) a change in the voting power of Sprint voting securities based on the relative trading values of Sprint's then outstanding securities as determined pursuant to Sprint's Articles of Incorporation or (y) an acquisition of Sprint securities by Sprint that, in either case, by itself (or in combination only with the other event listed in this sentence) causes the Sprint's voting securities beneficially owned by a person or group to represent 30% or more of the combined voting power of Sprint's then outstanding voting securities is not to be treated as an "acquisition" by any person or group for purposes 4 of clause (i) above. For purposes of clause (i) above, Sprint makes the calculation of voting power as if the date of the acquisition were a record date for a vote of Sprint's shareholders, and for purposes of clause (iii) above, Sprint makes the calculation of voting power as if the date of the consummation of the transaction were a record date for a vote of Sprint's shareholders. 1.04. Definition of Division Employer and Employee hereby agree to the following definition of "Division" to govern the Amended Agreement. "Division" means any distinct group or unit organized as a segment or portion of a Person that is devoted to the production, provision, or management of a common product or service or group of related products or services, regardless of whether the group is organized as a legally distinct entity. 1.05. Use of Restricted Stock The first sentence of Section 3.01(a) of the Agreement is amended to read as follows: Employee may not sell, transfer, assign, pledge, or otherwise encumber or dispose of shares of restricted stock or use those shares in payment of the exercise price of stock options until the restrictions on the shares lapse. 1.06. Notices Employee's and Employer's addresses for purposes of Notice under Section 7.06 of the Agreement are changed to the following: If to Employee: If to Employer: Len Lauer Sprint Corporation 2927 Verona Attn: Corporate Secretary Mission Hills, KS 66208 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 accordance with the Amended Agreement, or with respect to Employee, such address as Employee may provide Employer for purposes of its human resources database. 2. Alternative Stock-Based Awards As partial consideration for Employee's agreements hereunder, Employee shall be granted one of the two Stock-Based Awards, at the election of Employee, on the terms set forth in this section. Employee must indicate which of the two forms of compensation he elects to receive by checking the corresponding box above his signature line at the bottom of this Agreement. If Employee signs this 5 Agreement but checks neither box or both boxes, Employee shall be considered to have elected to receive restricted stock. 2.01. Alternative Award of Restricted Stock If Employee elects to receive Restricted Stock, this Section 2.01 shall be considered a part of this Agreement, otherwise it shall not be considered a part of this Agreement. Employer hereby grants to Employee, as of the New Grant Date an award of (a) 10,200 shares of restricted stock of Sprint's FON Common Stock, Series 1, and (b) 6,000 shares of restricted stock of Sprint's PCS Common Stock, Series 1, under Sprint's 1990 Restricted Stock Plan, the terms of which, to the extent not in conflict with this Agreement, are hereby incorporated into this Agreement by this reference. Notwithstanding the terms of the 1990 Restricted Stock Plan, the definition of a Change in Control set forth in this Agreement shall apply for all purposes. (a) Lapse of Restrictions Employee may not sell, transfer, assign, pledge, or otherwise encumber or dispose of shares of restricted stock or use those shares in payment of the exercise price of stock options until the restrictions on the shares lapse. Restrictions on the shares covered by this award shall lapse, with respect to 25% of the total shares granted, on each of the first four anniversary dates of the New Grant Date. (b) Rights as Stockholder and Issuance of Shares Except as set forth in the 1990 Restricted Stock Plan, Employee shall have all rights of a stockholder with respect to the shares of restricted 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 New Grant 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. 2.02. Alternative Award of Stock Options If Employee elects to receive Stock Options, this Section 2.02 shall be considered a part of this Agreement, otherwise it shall not be considered a part of this Agreement. Sprint hereby grants to Employee, under Sprint's 1990 Stock Option Plan, as of 6 the New Grant Date (a) an option to purchase 21,500 shares of Sprint's FON Stock, Series 1 and (b) an option to purchase 14,300 shares of Sprint's PCS Common Stock, Series 1, both at a strike price equal to the Fair Market Value of one share of the respective stock on the New Grant Date. The options shall become exercisable, with respect to 25% of the total shares granted, on each of the first four anniversaries of the New Grant Date. The options shall expire on the 10th anniversary of the New Grant Date. The terms of the 1990 Stock Option Plan, to the extent not in conflict with the terms of this Agreement, are hereby incorporated into this Agreement by reference. Notwithstanding the terms of the 1990 Stock Option Plan, the definition of a Change in Control set forth in this Agreement shall apply for all purposes. 2.03. Provisions Applicable to Awards of both Restricted Stock and Stock Options. (a) Acceleration of Stock-Based Awards. (1) Conditions to Acceleration. The restrictions on all shares of restricted stock that have not otherwise lapsed shall lapse or the stock options shall become immediately exercisable, as the case may be, if 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 (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. For purposes of the Stock-Based Awards, the definition of Change in Control set forth in this Agreement shall control, notwithstanding terms of the 1990 Restricted Stock Plan or the 1990 Stock Option Plan. (2) No Acceleration on Transfer of Employment to Affiliates. In no event shall the restrictions lapse on restricted stock nor the exercisability of stock options be accelerated as provided in the prior section upon Employee's ceasing employment with Employer to commence employment with an Affiliate of Sprint. (3) Section 280G Limits on Acceleration. If the acceleration of the vesting of restricted stock or the exercisability of the stock option award hereunder, together with all other payments or benefits contingent on a change in control within the meaning of Internal Revenue Code Section 280G or any successor pro-vision ("280G"), results in any portion of such payments or benefits to the Employee not being deductible by the Employer or its successor 7 as a result of the application of 280G, the Employee's benefits shall be reduced until the entire amount of the benefits is deductible. The reduction shall be effected by the exclusion of grants of options, restricted stock, or other benefits not deductible by Sprint under 280G in reverse chronological order of grant date from the application of this or other acceleration provision, until no portion of such benefits is rendered non- deductible by application of Code Section 280G. (b) Forfeiture of Stock-Based Award on Transfer to Affiliates and on Termination of Employment in Certain Circumstances. Employee shall not be entitled to sell or continue to own any unvested shares of restricted stock or exercise or continue to own any unexercisable stock options, as the case may be, if before such restricted shares vest or before such stock options become exercisable (i) Employee ceases employment with Employer and begins employment with an Affiliate of Employer, (ii) Employer terminates Employee's employment with Employer for any reason constituting Termination for Cause, or (iii) Employee terminates his employment with Employer for any reason other than Employee's Constructive Discharge. (c) Tax Withholding Employer may withhold the amount of any tax attributable to any amount payable or shares issuable under this Agreement. 3. Ratification of Agreement In all other respects, the parties confirm and ratify the terms of the Agreement. 8 IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and effective as of May 14, 2001. SPRINT CORPORATION by: /s/ I. Benjamin Watson I. Benjamin Watson, Senior Vice President-Human Resources /s/ Len J. Lauer Len Lauer, Employee EX-12 4 spr2q01_exh12.txt COMPUTATION OF EARNINGS TO FIXED CHARGES
EXHIBIT (12) COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND Sprint Corporation EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) Quarters Ended Year-to-Date June 30, June 30, ------------------------------- ------------------------------- ------------------------------- ------------------------------- 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------- (millions) Earnings Income (Loss) from continuing operations before income taxes $ 99 $ (95) $ 22 $ (165) Capitalized interest (44) (49) (88) (83) Equity in net losses of less than 50% owned entities 30 44 89 76 - -------------------------------------------------------------------------------------------------------------------- Subtotal 85 (100) 23 (172) - -------------------------------------------------------------------------------------------------------------------- Fixed charges Interest charges 354 279 705 567 Interest factor of operating rents 89 79 177 159 - -------------------------------------------------------------------------------------------------------------------- Total fixed charges 443 358 882 726 - -------------------------------------------------------------------------------------------------------------------- Earnings, as adjusted $ 528 $ 258 $ 905 $ 554 --------------------------------------------------------------- Ratio of earnings to fixed charges 1.19 -(1) 1.03(2) -(3) --------------------------------------------------------------- Total fixed charges $ 443 $ 358 $ 882 $ 726 Pre-tax cost of preferred stock dividends 3 2 6 5 - -------------------------------------------------------------------------------------------------------------------- Total fixed charges and preferred stock dividends $ 446 $ 360 $ 888 $ 731 --------------------------------------------------------------- Ratio of earnings to combined fixed charges and preferred stock dividends 1.18 -(1) 1.02(2) -(3) --------------------------------------------------------------- (1) Earnings, as adjusted, were inadequate to cover fixed charges by $100 million in the quarter ended June 30, 2000. Earnings, as adjusted, includes nonrecurring items of $187 million for costs associated with the proposed WorldCom merger, which was terminated, and a gain on the sale of an independent directory publishing operation of $45 million. Excluding these items, the ratio of earnings to fixed charges would have been 1.12 and the ratio of earnings to combined fixed charges and preferred stock dividends would have been 1.11. (2) Earnings, as adjusted, includes a nonrecurring gain of $14 million from investment activities in the first quarter of 2001. Excluding this gain, the ratio of earnings to fixed charges would have been 1.01 and the ratio of earnings to combined fixed charges and preferred stock dividends would have been 1.00. (3) Earnings, as adjusted, were inadequate to cover fixed charges by $172 million and inadequate to cover combined fixed charges and preferred stock dividends by $177 million in the year-to-date period ending June 30, 2000. Earnings, as adjusted, includes nonrecurring items in the first quarter of 2000 of a net gain from investment activities of $26 million and a nonrecurring gain of $28 million on the sale of network infrastructure and the right to manage customers to a PCS affiliate. Earnings, as adjusted, includes nonrecurring items in the second quarter of 2000 of $187 million for costs associated with the proposed WorldCom merger, which was terminated, and a gain on the sale of an independent directory publishing operation of $45 million. Excluding these items, earnings, as adjusted, would have been inadequate to cover fixed charges by $84 million and inadequate to cover combined fixed charges and preferred stock dividends by $89 million. Note:The ratios of earnings to fixed charges were computed by dividing fixed charges into the sum of earnings (after certain adjustments) and fixed charges. Earnings include income from continuing operations before taxes, plus equity in the net losses of less-than-50% owned entities, less capitalized interest. Fixed charges include interest on all debt of continuing operations, including amortization of debt issuance costs, and the interest component of operating rents. The ratios of earnings to fixed charges and preferred stock dividends were computed by dividing the sum of fixed charges and the pre-tax costs of preferred stock dividends into the sum of earnings (after certain adjustments) and fixed charges.
EX-99 5 spr2q01_exh99.txt ANNEX FINANCIAL STATEMENTS - FON GROUP & PCS GROUP Supplemental Information -- Annex I Sprint FON Group Combined Financial Information The FON Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the FON Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation.
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint FON Group (millions) (an integrated business of Sprint Corporation) - --------------------------------------------- --- ------------------------------- -- ------------------------------- Quarters Ended Year-to-Date June 30, June 30, - --------------------------------------------- --- ------------------------------- -- ------------------------------- - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 4,310 $ 4,446 $ 8,668 $ 8,850 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 2,089 2,023 4,194 3,971 Selling, general and administrative 1,118 1,118 2,253 2,271 Depreciation 609 534 1,189 1,062 Amortization 6 17 12 34 Merger related costs - 163 - 163 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 3,822 3,855 7,648 7,501 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income 488 591 1,020 1,349 Interest expense (16) (11) (43) (50) Other income (expense), net (1) 27 4 34 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income from continuing operations before income taxes 471 607 981 1,333 Income tax expense (181) (242) (375) (523) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income from Continuing Operations 290 365 606 810 Discontinued operation, net - - - 675 Extraordinary item, net - - (1) - Cumulative effect of change in accounting principle, net - - - (2) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income $ 290 $ 365 $ 605 $ 1,483 --- ------------- -- -------------- -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Sprint FON Group (millions) (an integrated business of Sprint Corporation) - --------------------------------------------- --- ------------------------------- -- ------------------------------- Quarters Ended Year-to-Date June 30 June 30, - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income $ 290 $ 365 $ 605 $ 1,483 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income (Loss) Unrealized holding gains (losses) on securities 25 (35) 24 (39) Income tax benefit (expense) (9) 12 (9) 14 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding gains (losses) on securities during the period 16 (23) 15 (25) Reclassification adjustment for gains included in net income - - - (32) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total net unrealized holding gains (losses) on securities 16 (23) 15 (57) Net unrealized losses on qualifying cash flow hedges - - (6) - Cumulative effect of change in accounting principle - - (9) - Foreign currency translation adjustments (7) - (11) - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income (loss) 9 (23) (11) (57) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Income $ 299 $ 342 $ 594 $ 1,426 --- ------------- -- -------------- -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED BALANCE SHEETS Sprint FON Group (millions) (an integrated business of Sprint Corporation) - ----------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 40 $ 122 Accounts receivable, net of allowance for doubtful accounts of $247 and $293 2,966 3,126 Inventories 420 434 Prepaid expenses 303 276 Receivables from the PCS Group 150 361 Other 183 193 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 4,062 4,512 Property, plant and equipment Global markets division 14,136 12,512 Local division 17,355 16,835 Other 1,867 1,651 - ----------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 33,358 30,998 Accumulated depreciation (16,117) (15,165) - ----------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 17,241 15,833 Investments in and advances to affiliates 636 842 Intangible assets Goodwill 879 877 Other 389 384 - ----------------------------------------------------------------------------------------------------------------------------- Total intangible assets 1,268 1,261 Accumulated amortization (69) (57) - ----------------------------------------------------------------------------------------------------------------------------- Net intangible assets 1,199 1,204 Other assets 1,461 1,258 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 24,599 $ 23,649 --------------------------------------- Liabilities and Combined Attributed Net Assets Current liabilities Short-term borrowings including current maturities of long-term debt $ 2,351 $ 1,026 Accounts payable 1,067 1,598 Accrued interconnection costs 559 547 Accrued taxes 272 264 Advance billings 471 462 Payroll and employee benefits 386 377 Other 687 730 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,793 5,004 Long-term debt and capital lease obligations 3,262 3,482 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,401 1,276 Postretirement and other benefit obligations 1,083 1,077 Other 419 457 - ----------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 2,903 2,810 Redeemable preferred stock 10 10 Combined attributed net assets 12,631 12,343 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 24,599 $ 23,649 --------------------------------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint FON Group (millions) (an integrated business of Sprint Corporation) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Year-to-Date June 30, 2001 2000 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net income $ 605 $ 1,483 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operation, net - (675) Equity in net losses of affiliates 42 47 Depreciation and amortization 1,201 1,096 Deferred income taxes and investment tax credits 140 336 Changes in assets and liabilities: Accounts receivable, net 160 (130) Inventories and other current assets (21) 44 Accounts payable and other current liabilities (466) (209) Affiliate receivables and payables, net 221 (357) Noncurrent assets and liabilities, net (71) 56 Other, net (35) (76) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by operating activities 1,776 1,615 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (2,602) (1,751) Investments in and loans to affiliates, net (32) (649) Proceeds from sales of other assets 15 51 Other, net 33 1 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by continuing operations (2,586) (2,348) Proceeds from sale of investment in Global One - 1,403 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (2,586) (945) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from debt 1,324 150 Payments on debt (226) (669) Proceeds from common stock issued 5 137 Dividends paid (219) (214) Other, net (156) (64) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by financing activities 728 (660) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents (82) 10 Cash and Equivalents at Beginning of Period 122 104 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 40 $ 114 --- ------------- -- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Sprint FON Group (an integrated business of Sprint Corporation) The information in this supplement has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the combined interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present the FON Group's combined financial position, results of operations, cash flows and comprehensive income. This combined financial information is provided as additional disclosure to investors regarding the operations of the FON Group. Certain information and footnote disclosures normally included in combined financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 2000 Form 10-K/A. Operating results for the 2001 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- 1. Basis of Combination and Presentation - -------------------------------------------------------------------------------- FON common stock and PCS common stock are intended to reflect the performance of the FON and PCS groups. However, they are classes of common stock of Sprint, not of the group they are intended to track. Accordingly, the PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division, and the product distribution and directory publishing businesses. The combined FON Group financial statements, together with the combined PCS Group financial statements, include all the accounts in Sprint's consolidated financial statements prior to inter-group eliminations. Transactions between the PCS Group and the FON Group have not been eliminated in the combined financial statements of either group. The combined financial statements for each group are prepared in accordance with accounting principles generally accepted in the United States. Investments in entities in which the FON Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). The FON Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the FON Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation. Investors in FON common stock are shareholders of Sprint and are subject to the risks related to an equity investment in Sprint and all of Sprint's businesses, assets and liabilities. The assets and liabilities allocated by Sprint's Board of Directors to the FON Group remain assets and liabilities of Sprint Corporation and are therefore subject to the claims of Sprint's creditors generally. In the event of the liquidation or winding up of Sprint Corporation, assets of Sprint remaining for distribution to Sprint's common shareholders will be distributed to holders of FON common stock based on the liquidation value of such shares as provided in Sprint's articles of incorporation, which may differ from the Board's allocation of assets and liabilities among the groups. The Board of Directors of Sprint may, subject to the restrictions in Sprint's articles of incorporation, change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The FON Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or combined attributed net assets as previously reported. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each group. Cost allocation methods other than time studies include factors (general, marketing or headcount) derived from the operating unit's relative share of the predefined category referenced (e.g. headcount). Sprint believes that the costs allocated are comparable to the costs that would be incurred if the groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Group Financing Financing activities for the groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the groups is specifically allocated to and reflected in the financial statements of the applicable group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. Under Sprint's centralized cash management program, one group may advance funds to the other group. These advances are accounted for as short-term borrowings between the groups and bear interest at a market rate that is substantially equal to the rate that group would be able to obtain from third parties on a short-term basis. The allocation of group financing activities may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to continue to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. - -------------------------------------------------------------------------------- 2. Investments - -------------------------------------------------------------------------------- At the end of June 2001, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance provider in Brazil, and other strategic investments. In the 2000 second quarter, investments accounted for using the equity method also included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long distance operation in Canada. Combined, unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows:
Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) Results of operations Net operating revenues $ 80 $ 541 $ 273 $ 1,022 --- ------------- -- -------------- -- ------------- --- ------------- Net operating loss $ (35) $ (63) $ (143) $ (123) --- ------------- -- -------------- -- ------------- --- ------------- Net loss $ (68) $ (149) $ (179) $ (286) --- ------------- -- -------------- -- ------------- --- ------------- Equity in net losses of affiliates $ (15) $ (22) $ (26) $ (47) --- ------------- -- -------------- -- ------------- --- -------------
- -------------------------------------------------------------------------------- 3. Income Taxes - -------------------------------------------------------------------------------- The differences that caused the FON Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Income tax expense at the federal statutory rate $ 343 $ 466 Effect of: State income taxes, net of federal income tax effect 31 39 Equity in losses of foreign joint ventures - 17 Goodwill amortization 5 5 Other, net (4) (4) - ------------------------------------------------------- Income tax expense $ 375 $ 523 ------------------------- Effective income tax rate 38.2% 39.2% ------------------------- - -------------------------------------------------------------------------------- 4. Accounting for Derivative Instruments - -------------------------------------------------------------------------------- Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement became effective for the FON Group on January 1, 2001 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management 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's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating rate debt to a fixed rate. In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transactions and are not designated as hedging instruments. Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Forward contracts, which function as natural hedges, are used to offset the impact of foreign currency fluctuations in these payments. Derivative Accounting Under the Standard The derivative instruments the FON Group holds are interest rate swaps and stock warrants. The interest rate swaps meet all the required criteria of SFAS No. 133 for the assumption of perfect effectiveness resulting in no recognition of changes in their fair values in earnings upon adoption or during the life of the swaps. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Forward contracts held during the period are not designated as hedges and, accordingly, not affected by the adoption of SFAS No. 133. Upon adoption of SFAS No. 133, the FON Group recorded a cumulative reduction in other comprehensive income of $9 million. The total fair value of the stock warrants held by the FON Group on the date of adoption was not material and required no transition adjustment to earnings. The reduction in other comprehensive income results from a decrease in fair value of cash flow hedges resulting from interest rate fluctuations. The decrease is recorded in "Net unrealized losses on qualifying cash flow hedges" in the FON Group's Combined Statements of Comprehensive Income. The net derivative losses included in other comprehensive income as of January 1, 2001 are not expected to be reclassified into earnings within the next 12-month period because the FON Group intends to hold the qualifying cash flow hedges until maturity in 2002. The FON Group recorded a net derivative gain in earnings of $0.2 million (net of tax of $0.1 million) for the 2001 year-to-date period due to changes in the fair value of the stock warrants that are not designated as hedging instruments. There was not a material fluctuation in valuation of warrants held during the 2001 second quarter. The net derivative gain is included in Other income, net on the Combined Statements of Operations. The FON Group recorded a $6 million reduction in other comprehensive income in the 2001 year-to-date period resulting from losses on cash flow hedges. There was not a material fluctuation in valuation of the cash flow hedges held during the 2001 second quarter. - -------------------------------------------------------------------------------- 5. Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of June 2001, short-term borrowings exceeded the long-term portion of those unused credit facilities. Accordingly, the amount of commercial paper borrowings and other bank notes allocated to the FON Group and reclassified to long-term debt was limited to $495 million. In February 2001, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. - -------------------------------------------------------------------------------- 6. Conversion of FON Common Stock Underlying Class A Common Stock - -------------------------------------------------------------------------------- On June 4, 2001, Sprint completed a registered secondary offering on behalf of France Telecom (FT) and Deutsche Telekom AG (DT) in which they sold 174.8 million shares of FON common stock (including 22.8 million shares to cover over-allotments), which represented an approximate 10% voting interest in Sprint. Sprint did not receive any proceeds from this offering. The FON common stock underlying Class A common stock of 86.2 million shares and Series 3 FON common stock of 88.6 million shares were converted into Series 1 FON common stock upon the sale. - -------------------------------------------------------------------------------- 7. Combined Attributed Net Assets - -------------------------------------------------------------------------------- Year-to-Date June 30, 2001 - ------------------------------------- --------------- (millions) Beginning balance $ 12,343 Net income 605 Dividends (218) Common stock issued 39 Tax benefit of stock compensation 7 Other comprehensive loss (11) Intergroup stock compensation (151) Other, net 17 - ------------------------------------------------------- Ending balance $ 12,631 ------------------ - -------------------------------------------------------------------------------- 8. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- FON shareholders are subject to all of the risks related to an investment in Sprint and the FON Group, including the effects of any legal proceedings and claims against the PCS Group. In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the FON Group's combined financial statements. - -------------------------------------------------------------------------------- 9. Segment Information - -------------------------------------------------------------------------------- The FON Group operates in three business segments: the global markets division, the local division and the product distribution and directory publishing businesses. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value. Beginning in the 2000 fourth quarter, Sprint changed its segment reporting to align financial reporting with changes in how Sprint manages operations and assesses its performance. Using several factors, Sprint combined its long distance operation, Sprint ION, broadband fixed wireless services and certain other ventures into one division, global markets. The global markets division now includes four major revenue streams: voice, data, Internet, and other. Additionally, Sprint shifted the recognition of consumer long distance revenues and expenses associated with customers in its local franchise territories from the global markets division to the local division. The product distribution and directory publishing businesses is managed based on products and services provided to the market. As a result, all previously reported financial information relating to these segments has been restated to reflect the current composition of each segment. Segment financial information was as follows:
- -------------------------------------------------------------------------------------------------------------------- Product Global Distribution Corporate Sprint Quarters Ended Markets Local & and FON June 30, Division Division Directory Eliminations(1) Group Publishing - -------------------------------------------------------------------------------------------------------------------- (millions) 2001 Net operating revenues $ 2,563 $ 1,552 $ 474 $ (279) $ 4,310 Affiliated revenues 153 67 200 (279) 141 Operating income (loss) (47) 466 79 (10) 488 2000 Net operating revenues $ 2,687 $ 1,523 $ 471 $ (235) $ 4,446 Affiliated revenues 105 44 174 (235) 88 Operating income (loss) 240 456 68 (173) 591 - -------------------------------------------------------------------------------------------------------------------- (1) Significant intercompany eliminations consist of local access charged to the global markets division, equipment purchases from the product distribution business and interexchange services provided to the local division.
- -------------------------------------------------------------------------------------------------------------------- Product Global Distribution Corporate Sprint Year-to-Date Markets Local & and FON June 30, Division Division Directory Eliminations Group Publishing - -------------------------------------------------------------------------------------------------------------------- (millions) 2001 Net operating revenues $ 5,130 $ 3,105 $ 968 $ (535) $ 8,668 Affiliated revenues 283 123 388 (535) 259 Operating income (loss) (22) 904 157 (19) 1,020 2000 Net operating revenues $ 5,314 $ 3,052 $ 932 $ (448) $ 8,850 Affiliated revenues 200 93 334 (448) 179 Operating income (loss) 505 889 135 (180) 1,349 - --------------------------------------------------------------------------------------------------------------------
Net operating revenues by product and services were as follows:
- -------------------------------------------------------------------------------------------------------------------- Product Global Distribution Sprint Quarters Ended Markets Local & FON June 30, Division Division Directory Eliminations(1) Group Publishing - -------------------------------------------------------------------------------------------------------------------- (millions) 2001 Voice $ 1,708 $ - $ - $ (29) $ 1,679 Data 513 - - - 513 Internet 262 - - - 262 Local service - 735 - - 735 Network access - 509 - (50) 459 Long distance - 177 - - 177 Product distribution - - 334 (198) 136 Directory publishing - - 140 - 140 Other 80 131 - (2) 209 ---------------------------------------------------------------------------- Total net operating revenues $ 2,563 $ 1,552 $ 474 $ (279) $ 4,310 ---------------------------------------------------------------------------- 2000 Voice $ 1,795 $ - $ - $ (27) $ 1,768 Data 485 - - - 485 Internet 235 - - - 235 Local service - 705 - - 705 Network access - 500 - (33) 467 Long distance - 178 - - 178 Product distribution - - 367 (173) 194 Directory publishing - - 104 - 104 Other 172 140 - (2) 310 ---------------------------------------------------------------------------- Total net operating revenues $ 2,687 $ 1,523 $ 471 $ (235) $ 4,446 ---------------------------------------------------------------------------- (1) Significant intercompany eliminations consist of local access charged to the global markets division, equipment purchases from the product distribution business and interexchange services provided to the local division.
- -------------------------------------------------------------------------------------------------------------------- Product Global Distribution Sprint Year-to-Date Markets Local & FON June 30, Division Division Directory Eliminations Group Publishing - -------------------------------------------------------------------------------------------------------------------- (millions) 2001 Voice $ 3,444 $ - $ - $ (56) $ 3,388 Data 1,015 - - - 1,015 Internet 511 - - - 511 Local service - 1,467 - - 1,467 Network access - 1,014 - (91) 923 Long distance - 363 - - 363 Product distribution - - 693 (383) 310 Directory publishing - - 275 - 275 Other 160 261 - (5) 416 ---------------------------------------------------------------------------- Total net operating revenues $ 5,130 $ 3,105 $ 968 $ (535) $ 8,668 ---------------------------------------------------------------------------- 2000 Voice $ 3,575 $ - $ - $ (53) $ 3,522 Data 959 - - - 959 Internet 453 - - - 453 Local service - 1,401 - - 1,401 Network access - 1,011 - (62) 949 Long distance - 349 - - 349 Product distribution - - 722 (331) 391 Directory publishing - - 210 - 210 Other 327 291 - (2) 616 ---------------------------------------------------------------------------- Total net operating revenues $ 5,314 $ 3,052 $ 932 $ (448) $ 8,850 ----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 10. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- The FON Group's cash paid for interest and income taxes was as follows: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 81 $ 55 ------------------------- Income taxes $ 179 $ 165 ------------------------- The FON Group's noncash activities included the following: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 35 $ 33 ------------------------- Tax benefit from stock compensation $ 7 $ 172 ------------------------- Stock received for stock options exercised $ - $ 23 ------------------------- Debt redeemed with investments in equity securities $ - $ 275 ------------------------- - -------------------------------------------------------------------------------- 11. Discontinued Operation - -------------------------------------------------------------------------------- In the 2000 first quarter, Sprint sold its interest in Global One to FT and DT. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, the FON Group's gain on the sale has been reported as a discontinued operation. The FON Group recorded an after-tax gain related to the sale of Sprint's interest in Global One of $675 million in the first quarter of 2000. - -------------------------------------------------------------------------------- 12. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, the FON Group recognized a one-time, pre-tax charge of $163 million for costs associated with the terminated merger. - -------------------------------------------------------------------------------- 13. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 supercedes the Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and Statement No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises." This statement requires accounting for all business combinations using the purchase method and changes the criteria for recognizing intangible assets apart from goodwill. The statement is effective for all business combinations initiated after June 30, 2001. Statement No. 142 supercedes APB Opinion No. 17, "Intangible Assets," and addresses how purchased intangibles should be accounted for upon acquisition. The statement proscribes the necessary accounting for both identifiable intangibles and goodwill after initial recognition. Amortization of goodwill will cease upon adoption of this statement and periodic impairment testing of all intangibles will be required. The FON Group is currently assessing the impact of this standard and expects to complete that assessment by year-end. This statement is effective for fiscal years beginning after December 15, 2001. - -------------------------------------------------------------------------------- 14. Subsequent Event - -------------------------------------------------------------------------------- In July 2001, Sprint's Board of Directors declared a dividend of 12.5 cents per share on the Sprint FON common stock. Dividends will be paid September 28, 2001. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION Sprint FON Group AND RESULTS OF OPERATIONS (an integrated business of Sprint Corporation) - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: o the effects of vigorous competition in the markets in which Sprint operates; o the costs and business risks associated with providing new services and entering new markets necessary to provide nationwide or global services; o the ability of the PCS Group to continue to grow a significant market presence; o the effects of mergers and consolidations within the telecommunications industry; o the uncertainties related to Sprint's strategic investments; o the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; o unexpected results of litigation filed against Sprint; o the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes including the impact of the Telecommunications Act of 1996, or other external factors over which Sprint has no control; and o other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout Management's Discussion. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- Sprint FON Group - -------------------------------------------------------------------------------- Operating Segments Sprint's business is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses, and the PCS wireless telephony products and services business. The FON Group includes the global markets division, the local division and the product distribution and directory publishing businesses, and the PCS Group includes the PCS wireless telephony products and services business. The PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division and the product distribution and directory publishing businesses. During 2000, Sprint changed the segments comprising the FON Group to align financial reporting with changes in how Sprint manages the FON Group's operations and assesses its performance. The FON Group operates in three business segments: the global markets division, the local division and the product distribution and directory publishing businesses. Board Discretion Regarding Tracking Stocks Sprint's Board of Directors has the discretion to, among other things, make operating and financial decisions that could favor one group over the other and, subject to the restrictions in Sprint's articles of incorporation, to change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Under the applicable corporate law, Sprint's Board owes its fiduciary duties to all of Sprint's shareholders and there is no board of directors that owes separate duties to the holders of either the FON common stock or the PCS common stock. The Tracking Stock Policies, adopted by Sprint's Board, provide that the Board, in resolving material matters in which the holders of FON common stock and PCS common stock have potentially divergent interests, will act in the best interests of Sprint and all of its common shareholders after giving fair consideration to the potentially divergent interests of the holders of the separate classes of Sprint common stock. These policies may be changed by the Board without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; Internet; data communications such as frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(R). Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). Digital Subscriber Line technology enables high-speed transmission of data over existing copper telephone lines between the customer and the service provider, and MMDS is a fixed wireless network that distributes signals through microwave from a single transmission point to multiple receiving points. Sprint is currently reevaluating its high-speed integrated communications strategy. This reevaluation may impact the valuation of certain assets and other resources deployed in pursuit of this strategy, as well as service plans offered by the company. Sprint anticipates this valuation analysis will be concluded this year. The global markets division also includes the operating results of the cable TV service operations of the broadband fixed wireless companies. During 2000 and 2001, Sprint converted several markets served by MMDS capabilities from cable TV services to high-speed data services. Global markets operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. - -------------------------------------------------------------------------------- Results of Operations - --------------------------------------------------------------------------------
Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 4,310 $ 4,446 $ (136) (3.1)% Operating expenses 3,822 3,855 (33) (0.9)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income $ 488 $ 591 $ (103) (17.4)% -- ------------- -- -------------- -- ------------- Income from continuing operations $ 290 $ 365 $ (75) (20.5)% -- ------------- -- -------------- -- -------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 8,668 $ 8,850 $ (182) (2.1)% Operating expenses 7,648 7,501 147 2.0% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income $ 1,020 $ 1,349 $ (329) (24.4)% -- ------------- -- -------------- -- ------------- Income from continuing operations $ 606 $ 810 $ (204) (25.2)% -- ------------- -- -------------- -- -------------
In the 2001 year-to-date period, income from continuing operations includes a nonrecurring gain of $9 million from investment activities. In the 2000 second quarter and year-to-date period, income from continuing operations includes a nonrecurring charge of $105 million for costs associated with the terminated WorldCom merger and a nonrecurring gain of $27 million from the sale of an independent directory publishing operation. Income from continuing operations in the 2000 year-to-date period also includes net nonrecurring gains of $17 million from investment activities. Excluding nonrecurring items, income from continuing operations was $597 million in the 2001 year-to-date period, $443 million in the 2000 second quarter and $871 million in the 2000 year-to-date period. - -------------------------------------------------------------------------------- Segmental Results of Operations - -------------------------------------------------------------------------------- Global Markets Division
Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Voice $ 1,708 $ 1,795 $ (87) (4.8)% Data 513 485 28 5.8% Internet 262 235 27 11.5% Other 80 172 (92) (53.5)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total net operating revenues 2,563 2,687 (124) (4.6)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,528 1,417 111 7.8% Selling, general and administrative 748 763 (15) (2.0)% Depreciation and amortization 334 267 67 25.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,610 2,447 163 6.7% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income (loss) $ (47) $ 240 $ (287) NM -- ------------- -- -------------- -- ------------- Operating margin NM 8.9% -- ------------- -- -------------- NM = Not meaningful
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Voice $ 3,444 $ 3,575 $ (131) (3.7)% Data 1,015 959 56 5.8% Internet 511 453 58 12.8% Other 160 327 (167) (51.1)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total net operating revenues 5,130 5,314 (184) (3.5)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 3,017 2,739 278 10.1% Selling, general and administrative 1,499 1,538 (39) (2.5)% Depreciation and amortization 636 532 104 19.5% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 5,152 4,809 343 7.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income (loss) $ (22) $ 505 $ (527) NM -- ------------- -- -------------- -- ------------- Operating margin NM 9.5% -- ------------- -- -------------- NM = Not meaningful
Net Operating Revenues Net operating revenues decreased 5% in the 2001 second quarter and 3% in the 2001 year-to-date period from the same 2000 periods. Minute growth was 18% in the 2001 second quarter and 20% in the 2001 year-to-date period compared to the same 2000 periods. The calling volume growth, driven in part by the increase in wholesale minutes sold to the PCS Group, was more than offset by a highly competitive pricing environment. The decreases in net operating revenues reflect cable capacity sales in the 2000 second quarter and year-to-date period with no corresponding capacity sales in the same 2001 periods. These decreases also reflect a decline in network management services, professional services and legacy data services, partly offset by growth in Internet communications and data services revenues. Revenue and operating income growth will likely continue to be impacted by pricing pressures and increased spending to support the growth of Internet Protocol services. Voice Revenues Voice revenues decreased 5% in the 2001 second quarter and 4% in the 2001 year-to-date period from the same 2000 periods due to a decline in consumer and business voice revenues resulting from a more competitive pricing environment. Consumer voice revenues were also impacted by lower calling card usage partly offset by increased prepaid and international services. The decline in business voice revenues mainly reflects decreased inbound and outbound toll-free calls. Data Revenues Data revenues increased 6% in the 2001 second quarter and year-to-date period from the same 2000 periods due to increased sales in current-generation data services, including asynchronous transfer mode and frame relay services, largely offset by a decline in network management services. Internet Revenues Internet revenues increased 11% in the 2001 second quarter and 13% in the 2001 year-to-date period from the same 2000 periods due to strong growth in dedicated service revenues partly offset by a slight decline in dial-up Internet service provider-related revenues. Other Revenues Other revenues decreased 53% in the 2001 second quarter and 51% in the 2001 year-to-date period from the same 2000 periods. The decreases reflect cable capacity sales in the 2000 second quarter and year-to-date period with no corresponding cable capacity sales in the same 2001 periods. The decreases also reflect a decline in professional services and legacy data services. Costs of Services and Products Costs of services and products include interconnection costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers, costs to operate and maintain the long distance network and the Internet protocol network, costs of equipment and transmission capacity sales, and costs related to the development and deployment of Sprint ION. These costs increased 8% in the 2001 second quarter and 10% in the 2001 year-to-date period from the same 2000 periods. Interconnection costs increased 15% in the 2001 second quarter and 16% in the 2001 year-to-date period from the same 2000 periods due to increased calling volumes. All other costs of services and products decreased 3% in the 2001 second quarter and remained flat in the 2001 year-to-date period compared to the same 2000 periods due to decreases in costs related to sales of transoceanic cable in 2000 with no corresponding sales in 2001. These decreases were largely offset by increased network costs of the long distance operation and costs associated with Sprint ION. Total costs of services and products for global markets were 59.6% of net operating revenues in the 2001 second quarter and 58.8% in the 2001 year-to-date period compared to 52.7% and 51.5% for the same periods a year ago. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense decreased 2% in the 2001 second quarter and 3% in the 2001 year-to-date period from the same 2000 periods due to a reduction in advertising and promotion costs in both the consumer and business markets and a strong emphasis on cost control, partly offset by increased marketing and promotions of Internet services and an increase in bad debt expense related to wholesale customers. SG&A expense was 29.2% of net operating revenues in the 2001 second quarter and year-to-date periods compared to 28.4% and 29.0% for the same periods a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 25% in the 2001 second quarter and 20% in the 2001 year-to-date period from the same periods a year ago due to an increased asset base to enhance network reliability and meet increased demand for voice and data-related services as well as an increasing asset base for growth of Internet Protocol services and other growth initiatives. Depreciation and amortization expense was 13.0% of net operating revenues in the 2001 second quarter and 12.4% in the 2001 year-to-date period compared to 9.9% and 10.0% for the same periods a year ago. Local Division
Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Local service $ 735 $ 705 $ 30 4.3% Network access 509 500 9 1.8% Long distance 177 178 (1) (0.6)% Other 131 140 (9) (6.4)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total net operating revenues 1,552 1,523 29 1.9% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 484 471 13 2.8% Selling, general and administrative 327 313 14 4.5% Depreciation and amortization 275 283 (8) (2.8)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 1,086 1,067 19 1.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 466 $ 456 $ 10 2.2% --- ------------- -- -------------- -- ------------- Operating margin 30.0% 29.9% --- ------------- -- --------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Local service $ 1,467 $ 1,401 $ 66 4.7% Network access 1,014 1,011 3 0.3% Long distance 363 349 14 4.0% Other 261 291 (30) (10.3)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total net operating revenues 3,105 3,052 53 1.7% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 980 951 29 3.0% Selling, general and administrative 665 650 15 2.3% Depreciation and amortization 556 562 (6) (1.1)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 2,201 2,163 38 1.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 904 $ 889 $ 15 1.7% --- ------------- -- -------------- -- ------------- Operating margin 29.1% 29.1% --- ------------- -- --------------
Net Operating Revenues At the beginning of the 2000 third quarter, Sprint changed its transfer pricing for certain transactions between FON Group entities. The main effect of this change was a reduction in the local division's "Net Operating Revenues - Other Revenues." In addition, Sprint's local division transferred a customer service and telemarketing organization to the PCS Group at the beginning of the 2000 second quarter. For comparative purposes, the following discussion of local division results assumes the transfer pricing change and the transfer of the customer service and telemarketing organization occurred at the beginning of 2000. Adjusting for the transfer pricing change and this transfer, operating margin would have been 29.3% for the 2000 second quarter and 28.7% for the 2000 year-to-date period. Net operating revenues increased 3% in the 2001 second quarter and year-to-date periods from the same 2000 periods. These increases mainly reflect increased special access service revenues and increased sales of network-based services such as Caller ID and Call Waiting. Sales of network-based services increased due to strong demand for bundled services which combine local service, network-based features and long distance calling. The local division ended the 2001 second quarter with approximately 8.3 million switched access lines, a 1% increase during the past 12 months. Access line growth was impacted by a slower economy, increases in subscriber line prices and wireless, cable and DSL substitution. On a voice-grade equivalent basis, which includes both traditional switched services and high capacity lines, access lines grew 17% during the past 12 months. This growth reflects many business customers switching from individual lines to high capacity dedicated circuits. Local Service Revenues Local service revenues, derived from local exchange services, grew 4% in the 2001 second quarter and 5% in the 2001 year-to-date period from the same 2000 periods because of continued demand for network-based services, as well as increased equipment maintenance and private line revenues. Network Access Revenues Network access revenues, derived from long distance phone companies using the local network to complete calls, increased 2% in the 2001 second quarter and remained flat in the 2001 year-to-date period compared to the same 2000 periods. Strong growth in special access services in the 2001 second quarter and year-to-date periods was largely offset by a 3% decline in minutes of use and FCC-mandated access rate reductions which took effect in July 2000. Long Distance Revenues Long distance revenues are mainly derived from providing consumer long distance services to customers within Sprint's local franchise territories and other long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues decreased 1% in the 2001 second quarter and increased 4% in the 2001 year-to-date period from the same 2000 periods. In the 2001 year-to-date period, sales of consumer long distance services increased reflecting the success of bundled services, but were largely offset by a decline in intra-LATA long distance services. In the 2001 second quarter, increased sales of consumer long distance service were more than offset by a decline in intra-LATA long distance services. Other Revenues Other revenues increased 3% in the 2001 second quarter and 7% in the 2001 year-to-date period from the same 2000 periods mainly because of an increase in collocation revenues. Equipment sales were flat in the 2001 second quarter and increased 3% in the 2001 year-to-date period compared to the same 2000 periods. Costs of Services and Products Costs of services and products include costs to operate and maintain the local network and costs of equipment sales. These costs increased 3% in the 2001 second quarter and 5% in the 2001 year-to-date period compared to the same 2000 periods due to increased reciprocal compensation costs resulting from calling traffic exchanged with wireless and competitive local exchange carriers, increased access costs associated with consumer long distance revenues and increased costs of equipment sales. Costs of services and products were 31.2% of net operating revenues in the 2001 second quarter and 31.6% in the 2001 year-to-date period compared to 31.2% for the same periods a year ago. Selling, General and Administrative Expense SG&A expense increased 4% in the 2001 second quarter and 3% in the 2001 year-to-date period compared to the same 2000 periods mainly due to an increase in bad debt expense related to retail and wholesale customer accounts. SG&A expense was 21.1% of net operating revenues in the 2001 second quarter and 21.4% in the 2001 year-to-date period compared to 20.7% and 21.4% for the same periods a year ago. Depreciation and Amortization Expense Depreciation and amortization expense decreased 3% in the 2001 second quarter and 1% in the 2001 year-to-date period compared to the same 2000 periods reflecting an increase to the depreciable lives for certain assets partly offset by higher property balances. Depreciation and amortization expense was 17.7% of net operating revenues in the 2001 second quarter and 17.9% in the 2001 year-to-date period compared to 18.8% and 18.7% for the same periods a year ago. Product Distribution and Directory Publishing Businesses
Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 474 $ 471 $ 3 0.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 344 359 (15) (4.2)% Selling, general and administrative 46 40 6 15.0% Depreciation and amortization 5 4 1 25.0% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 395 403 (8) (2.0)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 79 $ 68 $ 11 16.2% --- ------------- -- -------------- -- ------------- Operating margin 16.7% 14.4% --- ------------- -- --------------
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 968 $ 932 $ 36 3.9% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 708 710 (2) (0.3)% Selling, general and administrative 94 79 15 19.0% Depreciation and amortization 9 8 1 12.5% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 811 797 14 1.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 157 $ 135 $ 22 16.3% --- ------------- -- -------------- -- ------------- Operating margin 16.2% 14.5% --- ------------- -- --------------
Net operating revenues increased 1% in the 2001 second quarter and 4% in the 2001 year-to-date period compared to the same 2000 periods. Nonaffiliated revenues accounted for approximately 60% of revenues in both the 2001 and 2000 second quarters and year-to-date periods. Nonaffiliated revenues decreased 8% in the 2001 second quarter and 3% in the 2001 year-to-date period compared to the same 2000 periods reflecting an industry slow down in capital spending, partly offset by increased revenues due to the consolidation of a directory publishing partnership. Beginning in the 2000 third quarter, the directory publishing partnership, previously accounted for as an equity method investment, was fully consolidated due to a restructuring in the partnership, which resulted in transfer of control to Sprint. Affiliated revenues increased 15% in the 2001 second quarter and 16% in the 2001 year-to-date period compared to the same 2000 periods reflecting a change in the mix of the local division's capital program to more network equipment and components. In the 2000 second quarter and year-to-date periods, affiliate sales were lower because the local division generally purchased electronics and software directly from manufacturers. Operating expenses decreased 2% in the 2001 second quarter and increased 2% in the 2001 year-to-date period compared to the same 2000 periods. The decrease in the 2001 second quarter reflects decreased costs of services and products due to a decline in equipment sales, partly offset by increased costs of services and products and SG&A expense due to the consolidation of the directory publishing partnership. The increase in the 2001 year-to-date period reflects an increase of SG&A expense due to the consolidation of the directory publishing partnership. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense Interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The difference between Sprint's actual interest rates and the rates charged to the PCS Group is reflected as a reduction in the FON Group's interest expense as follows:
Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) FON Group interest costs $ 89 $ 69 $ 180 $ 166 Credit from the PCS Group (73) (58) (137) (116) --- ------------- -- -------------- -- ------------- --- ------------- Interest expense $ 16 $ 11 $ 43 $ 50 --- ------------- -- -------------- -- ------------- --- -------------
The FON Group's effective interest rate on long-term debt was 7.2% in the 2001 second quarter, 7.3% in the 2001 year-to-date period, 7.3% in the 2000 second quarter and 7.4% in the 2000 year-to-date period. The decrease mainly reflects the additional debt with lower interest rates. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings, deferred compensation plans, customer deposits, and the credit from the PCS Group detailed above have been excluded so as not to distort the effective interest rate on long-term debt. Other Income, Net Other income (expense) consisted of the following:
Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) Dividend and interest income $ 12 $ 9 $ 25 $ 20 Equity in net losses of affiliates (15) (22) (26) (47) Gain on sale of directory publishing operation - 45 - 45 Net gains (losses) from investments (2) (3) (2) 23 Other, net 4 (2) 7 (7) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total $ (1) $ 27 $ 4 $ 34 --- ------------- -- -------------- -- ------------- --- -------------
Dividend and interest income for both the 2001 and 2000 second quarter and year-to-date periods reflect dividends earned on cost method investments and interest earned on temporary investments. In the 2001 second quarter and year-to-date period, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance provider in Brazil, and other strategic investments. In the 2000 second quarter and year-to-date period, investments accounted for using the equity method included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long distance operation in Canada, and other strategic investments. Net gains from investments in the 2000 year-to-date period mainly include a gain associated with equity securities used to retire debt instruments offset by net losses on miscellaneous investment activities. Income Taxes See Note 3 of Condensed Notes to Combined Financial Statements for information about the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Discontinued Operation, Net In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, the FON Group's gain on sale has been reported as a discontinued operation. The FON Group recorded an after-tax gain related to the sale of Sprint's interest in Global One of $675 million in the first quarter of 2000. Extraordinary Item, Net In the 2001 first quarter, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- June 30, December 31, 2001 2000 - ------------------------------------------------------ (millions) Combined assets $ 24,599 $ 23,649 -------------------------------- The FON Group's combined assets increased $950 million in the 2001 year-to-date period. Net property, plant and equipment increased $1.4 billion reflecting capital expenditures to support the build-out of the Internet protocol network and long distance and local network enhancements, partly offset by depreciation. Offsetting decreases in the FON Group's combined assets primarily reflect a reduction in current assets. See "Liquidity and Capital Resources" for more information about changes in the FON Group's Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Sprint's Board of Directors has the power to make determinations that may impact the financial and liquidity position of each of the tracking stock groups. This power includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding the timing and amount of capital expenditures. The actions of the Board of Directors are subject to its fiduciary duties to all shareholders of Sprint, and not just to the holders of a particular class of common stock. Given the above, it may be difficult for investors to assess each group's liquidity and capital resources and in turn the future prospects of each group based on past performance. Operating Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided by operating activities $ 1,776 $ 1,615 ------------------------------- Operating cash flows increased $161 million in the 2001 year-to-date period mainly reflecting decreases in working capital requirements partly offset by a decline in the FON Group's operating results. Investing Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows used by investing activities $ (2,586) $ (945) ------------------------------- Capital expenditures totaled $2.6 billion in the 2001 year-to-date period and $1.8 million in the same 2000 period. Global markets division 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 and to continue development and hardware deployment for Sprint ION. The local division incurred capital expenditures to accommodate voice grade equivalent growth, expand capabilities for providing enhanced services and continue the build-out of high-speed DSL services. Other FON Group capital expenditures were incurred for Sprint's World Headquarters Campus. In February 2000, the FON Group received $1.4 billion from the sale of its investment in Global One. "Investments in and loans to affiliates, net" consisted mainly of the FON Group's investments in EarthLink and Intelig. Financing Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided (used) by financing activities $ 728 $ (660) ------------------------------- Financing activities in the 2001 year-to-date period mainly reflect net borrowings of $1.1 billion compared to net payments on borrowings of $519 million in the same 2000 period. The FON Group paid cash dividends of $219 million in the 2001 year-to-date period and $214 million in the same 2000 period. Also included in the 2001 year-to-date financing activities is a $151 million reimbursement to the PCS Group to compensate for the net amount of PCS stock-based compensation granted to FON Group employees and FON stock-based compensation granted to PCS Group employees. Capital Requirements The FON Group's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be $6 billion. FON Group capital expenditures are expected to be $5.9 billion in 2001. The global markets division and local division will require the majority of this total. Investments in affiliates are expected to be approximately $100 million. Dividend payments are expected to approximate $440 million. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group losses. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's board of directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Supplemental Information -- Annex II Sprint PCS Group Combined Financial Information The PCS Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the PCS Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation.
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - --------------------------------------------- --- ------------------------------- -- ------------------------------- Quarters Ended Year-to-Date June 30, June 30, - --------------------------------------------- --- ------------------------------- -- ------------------------------- - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 2,264 $ 1,476 $ 4,315 $ 2,696 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 1,161 937 2,295 1,831 Selling, general and administrative 612 528 1,276 1,035 Depreciation 438 322 839 611 Amortization 110 134 244 266 Merger related costs - 24 - 24 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 2,321 1,945 4,654 3,767 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Loss (57) (469) (339) (1,071) Interest expense (300) (224) (585) (444) Other income (expense), net (15) (9) (35) 17 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss from continuing operations before income taxes (372) (702) (959) (1,498) Income tax benefit 125 246 319 532 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss from Continuing Operations (247) (456) (640) (966) Extraordinary item, net - - - (3) Cumulative effect of change in accounting principle, net - - 2 - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Loss $ (247) $ (456) $ (638) $ (969) --- ------------- -- -------------- -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - --------------------------------------------- --- ------------------------------- -- ------------------------------- Quarters Ended Year-to-Date June 30, June 30, - --------------------------------------------- --- ------------------------------- -- ------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Loss $ (247) $ (456) $ (638) $ (969) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income (Loss) Unrealized holding gains on securities - - - 3 Income tax expense - - - (1) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding gains on securities - - - 2 Foreign currency translation adjustments (1) 3 (1) 3 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income (loss) (1) 3 (1) 5 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Loss $ (248) $ (453) $ (639) $ (964) --- ------------- -- -------------- -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED BALANCE SHEETS Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - ------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 136 $ 117 Accounts receivable, net of allowance for doubtful accounts of $170 and $96 1,098 902 Inventories 541 515 Prepaid expenses 138 90 Current tax benefit receivable from the FON Group - 26 Other 126 200 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 2,039 1,850 Property, plant and equipment Network equipment 8,270 7,540 Construction work in progress 1,996 1,713 Buildings and leasehold improvements 2,393 2,108 Other 904 756 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 13,563 12,117 Accumulated depreciation (3,175) (2,595) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 10,388 9,522 Investments in affiliates 159 148 Intangible assets Goodwill 4,548 4,548 PCS licenses 3,059 3,059 Customer base 746 747 Microwave relocation costs 400 411 Other 46 46 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 8,799 8,811 Accumulated amortization (1,317) (1,077) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 7,482 7,734 Other 517 509 - ------------------------------------------------------------------------------------------------------------------------- Total $ 20,585 $ 19,763 - ------------------------------------------------------------------------------------------------------------------------- Liabilities and Combined Attributed Net Assets Current liabilities Short-term borrowings including current maturities of long-term debt $ 2,996 $ 244 Accounts payable 480 687 Construction obligations 881 997 Accrued taxes 222 203 Accrued interest 195 119 Payables to the FON Group 81 296 Other 896 846 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,751 3,392 Long-term debt and capital lease obligations 13,063 14,136 Deferred credits and other liabilities Deferred income taxes 13 90 Other 292 253 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 305 343 Redeemable preferred stock 526 526 Combined attributed net assets 940 1,366 - ------------------------------------------------------------------------------------------------------------------------- Total $ 20,585 $ 19,763 - ------------------------------------------------------------------------------------------------------------------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Year-to-Date June 30, 2001 2000 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net loss $ (638) $ (969) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Equity in net losses of affiliates 47 14 Depreciation and amortization 1,083 877 Deferred income taxes (96) (232) Changes in assets and liabilities: Accounts receivable, net (196) (102) Inventories and other current assets (53) (15) Accounts payable and other current liabilities (151) 33 Current tax benefit receivable from the FON Group 26 293 Affiliate receivables and payables, net (221) 357 Noncurrent assets and liabilities, net 37 44 Other, net 8 (6) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by operating activities (154) 294 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (1,712) (1,435) Investment in affiliate (17) (200) Proceeds from sales of assets 43 166 Other, net - 2 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (1,686) (1,467) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from debt 3,323 1,408 Payments on debt (1,653) (381) Proceeds from common stock issued 8 66 Dividends paid (7) (7) Other, net 188 156 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by financing activities 1,859 1,242 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase in Cash and Equivalents 19 69 Cash and Equivalents at Beginning of Period 117 16 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 136 $ 85 --- ------------- -- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Sprint PCS Group (an integrated business of Sprint Corporation) The information in this supplement has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the combined interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present the PCS Group's combined financial position, results of operations, cash flows and comprehensive loss. The combined financial information is provided as additional disclosure to investors regarding the operations of the PCS Group. Certain information and footnote disclosures normally included in combined financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 2000 Form 10-K/A. Operating results for the 2001 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- 1. Basis of Combination and Presentation - -------------------------------------------------------------------------------- FON common stock and PCS common stock are intended to reflect the performance of the FON and PCS groups. However, they are classes of common stock of Sprint, not of the group they are intended to track. Accordingly, the PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division, and the product distribution and directory publishing businesses. The combined FON Group financial statements, together with the combined PCS Group financial statements, include all the accounts in Sprint's consolidated financial statements prior to inter-group eliminations. Transactions between the PCS Group and the FON Group have not been eliminated in the combined financial statements of either group. The combined financial statements for each group are prepared in accordance with accounting principles generally accepted in the United States. Investments in entities in which the PCS Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). The PCS Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the PCS Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation. Investors in PCS common stock are shareholders of Sprint and are subject to the risks related to an equity investment in Sprint and all of Sprint's businesses, assets and liabilities. The assets and liabilities allocated by Sprint's Board of Directors to the PCS Group remain assets and liabilities of Sprint Corporation and are therefore subject to the claims of Sprint's creditors generally. In the event of the liquidation or winding up of Sprint Corporation, assets of Sprint remaining for distribution to Sprint's common shareholders will be distributed to holders of PCS common stock based on the liquidation value of such shares as provided in Sprint's articles of incorporation, which may differ from the Board's allocation of assets and liabilities among the groups. The Board of Directors of Sprint may, subject to the restrictions in Sprint's articles of incorporation, change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The PCS Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or combined attributed net assets as previously reported. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each group. Cost allocation methods other than time studies include factors (general, marketing or headcount) derived from the operating unit's relative share of the predefined category referenced (e.g. headcount). Sprint believes that the costs allocated are comparable to the costs that would be incurred if the groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Group Financing Financing activities for the groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the groups is specifically allocated to and reflected in the financial statements of the applicable group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. Under Sprint's centralized cash management program, one group may advance funds to the other group. These advances are accounted for as short-term borrowings between the groups and bear interest at a market rate that is substantially equal to the rate that group would be able to obtain from third parties on a short-term basis. The allocation of group financing activities may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to continue to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. - -------------------------------------------------------------------------------- 2. Investments - -------------------------------------------------------------------------------- At the end of June 2001, investments accounted for using the equity method mainly consisted of the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico purchased in the second quarter of 2000. Unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows: Quarter Year-to- Inception-to- Ended Date Date June 30, June 30, June 30, ----------------------------------- 2001 2001 2000 - -------------------------------------------------------- (millions) Results of operations Net operating revenues $ 42 $ 77 $ 22 ----------------------------------- Operating losses $ (83) $ (143) $ (44) ----------------------------------- Net loss $ (31) $ (129) $ (76) ----------------------------------- Equity in net losses of affiliates $ (13) $ (47) $ (14) ----------------------------------- - -------------------------------------------------------------------------------- 3. Income Taxes - -------------------------------------------------------------------------------- The differences that caused the PCS Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Income tax benefit at the federal statutory rate $ (336) $ (524) Effect of: State income taxes, net of federal income tax effect (20) (33) Equity in loss of foreign affiliate 18 6 Goodwill amortization 19 19 - ------------------------------------------------------- Income tax benefit $ (319) $ (532) ------------------------- Effective income tax rate 33.3% 35.5% ------------------------- - -------------------------------------------------------------------------------- 4. Accounting for Derivative Instruments - -------------------------------------------------------------------------------- Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement became effective for the PCS Group on January 1, 2001 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management 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's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating rate debt to a fixed rate. In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transactions and are not designated as hedging instruments. Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Forward contracts, which function as natural hedges, are used to offset the impact of foreign currency fluctuations in these payments. Derivative Accounting Under the Standard The derivative instruments the PCS Group holds are stock warrants. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Forward contracts held during the period are not designated as hedges and, accordingly, not affected by the adoption of SFAS No. 133. Upon adoption of SFAS No. 133, the PCS Group recorded a cumulative adjustment to net income of $2 million (net of tax of $1 million). The cumulative adjustment was due to changes in the fair value of warrants that are not designated as hedging instruments and is recorded in "Cumulative effect of change in accounting principle, net" in the PCS Group's Combined Statements of Operations. The PCS Group recorded a net derivative loss in earnings of $0.1 million (net of tax of $0.1 million) for the 2001 second quarter and a net derivative gain in earnings of $0.2 million (net of tax of $0.1 million) for the year-to-date period due to changes in the fair value of the stock warrants that are not designated as hedging instruments. The net derivative gain and loss are included in Other income (expense), net on the Combined Statements of Operations. - -------------------------------------------------------------------------------- 5. Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of June 2001, short-term borrowings exceeded the long-term portion of those unused credit facilities. Accordingly, the amount of commercial paper borrowings allocated to the PCS Group and reclassified to long-term debt, was limited to $1.6 billion. In January 2001, Sprint allocated to the PCS Group $2.4 billion of debt consisting of notes with 5 year and 10 year maturities. These notes have interest rates ranging from 8.2% to 9.0%, which are based on rates the PCS Group would have been able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guarantee by Sprint or any member of the FON Group. - -------------------------------------------------------------------------------- 6. Combined Attributed Net Assets - -------------------------------------------------------------------------------- Year-to-Date June 30, 2001 - ------------------------------------------------------- (millions) Beginning balance $ 1,366 Net loss (638) Dividends (7) Common stock issued 66 Tax benefit of stock compensation 4 Intergroup stock compensation 151 Other, net (2) - ------------------------------------------------------- Ending balance $ 940 ------------------ - -------------------------------------------------------------------------------- 7. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- PCS shareholders are subject to all of the risks related to an investment in Sprint and the PCS Group, including the effects of any legal proceedings and claims against the FON Group. In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the PCS Group's combined financial statements. - -------------------------------------------------------------------------------- 8. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- The PCS Group's cash paid (received) for interest and income taxes was as follows: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 481 $ 423 ------------------------- Income taxes $ (177) $ (580) ------------------------- The PCS Group's noncash activities included the following: Year-to-Date June 30, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 58 $ 69 ------------------------- Tax benefit from stock compensation $ 4 $ 113 ------------------------- Stock received for stock options exercised $ - $ 21 ------------------------- - -------------------------------------------------------------------------------- 9. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. In the 2000 second quarter, the PCS Group recognized a one-time, pre-tax charge of $24 million for costs associated with the terminated merger. - -------------------------------------------------------------------------------- 10. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 supercedes the Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and Statement No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises." This statement requires accounting for all business combinations using the purchase method and changes the criteria for recognizing intangible assets apart from goodwill. This statement is effective for all business combinations initiated after June 30, 2001. Statement No. 142 supercedes APB Opinion No. 17, "Intangible Assets," and addresses how purchased intangibles should be accounted for upon acquisition. The statement proscribes the necessary accounting for both identifiable intangibles and goodwill after initial recognition. Amortization of goodwill will cease upon adoption of this statement and periodic impairment testing of all intangibles will be required. The PCS Group is currently assessing the impact of this standard and expects to complete that assessment by year-end. This statement is effective for fiscal years beginning after December 15, 2001. - -------------------------------------------------------------------------------- 11. Subsequent Event - -------------------------------------------------------------------------------- In August 2001, Sprint issued 20.4 million shares of PCS common stock and received net proceeds of $488 million. Sprint also issued $1.7 billion of equity units yielding 7.125%, which consist of a 3-year forward purchase agreement to purchase PCS common stock and a 5-year senior note. Along with these transactions, DT sold 49.6 million shares of PCS common stock, including PCS shares underlying the Class A common stock. DT received the related proceeds from the sale of its stock. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION Sprint PCS Group AND RESULTS OF OPERATIONS (an integrated business of Sprint Corporation) - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: o the effects of vigorous competition in the markets in which Sprint operates; o the costs and business risks associated with providing new services and entering new markets necessary to provide nationwide or global services; o the ability of the PCS Group to continue to grow a significant market presence; o the effects of mergers and consolidations within the telecommunications industry; o the uncertainties related to Sprint's strategic investments; o the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; o unexpected results of litigation filed against Sprint; o the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes including the impact of the Telecommunications Act of 1996, or other external factors over which Sprint has no control; and o other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout Management's Discussion. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- Sprint PCS Group - -------------------------------------------------------------------------------- Operating Segments Sprint's business is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses, and the PCS wireless telephony products and services business. The FON Group includes the global markets division, the local division and the product distribution and directory publishing businesses, and the PCS Group includes the PCS wireless telephony products and services business. The PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division and the product distribution and directory publishing businesses. Board Discretion Regarding Tracking Stocks Sprint's Board of Directors has the discretion to, among other things, make operating and financial decisions that could favor one group over the other and, subject to the restrictions in Sprint's articles of incorporation, to change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Under the applicable corporate law, Sprint's Board owes its fiduciary duties to all of Sprint's shareholders and there is no board of directors that owes separate duties to the holders of either the FON common stock or the PCS common stock. The Tracking Stock Policies, adopted by Sprint's Board, provide that the Board, in resolving material matters in which the holders of FON common stock and PCS common stock have potentially divergent interests, will act in the best interests of Sprint and all of its common shareholders after giving fair consideration to the potentially divergent interests of the holders of the separate classes of Sprint common stock. These policies may be changed by the Board without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. PCS Group The PCS Group includes Sprint's PCS wireless telephony products and services business. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency band and a single technology. The PCS Group has licenses to provide service to the entire United States population including Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches nearly 239 million people. The PCS Group provides nationwide service through: o operating its own digital network in major U.S. metropolitan areas, o affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, o roaming on other providers' analog cellular networks using dual-band/dual-mode handsets, and o roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS Group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of customer acquisition and service. The wireless industry, including the PCS Group, typically generates a higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions. - -------------------------------------------------------------------------------- Results of Operations - --------------------------------------------------------------------------------
Selected Operating Results --------------------------------------------------------------------- Quarters Ended June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 2,264 $ 1,476 $ 788 53.4% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,161 937 224 23.9% Selling, general and administrative 612 528 84 15.9% Depreciation and amortization 548 456 92 20.2% Merger related costs - 24 (24) (100.0)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,321 1,945 376 19.3% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (57) $ (469) $ 412 87.8% -- ------------- -- -------------- -- ------------- Operating income before depreciation and amortization and merger related costs $ 491 $ 11 $ 480 NM -- ------------- -- -------------- -- ------------- NM = Not meaningful
Selected Operating Results --------------------------------------------------------------------- Year-to-Date June 30, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 4,315 $ 2,696 $ 1,619 60.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 2,295 1,831 464 25.3% Selling, general and administrative 1,276 1,035 241 23.3% Depreciation and amortization 1,083 877 206 23.5% Merger related costs - 24 (24) (100.0)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 4,654 3,767 887 23.5% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (339) $ (1,071) $ 732 68.3% -- ------------- -- -------------- -- ------------- Operating income (loss) before depreciation and amortization and merger related costs $ 744 $ (170) $ 914 NM -- ------------- -- -------------- -- ------------- NM = Not meaningful
The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 23% of net operating revenues in the 2001 second quarter and year-to-date periods. These revenues were 24% of net operating revenues in the 2000 second quarter and year-to-date periods.
Net Operating Revenues Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Customers (millions) 11.2 7.4 11.2 7.4 --- ------------- -- -------------- -- ------------- --- ------------- Average monthly service revenue per user (ARPU) $ 61 $ 59 $ 60 $ 58 --- ------------- -- -------------- -- ------------- --- ------------- Customer churn rate 2.2% 2.6% 2.3% 2.7% --- ------------- -- -------------- -- ------------- --- -------------
The PCS Group's net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges, usage charges and activation fees. Subscriber revenues increased 63% in the 2001 second quarter and 69% in the 2001 year-to-date period from the same 2000 periods mainly reflecting an increase in the average number of customers and an increase in ARPU. In the second quarter of 2001, the PCS Group began reporting contract cancellation fees on a net basis, reducing reported ARPU by about $2 in the 2001 second quarter and reducing reported monthly cash costs per user (CCPU) by a corresponding amount. ARPU on a proforma restated basis would be $62 for the 2001 second quarter and $59 in the 2001 first quarter and year-to-date periods and the 2000 second quarter, and $58 in the 2000 year-to-date period. Before reporting contract cancellation fees on a net basis, ARPU was $63 for the 2001 second quarter and $61 in the year to date period, compared to $60 in the 2001 first quarter, $59 in the 2000 second quarter and $58 in the 2000 year-to-date period. The improvement in ARPU was mainly due to customers subscribing to higher usage service plans. The PCS Group added 843,000 customers in the 2001 second quarter ending the period with nearly 11.2 million customers compared to 7.4 million customers at the end of the 2000 second quarter. Although the companies that the PCS Group serves on a wholesale basis reported a decline of 11,000 customers for the quarter, wholesale revenues increased from the 2001 first quarter. The PCS Group affiliates added approximately 220,000 customers for the 2001 second quarter bringing the total number of customers added in the quarter by the PCS Group and its affiliates to nearly 1.1 million and over 12.8 million total customers served on the PCS network. In the 2001 second quarter, the customer churn rate improved reflecting expanded network coverage, increased percentage of customers under contract and the success of several customer retention initiatives. Revenues from sales of handsets and accessories were approximately 10% of net operating revenues in the 2001 second quarter and year-to-date period. These revenues as a percentage of net operating revenues were approximately 15% in the 2000 second quarter and year-to-date period. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses
Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Acquisition costs per gross customer addition (CPGA) $ 340 $ 350 $ 350 $ 370 --- ------------- -- -------------- -- ------------- --- ------------- Monthly cash costs per user $ 32 $ 35 $ 33 $ 36 --- ------------- -- -------------- -- ------------- --- -------------
The PCS Group's costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 24% in the 2001 second quarter and 25% in the 2001 year-to-date period from the same 2000 periods reflecting an increase in the average number of customers and expanded market coverage. SG&A expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 16% in the 2001 second quarter and 23% in the 2001 year-to-date period from the same 2000 periods reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. CPGA, including equipment subsidies and marketing costs, have improved approximately 3% in the 2001 second quarter and 6% in the 2001 year-to-date period from the same 2000 periods. Lower equipment and marketing and selling costs contributed to the improvement. CCPU consists of costs of service revenues, service delivery and other general and administrative costs. Reporting contract cancellations fees on a net basis impacted 2001 second quarter reported CCPU by approximately $2. CCPU on a proforma restated basis would be $33 in both the first and second quarters of 2001 and $32 for the year-to-date period, compared to $35 for the 2000 second quarter and $36 for the 2000 year-to-date period. Before reporting these fees on a net basis, CCPU was $34 in the 2001 first and second quarters and the year-to-date period, compared to $35 in the 2000 second quarter and $36 in the 2000 year-to-date period. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 20% in the 2001 second quarter and 23% in the 2001 year-to-date period from the same 2000 periods mainly reflecting depreciation of the network assets placed in service during 2001 and 2000. Additionally, depreciation of certain network assets was increased in the 2001 first quarter to reflect the accelerated replacement of the assets to accommodate network technology upgrades. In May 2001, a significant portion of the value assigned to acquired customer base became fully amortized which caused a $24 million decrease in 2001 amortization expense compared to 2000. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense The PCS Group's effective interest rate on long-term debt was 8.7% in the 2001 second quarter and year-to-date period compared to 8.6% in the same 2000 periods. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings and deferred compensation plans have been excluded so as not to distort the PCS Group's effective interest rate on long-term debt. Interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The PCS Group's interest expense includes $73 million in the 2001 second quarter, $137 million in the 2001 year-to-date period, $58 million in the 2000 second quarter and $116 million in the 2000 year-to-date period resulting from the difference between Sprint's actual interest rates and the rates charged to the PCS Group. These costs are derived from both long-term and short-term borrowings. Only the long-term portion of these costs are in the effective interest rates above. Other Income (Expense), Net Other income (expense) consisted of the following:
Quarters Ended Year-to-Date June 30, June 30, ----------------------------------- ---------------------------------- 2001 2000 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- (millions) Dividend and interest income $ 1 $ - $ 2 $ - Equity in net losses of affiliates (13) (14) (47) (14) Gains on sales of assets - 6 10 34 Other, net (3) (1) - (3) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total $ (15) $ (9) $ (35) $ 17 --- ------------- -- -------------- -- ------------- --- -------------
Investments accounted for using the equity method mainly consisted of the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. The PCS Group purchased this investment in the 2000 second quarter. Gains on sales of assets in both the 2001 and 2000 year-to-date periods reflect the sales of network infrastructure and the rights to manage customers. Income Taxes See Note 3 of Condensed Notes to Combined Financial Statements for the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Extraordinary Items, Net In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- June 30, December 31, 2001 2000 - ------------------------------------------------------ (millions) Combined assets $ 20,585 $ 19,763 -------------------------------- The PCS Group's combined assets increased $822 million since year-end. Net property, plant and equipment increased $866 million mainly reflecting capital expenditures to support the PCS network buildout and expansion, partly offset by depreciation and network asset sales. See "Liquidity and Capital Resources" for more information about changes in the PCS Group's Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Sprint's Board of Directors has the power to make determinations that may impact the financial and liquidity position of each of the tracking stock groups. This power includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding the timing and amount of capital expenditures. The actions of the Board of Directors are subject to its fiduciary duties to all shareholders of Sprint, and not just to the holders of a particular class of common stock. Given the above, it may be difficult for investors to assess each group's liquidity and capital resources and, in turn, the future prospects of each group based on past performance. Operating Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided (used) by operating activities $ (154) $ 294 ------------------------------- Operating cash flows decreased $448 million in the 2001 year-to-date period from the same 2000 period primarily reflecting an increase in working capital requirements partly offset by improved operating results. Investing Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows used by investing activities $ (1,686) $ (1,467) ------------------------------- Capital expenditures, which are the PCS Group's largest investing activity, totaled $1.7 billion in the 2001 year-to-date period, compared to $1.4 billion in the 2000 year-to-date period. Capital expenditures in both years were mainly for the continued buildout and expansion of the PCS network. Financing Activities Year-to-Date June 30, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided by financing activities $ 1,859 $ 1,242 ------------------------------- In the 2001 year-to-date period, financing activities mainly reflect net borrowings of $1.7 billion used mainly to fund capital requirements. In the 2000 year-to-date period, financing activities mainly reflect net borrowings of $1 billion used primarily to fund capital requirements. Also included in the 2001 year-to-date financing activities is $151 million received from the FON Group to compensate for the net amount of PCS stock-based compensation granted to FON Group employees and FON stock-based compensation granted to PCS Group employees. Capital Requirements The PCS Group's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be between $3.7 and $4 billion. Capital expenditures are expected to range between $3.3 and $3.5 billion, and investments in affiliates are expected to be between $350 and $450 million. PCS preferred stock dividend payments are expected to total $15 million in 2001, including payments to the FON Group, in the amount of $8 million, for its preferred intergroup interest. -----END PRIVACY-ENHANCED MESSAGE-----