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 September 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 OCTOBER 31, 2001:
FON COMMON STOCK 888,392,279
PCS COMMON STOCK 985,694,314
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 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 40
Part II - Other Information
Item 1. Legal Proceedings 41
Item 2. Changes in Securities 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Signature 44
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, except per share data) Consolidated
--------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Quarters Ended September 30, 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,715 $ 6,040
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 3,442 2,935
Selling, general and administrative 1,805 1,686
Depreciation 1,096 908
Amortization 66 154
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 6,409 5,683
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 306 357
Interest expense (290) (233)
Other expense, net (95) (89)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) before income taxes (79) 35
Income tax benefit (expense) (55) (41)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) (134) (6)
Preferred stock dividends (paid) received (1) (3)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) applicable to
common stock $ (135) $ (9)
-- ------------- --- -------------
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
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (180) $ (111) $ 4,244 $ 4,444 $ 2,651 $ 1,707
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(180) (111) 2,106 2,064 1,516 982
- - 1,072 1,083 733 603
- - 638 556 458 352
- - 6 17 60 137
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(180) (111) 3,822 3,720 2,767 2,074
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 422 724 (116) (367)
4 4 (13) (8) (281) (229)
(4) (4) (56) (84) (35) (1)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 353 632 (432) (597)
- - (199) (248) 144 207
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 154 384 (288) (390)
- - 2 1 (3) (4)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 156 $ 385 $ (291) $ (394)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.18 $ 0.43 $ (0.29) $ (0.41)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
889.6 890.8 993.0 971.3
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.18 $ 0.44 $ (0.29) $ (0.41)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
887.2 884.2 993.0 971.3
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Unaudited) Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
--------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Year-to-Date September 30, 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 19,415 $ 17,390
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 9,648 8,541
Selling, general and administrative 5,334 4,992
Depreciation 3,124 2,581
Amortization 322 454
Merger related costs - 187
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 18,428 16,755
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 987 635
Interest expense (907) (717)
Other income (expense), net (137) (48)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations
before income taxes (57) (130)
Income tax benefit (expense) (111) (32)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations (168) (162)
Discontinued operation, net - 675
Extraordinary items, net (1) (3)
Cumulative effect of changes in
accounting principles, net 2 (2)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) (167) 508
Preferred stock dividends (paid) received (5) (6)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) applicable to
common stock $ (172) $ 502
-- ------------- --- -------------
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
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (463) $ (307) $ 12,912 $ 13,294 $ 6,966 $ 4,403
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(463) (307) 6,300 6,035 3,811 2,813
- - 3,325 3,354 2,009 1,638
- - 1,827 1,618 1,297 963
- - 18 51 304 403
- - - 163 - 24
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(463) (307) 11,470 11,221 7,421 5,841
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,442 2,073 (455) (1,438)
15 14 (56) (58) (866) (673)
(15) (14) (52) (50) (70) 16
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,334 1,965 (1,391) (2,095)
- - (574) (771) 463 739
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 760 1,194 (928) (1,356)
- - - 675 - -
- - (1) - - (3)
- - - (2) 2 -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 759 1,867 (926) (1,359)
- - 5 5 (10) (11)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 764 $ 1,872 $ (936) $ (1,370)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.86 $ 1.34 $ (0.95) $ (1.42)
- 0.75 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.86 $ 2.09 $ (0.95) $ (1.42)
--- ------------- -- ------------- -- ------------- --- -------------
888.3 894.5 983.7 963.5
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.86 $ 1.36 $ (0.95) $ (1.42)
- 0.77 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.86 $ 2.13 $ (0.95) $ (1.42)
--- ------------- -- ------------- -- ------------- --- -------------
886.3 879.8 983.7 963.5
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.375 $ 0.375 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
--------------------------------------------- ----------------- ----------------- -- -------------------------------
Quarters Ended September 30, 2001 2000
--------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ (134) $ (6)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (22) 5
Income tax benefit (expense) 8 (2)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities (14) 3
Reclassification adjustment for gains
included in net income (loss) (15) (8)
------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding gains (losses)
on securities (29) (5)
Foreign currency translation adjustments (5) 1
Reclassification adjustment for losses
included in net income (loss) 31 -
------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Total foreign currency translation adjustments 26 1
Net unrealized losses on qualifying
cash flow hedges (2) -
------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) (5) (4)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (139) $ (10)
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ------------------------------- -- ----------------------------------
2001 2000 2001 2000 2001 2000
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 154 $ 384 $ (288) $ (390)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
4 (3) (26) 6 - 2
(2) 1 10 (2) - (1)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2 (2) (16) 4 - 1
- - (15) - - (8)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2 (2) (31) 4 - (7)
- - (5) - - 1
- - 31 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 26 - - 1
- - (2) - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2 (2) (7) 4 - (6)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 2 $ (2) $ 147 $ 388 $ (288) $ (396)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (continued)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
--------------------------------------------- ----------------- ----------------- -- -------------------------------
Year-to-Date September 30, 2001 2000
--------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ (167) $ 508
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities 6 (28)
Income tax benefit (expense) (2) 10
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period 4 (18)
Reclassification adjustment for gains
included in net income (loss) (15) (40)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding gains (losses)
on securities (11) (58)
Foreign currency translation adjustments (17) 4
Reclassification adjustment of losses
included in net income (loss) 31 -
------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Total foreign currency translation adjustments 14 4
Net unrealized losses on qualifying
cash flow hedges (8) -
Cumulative effect of change in
accounting principle (9) -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) (14) (54)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (181) $ 454
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ------------------------------- -- ----------------------------------
2001 2000 2001 2000 2001 2000
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 759 $ 1,867 $ (926) $ (1,359)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
8 - (2) (33) - 5
(3) - 1 12 - (2)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
5 - (1) (21) - 3
- - (15) (32) - (8)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
5 - (16) (53) - (5)
- - (16) - (1) 4
- - 31 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 15 - (1) 4
- - (8) - - -
- - (9) - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
5 - (18) (53) (1) (1)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 5 $ - $ 741 $ 1,814 $ (927) $ (1,360)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
-------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 205 $ 239
Accounts receivable, net of consolidated allowance for doubtful accounts of
$471 and $389 4,230 4,028
Inventories 638 949
Prepaid expenses 424 366
Current tax benefit receivable from the FON Group - -
Receivables from the PCS Group - -
Other 345 391
-------------------------------------------------------------------------------------------------------------------------
Total current assets 5,842 5,973
Property, plant and equipment
FON Group 34,454 30,998
PCS Group 14,161 12,117
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 48,615 43,115
Accumulated depreciation (19,664) (17,799)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 28,951 25,316
Investments in and loans to affiliates 275 607
Intangible assets
Goodwill 5,432 5,425
PCS licenses 3,059 3,059
PCS customer base 746 747
PCS microwave relocation costs 388 411
Other intangibles 434 430
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 10,059 10,072
Accumulated amortization (1,450) (1,134)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 8,609 8,938
Other assets 1,894 1,767
-------------------------------------------------------------------------------------------------------------------------
Total $ 45,571 $ 42,601
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ----------------------------------- -----------------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2001 2000 2001 2000 2001 2000
------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 64 $ 122 $ 141 $ 117
- - 2,863 3,126 1,367 902
- - 371 434 267 515
- - 289 276 135 90
- (26) - - - 26
(443) (361) 443 361 - -
- (2) 193 193 152 200
---------------------------------------- ------------------------------- -----------------------------------
(443) (389) 4,223 4,512 2,062 1,850
- - 34,454 30,998 - -
- - - - 14,161 12,117
------------------------------------- ----------------------------------- -----------------------------------
- - 34,454 30,998 14,161 12,117
(47) (39) (16,550) (15,165) (3,067) (2,595)
------------------------------------- ----------------------------------- -----------------------------------
(47) (39) 17,904 15,833 11,094 9,522
(279) (383) 415 842 139 148
- - 879 877 4,553 4,548
- - - - 3,059 3,059
- - - - 746 747
- - - - 388 411
- - 390 384 44 46
------------------------------------- ----------------------------------- -----------------------------------
- - 1,269 1,261 8,790 8,811
- - (75) (57) (1,375) (1,077)
------------------------------------- ----------------------------------- -----------------------------------
- - 1,194 1,204 7,415 7,734
- - 1,220 1,258 674 509
------------------------------------- ----------------------------------- -----------------------------------
$ (769) $ (811) $ 24,956 $ 23,649 $ 21,384 $ 19,763
------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
-------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings including current maturities of long-term debt $ 4,548 $ 1,205
Accounts payable 1,597 2,285
Construction obligations 737 997
Accrued interconnection costs 605 547
Accrued taxes 503 440
Advance billings 733 607
Payroll and employee benefits 491 498
Accrued interest 424 255
Payables to the FON Group - -
Other 1,341 1,134
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 10,979 7,968
Noncurrent liabilities
Long-term debt and capital lease obligations 15,434 17,514
Equity unit notes 1,725 -
Deferred income taxes and investment tax credits 1,620 1,360
Postretirement and other benefit obligations 957 1,077
Other 719 710
-------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 20,455 20,661
Redeemable preferred stock 256 256
Shareholders' equity
Common stock
Class A FT common stock, par value $0.50 and $2.50 per share, 100.0 shares
authorized, 43.1 shares issued and outstanding 22 108
Class A DT common stock, par value $0.01 and $2.50 per share, 100.0 shares
authorized, 43.1 shares issued and outstanding - 108
FON, par value $2.00 per share, 4,200.0 shares authorized, 887.5 and 798.8
shares issued and 887.5 and 798.4 shares outstanding 1,775 1,598
PCS, par value $1.00 per share, 4,600.0 and 2,350.0 shares authorized,
983.6 and 933.1 shares issued and outstanding 984 933
Capital in excess of par or stated value 10,006 9,380
Retained earnings 1,087 1,578
Treasury stock, at cost, 0.0 and 0.4 shares - (10)
Accumulated other comprehensive income 7 21
Combined attributed net assets - -
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,881 13,716
-------------------------------------------------------------------------------------------------------------------------
Total $ 45,571 $ 42,601
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------ ----------------------------------- -----------------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2001 2000 2001 2000 2001 2000
------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ (113) $ (65) $ 2,361 $ 1,026 $ 2,300 $ 244
- - 972 1,598 625 687
- - - - 737 997
- - 605 547 - -
(1) (27) 279 264 225 203
- - 514 462 219 145
- - 387 377 104 121
- - 118 136 306 119
(319) (296) - - 319 296
(46) (40) 687 594 700 580
------------------------------------ ----------------------------------- -----------------------------------
(479) (428) 5,923 5,004 5,535 3,392
- (104) 3,351 3,482 12,083 14,136
- - - - 1,725 -
(4) (6) 1,624 1,276 - 90
- - 957 1,077 - -
2 - 392 457 325 253
------------------------------------ ----------------------------------- -----------------------------------
(2) (110) 6,324 6,292 14,133 14,479
(280) (280) 10 10 526 526
22 108 - - - -
- 108 - - - -
1,775 1,598 - - - -
984 933 - - - -
10,006 9,380 - - - -
1,087 1,578 - - - -
- (10) - - - -
7 21 - - - -
(13,889) (13,709) 12,699 12,343 1,190 1,366
------------------------------------ ----------------------------------- -----------------------------------
(8) 7 - - - -
------------------------------------ ----------------------------------- -----------------------------------
$ (769) $ (811) $ 24,956 $ 23,649 $ 21,384 $ 19,763
------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
------------------------------------------------------------------ ----------------- ----------------------------------
Year-to-Date September 30, 2001 2000
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ (167) $ 508
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Discontinued operation, net - (675)
Equity in net losses of affiliates 144 197
Depreciation and amortization 3,446 3,035
Deferred income taxes and investment tax credits 155 9
Changes in assets and liabilities:
Accounts receivable, net (202) (424)
Inventories and other current assets 235 414
Accounts payable and other current liabilities (312) (39)
Current tax benefit receivable from the FON Group - -
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net (113) 24
Other, net (40) (135)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 3,146 2,914
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (6,760) (4,765)
Investments in and loans to affiliates, net (61) (882)
Proceeds from sales of assets 286 255
Other, net 33 (10)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by continuing operations (6,502) (5,402)
Proceeds from sale of investment in Global One - 1,403
------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash used by investing activities (6,502) (3,999)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt 4,877 2,411
Payments on debt (3,620) (1,244)
Proceeds from equity units 1,725 -
Proceeds from common stock issued 605 264
Dividends paid (340) (333)
Other, net 75 86
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities 3,322 1,184
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents (34) 99
Cash and Equivalents at Beginning of Period 239 120
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 205 $ 219
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2001 2000 2001 2000 2001 2000
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 759 $ 1,867 $ (926) $ (1,359)
- - - (675) - -
- - 64 166 80 31
- - 1,845 1,669 1,601 1,366
- - 384 456 (229) (447)
- - 263 (228) (465) (196)
(2) 411 33 51 204 (48)
28 (118) (420) (212) 80 291
(26) (293) - - 26 293
- - (11) (258) 11 258
2 - (160) (39) 45 63
(2) - 4 (106) (42) (29)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2,761 2,691 385 223
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (3,899) (2,655) (2,861) (2,110)
- - (32) (681) (29) (201)
- - 249 51 37 204
- (17) 33 18 - (11)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- (17) (3,649) (3,267) (2,853) (2,118)
- - - 1,403 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- (17) (3,649) (1,864) (2,853) (2,118)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,554 340 3,323 2,071
- - (292) (844) (3,328) (400)
- - - - 1,725 -
- - 22 156 583 108
- - (329) (322) (11) (11)
- 17 (125) (132) 200 201
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 17 830 (802) 2,492 1,969
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (58) 25 24 74
- - 122 104 117 16
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 64 $ 129 $ 141 $ 90
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
-----------------------------------------------------------------------------------------------------------------------
Year-to-Date September 30, 2001
-----------------------------------------------------------------------------------------------------------------------
Capital
Class A Class A FON PCS In Excess
FT DT Common Common of Par or Retained Treasury
common common Stock Stock Stated Earnings Stock Other Total
stock stock Value
-----------------------------------------------------------------------------------------------------------------------
Beginning 2001 balance $ 108 $ 108 $ 1,598 $ 933 $ 9,380 $ 1,578 $ (10) $ 21 $ 13,716
Net loss - - - - - (167) - - (167)
FON common stock
dividends - - - - - (322) - - (322)
Class A common stock
dividends - - - - - (11) - - (11)
PCS preferred stock
dividends - - - - - (5) - - (5)
Conversion of FON
common stock
underlying Class A
common stock (86) (86) 172 - - - - - -
Conversion of PCS
common stock
underlying Class A
common stock - (21) - 21 - - - - -
FON Series 1 common
stock issued - - 5 - 57 - - - 62
PCS Series 1 common
stock issued - - - 30 626 - - - 656
Treasury stock issued - - - - - (2) 10 - 8
Present value of
purchase contract
adjustment payments - - - - (53) - - - (53)
Tax benefit from stock
compensation - - - - 8 - - - 8
Other, net - (1) - - (12) 16 - (14) (11)
-----------------------------------------------------------------------------------------------------------------------
September 2001 balance $ 22 $ - $ 1,775 $ 984 $ 10,006 $ 1,087 $ - $ 7 $ 13,881
-------------------------------------------------------------------------------------------------
Shares Outstanding
-------------------------------------------------------------------
Beginning 2001 balance
43.1 43.1 798.4 933.1
Conversion of FON
common stock
underlying Class A
common stock - - 86.2 -
Conversion of PCS
common stock
underlying Class A
common stock - - - 21.2
FON Series 1 common
stock issued - - 2.5 -
PCS Series 1 common
stock issued - - - 29.3
Treasury stock issued - - 0.4 -
---------------------------------------------
September 2001 balance
43.1 43.1 887.5 983.6
---------------------------------------------
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.
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 $132 million and $146 million in the 2001
and 2000 third quarters and $402 million and $462 million in the 2001 and 2000
year-to-date periods, respectively. The percentage of these costs allocated to
the PCS Group were approximately 24% and 15% in the 2001 and 2000 third quarters
and 21% and 14% 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 $79 million and
$59 million in the 2001 and 2000 third quarters and $216 million and $175
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 September 2001, investments accounted for using the equity method
consisted primarily of the FON Group's investment in Intelig, a long distance
operation in Brazil, and the PCS Group's investment in Pegaso
Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. 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.
In the 2001 third quarter, Sprint completed an analysis of the valuation of its
equity method investments that resulted in an $157 million write-down. This
charge was included in "Other income (expense), net" in Sprint's Consolidated
Statements of Operations.
Combined, unaudited, summarized financial information (100% basis) of entities
accounted for using the equity method was as follows:
Quarters Ended Year-to-Date
September 30, September 30,
--- ------------------------------- -- -------------------------------
2001 2000 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
Net operating revenues $ 157 $ 655 $ 507 $ 1,699
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (72) $ (449) $ (358) $ (616)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (191) $ (453) $ (499) $ (815)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (55) $ (120) $ (128) $ (181)
--- ------------- -- -------------- -- ------------- --- -------------
--------------------------------------------------------------------------------
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
September 30,
-----------------------
2001 2000
---------------------------------------------------------
(millions)
Income tax benefit at the
federal statutory rate $ (20) $ (46)
Effect of:
State income taxes, net of
federal income tax effect 23 13
Equity in losses of foreign
joint ventures 28 38
Goodwill amortization 35 38
Write down of equity method
investment 55 -
Other, net (10) (11)
---------------------------------------------------------
Income tax expense $ 111 $ 32
-----------------------
--------------------------------------------------------------------------------
4. Accounting for Derivative Instruments
--------------------------------------------------------------------------------
Accounting Standard
In June 1998, the Financial Accounting Standards Board (FASB) 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 are 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 swap. The stock warrants are not designated
as hedging instruments and changes in the fair value 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 recognizing 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 recognizing
the fair value of cash flow hedges and is recorded in "Cumulative effect of
change in accounting principle" 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 net derivative losses in earnings of $0.6 million (net of tax
benefit of $0.3 million) for the 2001 third quarter and $0.2 million (net of tax
benefit 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 losses are included in Other income (expense), net on the
Consolidated Statements of Operations. Sprint recorded a $2 million reduction in
other comprehensive income in the 2001 third quarter and an $8 million reduction
in the year-to-date period resulting from losses on cash flow hedges. The
reduction in other comprehensive income is included in "Net unrealized losses on
qualifying cash flow hedges" on the Consolidated Statements of Comprehensive
Income (Loss).
--------------------------------------------------------------------------------
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. Sprint's
ability to refinance these borrowings is limited to the long-term portion of
Sprint's unused credit facilities. At the end of September 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 $2.1 billion. The commercial paper borrowings
that remained in current liabilities were $657 million.
In August 2001, Sprint renewed its $3.0 billion 364- day revolving credit
facility with a syndicate of domestic and international banks to support
commercial paper operations. At September 30, 2001, the entire credit facility
was unused.
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 to repay debt, and
to fund capital investments and working capital requirements.
--------------------------------------------------------------------------------
6. Equity Unit Offering
--------------------------------------------------------------------------------
In August 2001, Sprint completed a registered offering of 69 million equity
units, each with a stated amount of $25. Net proceeds from the issuance were
approximately $1.7 billion after deducting the underwriting discount and other
offering expenses. The proceeds were used to repay debt, and to fund capital
investments and working capital requirements.
Each equity unit initially consists of a corporate unit. Each corporate unit
consists of a purchase contract and $25 principal amount of senior notes (Notes)
of Sprint's wholly owned subsidiary, Sprint Capital Corporation. The corporate
unit may be converted by the holder into a treasury unit consisting of the
purchase contract and a treasury portfolio of zero-coupon U.S. treasury
securities by substituting the treasury securities for the Notes. The holder of
the equity unit will own the underlying Notes or treasury portfolio, but will
pledge the Notes or portfolio to Sprint to secure its obligations under the
purchase contract.
Purchase Contract
As a component of the equity unit, the purchase contract obligates the holder to
purchase, and obligates Sprint to sell, on August 17, 2004, a variable number of
newly issued shares of PCS common stock ranging from approximately 58 million to
70 million shares depending on the market price of PCS common stock. Sprint will
make quarterly contract adjustment payments of 1.125% on the $25 stated amount
per year until the purchase contract is settled, although it has the right to
defer these payments until August 17, 2004. The present value of this obligation
is classified as an other liability on the Consolidated Balance Sheets.
These contingently issuable shares have not been included in the diluted
earnings per share calculation because their effect is currently antidilutive.
Notes
The Notes initially bear interest, payable quarterly in arrears, at the rate of
6% per annum. Sprint is obligated to remarket the Notes in 2004, at which time
the interest rate will be reset. The Notes mature August 17, 2006.
The corporate units are listed on the New York Stock Exchange under the symbol
"SDE".
--------------------------------------------------------------------------------
7. Common Stock Issuances
--------------------------------------------------------------------------------
In August 2001, Sprint completed a registered offering of 23.5 million shares of
its PCS common stock. Net proceeds from the issuance were approximately $561
million after deducting the underwriting discount and other offering expenses.
The proceeds were used to repay debt, and to fund capital investments and
working capital requirements.
In conjunction with the above offering, Deutsche Telekom AG (DT) sold 57 million
shares of PCS common stock, which represented an approximate 4% voting interest
in Sprint Corporation. Sprint did not receive any of the proceeds from the sale
of shares by DT. Upon the sale, 21.2 million shares of PCS common stock
underlying Class A common stock and 35.8 million shares of Series 3 PCS common
stock were converted into shares of Series 1 PCS common stock.
In June 2001, Sprint completed a registered offering on behalf of France Telecom
(FT) and DT in which they sold 174.8 million shares of FON common stock, which
represented an approximate 10% voting interest in Sprint. Sprint did not receive
any proceeds from this offering. Upon the sale, 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 shares of Series 1 FON common stock.
After these conversions, a Class A FT common share represents the right to 50%
of a share of PCS common stock and a Class A DT common share represents the
right to approximately 0.9% of a share of PCS common stock.
--------------------------------------------------------------------------------
8. 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 2000 first quarter. 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.
--------------------------------------------------------------------------------
9. 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.
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
Quarters Ended Markets Local & Directory PCS Corporate and
September 30, Division Division Publishing Group Eliminations(1) Consolidated
----------------------------------------------------------------------------------------------------------------
(millions)
2001
Net operating revenues $ 2,505 $ 1,564 $ 434 $ 2,651 $ (439) $ 6,715
Affiliated revenues 168 70 180 21 (439) -
Operating income (loss) (119) 477 73 (116) (9) 306
2000
Net operating revenues $ 2,646 $ 1,545 $ 496 $ 1,707 $ (354) $ 6,040
Affiliated revenues 114 46 182 12 (354) -
Operating income (loss) 226 431 75 (367) (8) 357
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Product
Global Distribution Corporate and
Year-to-Date Markets Local & Directory PCS Eliminations
September 30, Division Division Publishing Group(3) (1), (2) Consolidated
----------------------------------------------------------------------------------------------------------------
(millions)
2001
Net operating revenues $ 7,635 $ 4,669 $ 1,402 $ 6,966 $ (1,257) $ 19,415
Affiliated revenues 451 193 568 45 (1,257) -
Operating income (loss) (141) 1,381 230 (455) (28) 987
2000
Net operating revenues $ 7,960 $ 4,597 $ 1,428 $ 4,403 $ (998) $ 17,390
Affiliated revenues 313 139 516 30 (998) -
Operating income (loss) 731 1,320 210 (1,438) (188) 635
----------------------------------------------------------------------------------------------------------------
(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.
(2) In the 2000 year-to-date period corporate operating loss includes a $163
million charge for the FON Group costs associated with the terminated
WorldCom merger.
(3) The PCS Group operating loss includes a $24 million charge for costs
associated with the terminated WorldCom merger.
Net operating revenues by product and services were as follows:
---------------------------------------------------------------------------------------------------------------------
Product
Global Distribution
Quarters Ended Markets Local & Directory PCS
September 30, Division Division Publishing Group Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------------------------------
(millions)
2001
Voice $ 1,692 $ - $ - $ - $ (168) $ 1,524
Data 497 - - - - 497
Internet 248 - - - - 248
Local service - 732 - - (1) 731
Network access - 507 - - (52) 455
Long distance - 186 - - - 186
Product distribution - - 293 - (180) 113
Directory publishing - - 141 - - 141
Wireless services - - - 2,651 (21) 2,630
Other 68 139 - - (17) 190
-------------------------------------------------------------------------------
Total net operating revenues $ 2,505 $ 1,564 $ 434 $ 2,651 $ (439) $ 6,715
-------------------------------------------------------------------------------
2000
Voice $ 1,795 $ - $ - $ - $ (114) $ 1,681
Data 470 - - - - 470
Internet 223 - - - - 223
Local service - 720 - - - 720
Network access - 486 - - (37) 449
Long distance - 187 - - - 187
Product distribution - - 369 - (182) 187
Directory publishing - - 127 - - 127
Wireless services - - - 1,707 (12) 1,695
Other 158 152 - - (9) 301
-------------------------------------------------------------------------------
Total net operating revenues $ 2,646 $ 1,545 $ 496 $ 1,707 $ (354) $ 6,040
-------------------------------------------------------------------------------
(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
September 30, Division Division Publishing Group Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------------------------------
(millions)
2001
Voice $ 5,136 $ - $ - $ - $ (451) $ 4,685
Data 1,512 - - - - 1,512
Internet 759 - - - - 759
Local service - 2,199 - - (3) 2,196
Network access - 1,521 - - (147) 1,374
Long distance - 549 - - - 549
Product distribution - - 986 - (568) 418
Directory publishing - - 416 - - 416
Wireless services - - - 6,966 (45) 6,921
Other 228 400 - - (43) 585
-------------------------------------------------------------------------------
Total net operating revenues $ 7,635 $ 4,669 $ 1,402 $ 6,966 $ (1,257) $ 19,415
-------------------------------------------------------------------------------
2000
Voice $ 5,370 $ - $ - $ - $ (313) $ 5,057
Data 1,429 - - - - 1,429
Internet 676 - - - - 676
Local service - 2,121 - - (1) 2,120
Network access - 1,497 - - (102) 1,395
Long distance - 536 - - - 536
Product distribution - - 1,091 - (516) 575
Directory publishing - - 337 - - 337
Wireless services - - - 4,403 (30) 4,373
Other 485 443 - - (36) 892
-------------------------------------------------------------------------------
Total net operating revenues $ 7,960 $ 4,597 $ 1,428 $ 4,403 $ (998) $ 17,390
-------------------------------------------------------------------------------
(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.
--------------------------------------------------------------------------------
10. Supplemental Cash Flows Information
--------------------------------------------------------------------------------
Sprint's cash paid (received) for interest and income taxes was as follows:
Year-to-Date
September 30,
-------------------------
2001 2000
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 726 $ 592
-------------------------
Income taxes $ 12 $ (399)
-------------------------
Sprint's noncash activities included the following:
Year-to-Date
September 30,
-------------------------
2001 2000
-------------------------------------------------------
(millions)
Present value of purchase
contracts adjustment
payments $ 53 $ -
-------------------------
Common stock issued under
employee stock benefit
plans $ 124 $ 173
-------------------------
Tax benefit from stock
compensation $ 8 $ 406
-------------------------
Stock received for stock
options exercised $ 3 $ 64
-------------------------
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, 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.
--------------------------------------------------------------------------------
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, Sprint recognized a one-time, pre-tax charge of $187
million for costs associated with the terminated merger.
--------------------------------------------------------------------------------
13. Other Post-Employment Benefit Curtailment
--------------------------------------------------------------------------------
In September 2001, Sprint adopted a negative plan amendment to the Sprint
Retiree Medical Plan. This amendment reduces the accumulated post-retirement
benefit obligation and reduces employee benefits attributed to employee service
already rendered. As a result of this amendment, the life insurance benefit is
eliminated for employees retiring after 2003 and the post-retirement medical
insurance plan is replaced with a Sprint funded account to be managed by the
employee. The net curtailment gain resulting from this amendment is $75 million
(net of tax expense of $45 million) for the 2001 third quarter.
--------------------------------------------------------------------------------
14. Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. This new standard, when in effect, will
supersede SFAS Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for the Long-Lived Assets to Be Disposed Of", providing one
accounting model for the review of asset impairment. Statement No. 144 retains
much of the recognition and measurement provisions of Statement No. 121, but
removes goodwill from its scope. It also requires long-lived assets to be
disposed of other than by sale to be considered as held and used until disposed
of, requiring the depreciable life to be adjusted as an accounting change.
Criteria to classify long-lived assets to be disposed of by sale has changed
from SFAS Statement No. 121, but these costs will continue to be reported at the
lower of their carrying amount or fair value less cost to sell, and will cease
to be depreciated.
Statement 144 will also supercede the section of the Accounting Principles Board
(APB) Opinion 30, which prescribes reporting for the effects of a disposal of a
segment of a business. This statement retains the basic presentation provisions
of the opinion, but requires losses on a disposal or discontinued operation to
be recognized as incurred. It also broadens the definition of a discontinued
operation to include a component of an entity.
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." The objective of this statement is to provide
accounting guidance for legal obligations associated with the retirement of
long-lived assets by requiring the fair value of a liability for the asset
retirement obligation to be recognized in the period in which it is incurred.
When the liability is initially recognized, the asset retirement costs should
also be capitalized by increasing the carrying amount of the related long-lived
asset. The liability is then accreted to its present value each period and the
capitalized costs are depreciated over the useful life of the associated asset.
Sprint is currently assessing its legal obligations. This statement is effective
for fiscal years beginning after June 15, 2002.
In June 2001, the FASB issued Statement No. 141, "Business Combinations," and
Statement No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 supercedes 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 prescribes the necessary accounting for both identifiable
intangibles and goodwill after initial recognition. Amortization of goodwill and
indefinite lived intangibles will cease upon adoption of this statement and
periodic impairment testing will be required. Amortization of definite lived
intangibles will continue over the useful life. 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.
--------------------------------------------------------------------------------
15. Subsequent Events
--------------------------------------------------------------------------------
Business Restructuring
In October 2001, Sprint announced it would terminate its efforts to develop and
deploy its integrated communications services referred to as Sprint ION, as well
as take additional steps to reduce overall operating costs. Sprint also
announced it would suspend customer acquisition for the fixed wireless
Multipoint Multichannel Distribution Services (MMDS). We expect the accounting
charge related to this announcement to include costs associated with the
wind-down of Sprint ION, asset write-offs and workforce reductions and to result
in a pre-tax charge of approximately $2 billion.
Debt Redemption
In October 2001, Sprint redeemed, prior to scheduled maturities, $558 million of
11% Senior Notes and 12 1/2% Senior Discount Notes.
Dividend Declaration
In October 2001, Sprint's Board of Directors declared a dividend of 12.5 cents
per share on the FON common stock. Dividends will be paid December 28, 2001.
Debt Offering
In November 2001, Sprint issued $1.75 billion of debt securities through a
private offering. These borrowings have an interest rate of 6% and mature in
2007. The proceeds were used for repayment of debt.
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 the impact of new technologies on Sprint's business;
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 and Analysis. 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.
In October 2001, Sprint announced it would terminate its efforts to develop and
deploy its integrated communications services referred to as Sprint ION, as well
as take additional steps to reduce overall operating costs. Sprint also
announced it would suspend customer acquisition for the fixed wireless
Multipoint Multichannel Distribution Services (MMDS). We expect the accounting
charge related to this announcement to include costs associated with the
wind-down of Sprint ION, asset write-offs and workforce reductions and to result
in a pre-tax charge of approximately $2 billion.
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.
The FON Group and the 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 currently uses various advanced services last-mile technologies,
including dedicated access, Digital Subscriber Line (xDSL), and 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.
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 244
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
September 30, September 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 4,244 $ 4,444 $ 12,912 $ 13,294
PCS Group 2,651 1,707 6,966 4,403
Intergroup eliminations (180) (111) (463) (307)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 6,715 $ 6,040 $ 19,415 $ 17,390
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues increased 11% in the 2001 third 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
September 30, September 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 154 $ 384 $ 760 $ 1,194
PCS Group (288) (390) (928) (1,356)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss from continuing operations $ (134) $ (6) $ (168) $ (162)
--- ------------- -- -------------- -- ------------- --- -------------
In the 2001 third quarter, loss from continuing operations includes nonrecurring
losses of $157 million from the write-down of an equity method investment, an $8
million loss from the sale of an investment, and a curtailment gain of $75
million resulting from the modification of certain retirement plan benefits. In
the 2001 first quarter, loss from continuing operations includes a nonrecurring
gain of $9 million from investment activities. 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. 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. Excluding nonrecurring
items, loss from continuing operations was $44 million in the 2001 third
quarter, $87 million in the 2001 year-to-date period, and $103 million in the
2000 year-to-date period.
--------------------------------------------------------------------------------
Segmental Results of Operations
--------------------------------------------------------------------------------
Global Markets Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2001 2000 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 1,692 $ 1,795 $ (103) (5.7)%
Data 497 470 27 5.7%
Internet 248 223 25 11.2%
Other 68 158 (90) (57.0)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 2,505 2,646 (141) (5.3)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,544 1,410 134 9.5%
Selling, general and administrative 724 723 1 0.1%
Depreciation and amortization 356 287 69 24.0%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,624 2,420 204 8.4%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ (119) $ 226 $ (345) NM
-- ------------- -- -------------- -- -------------
Operating margin NM 8.5%
-- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2001 2000 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 5,136 $ 5,370 $ (234) (4.4)%
Data 1,512 1,429 83 5.8%
Internet 759 676 83 12.3%
Other 228 485 (257) (53.0)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 7,635 7,960 (325) (4.1)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 4,561 4,149 412 9.9%
Selling, general and administrative 2,223 2,261 (38) (1.7)%
Depreciation and amortization 992 819 173 21.1%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 7,776 7,229 547 7.6%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ (141) $ 731 $ (872) NM
-- ------------- -- -------------- -- -------------
Operating margin NM 9.2%
-- ------------- -- --------------
NM = Not meaningful
Net Operating Revenues
Net operating revenues decreased 5% in the 2001 third quarter and 4% in the 2001
year-to-date period from the same 2000 periods. Minute growth was 21% in the
2001 third 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 third quarter and year-to-date period with
minimal corresponding capacity sales in the same 2001 periods. These decreases
also reflect a decline in 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. In addition, the Regional Bell Operating Companies continue to obtain
regulatory clearance to provide in-region long distance services.
Voice Revenues
Voice revenues decreased 6% in the 2001 third quarter and 4% in the 2001
year-to-date period from the same 2000 periods due to a decline in consumer
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 third quarter and year-to-date period
from the same 2000 periods due to increased sales in asynchronous transfer mode
and network management services, partially offset by a decline in frame relay
services.
Internet Revenues
Internet revenues increased 11% in the 2001 third quarter and 12% in the 2001
year-to-date period from the same 2000 periods due to strong growth in dedicated
service revenues partly offset by a decline in dial-up Internet service
provider-related revenues.
Other Revenues
Other revenues decreased 57% in the 2001 third quarter and 53% in the 2001
year-to-date period from the same 2000 periods. The decreases reflect cable
capacity sales in the 2000 third quarter and year-to-date period with minimal
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 10% in the 2001 third
quarter and the 2001 year-to-date period from the same 2000 periods.
Interconnection costs increased 21% in the 2001 third quarter and 18% 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 5% in the 2001 third 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
resulting from minimal sales in 2001 compared to 2000. 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 62% of net
operating revenues in the 2001 third quarter and 60% in the 2001 year-to-date
period compared to 53% and 52% for the same periods a year ago.
Excluding Sprint ION related costs, total costs of services and products for
global markets were 59% of net operating revenues in the 2001 third quarter and
57% in the 2001 year-to-date period compared to 51% and 50% for the same periods
a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses were flat in the 2001 third
quarter and decreased 2% in the 2001 year-to-date period from the same 2000
periods. The year-to-date decrease is 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 primarily related to wholesale
customers. SG&A expense was 29% of net operating revenues in the 2001 third
quarter and year-to-date periods compared to 27% and 28% for the same periods a
year ago.
Excluding Sprint ION related costs, SG&A expense was 27% of net operating
revenue in the 2001 third quarter and year-to-date periods compared to 26% in
the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 24% in the 2001 third quarter
and 21% 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 14% of net operating revenues in the 2001 third
quarter and 13% in the 2001 year-to-date period compared to 11% and 10% for the
same periods a year ago.
Excluding Sprint ION related costs, depreciation and amortization expense was
12% of net operating revenue in the 2001 third quarter and 11% in the 2001
year-to-date period compared to 10% in the same periods a year ago.
Local Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
----------------------------------- -------------------------------
2001 2000 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 732 $ 720 $ 12 1.7%
Network access 507 486 21 4.3%
Long distance 186 187 (1) (0.5)%
Other 139 152 (13) (8.6)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,564 1,545 19 1.2%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 496 513 (17) (3.3)%
Selling, general and administrative 307 318 (11) (3.5)%
Depreciation and amortization 284 283 1 0.4%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,087 1,114 (27) (2.4)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 477 $ 431 $ 46 10.7%
--- ------------- -- -------------- -- -------------
Operating margin 30.5% 27.9%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
----------------------------------- -------------------------------
2001 2000 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 2,199 $ 2,121 $ 78 3.7%
Network access 1,521 1,497 24 1.6%
Long distance 549 536 13 2.4%
Other 400 443 (43) (9.7)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 4,669 4,597 72 1.6%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,476 1,464 12 0.8%
Selling, general and administrative 972 968 4 0.4%
Depreciation and amortization 840 845 (5) (0.6)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 3,288 3,277 11 0.3%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 1,381 $ 1,320 $ 61 4.6%
--- ------------- -- -------------- -- -------------
Operating margin 29.6% 28.7%
--- ------------- -- --------------
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 28.4% for the 2000 year-to-date period.
Net operating revenues increased 1% in the 2001 third quarter and 3% in the 2001
year-to-date period 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 that combine local service,
network-based features and long distance calling. The local division ended the
2001 third quarter with approximately 8.3 million switched access lines, a 1%
decrease during the past 12 months. The reduction in access lines is driven by
an economic slowdown, wireless and cable substitution, and losses to competitive
local providers. On a voice-grade equivalent basis, which includes both
traditional switched services and high capacity lines, voice- grade equivalents
grew 15% 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 2% in the
2001 third quarter and 4% in the 2001 year-to-date period from the same 2000
periods due to continued demand for network-based services, as well as increased
equipment maintenance revenue.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 4% in the 2001 third quarter and 2%
in the 2001 year-to-date period compared to the same 2000 periods. Strong growth
in special access services in the 2001 third quarter and year-to-date periods
was partially offset by a 2% decline in minutes of use in third quarter 2001 and
a 3% decline year-to-date, as well as by FCC-mandated access rate reductions.
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 remained flat in the 2001 third
quarter and increased 2% 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 third
quarter, increased sales of consumer long distance services were offset by a
decline in intra-LATA long distance services.
Other Revenues
Other revenues decreased 7% in the 2001 third quarter and increased 3% in the
2001 year-to-date period from the same 2000 periods. The increase in the
year-to-date period is mainly because of an increase in collocation and database
revenues offset by a 14% decrease in equipment sales in the 2001 third quarter.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs decreased 3% in the 2001 third
quarter and increased 2% in the 2001 year-to-date period compared to the same
2000 periods. The third quarter decrease is due to lower maintenance expense
resulting from cost control initiatives and lower cost of equipment sales
somewhat offset by increased reciprocal compensation costs resulting from
calling traffic exchanged with wireless and competitive local exchange carriers.
The year-to-date increase is due to increased reciprocal compensation costs and
increased access costs associated with consumer long distance revenues somewhat
offset by lower maintenance expense. Costs of services and products were 31.7%
of net operating revenues in the 2001 third quarter and 31.6% in the 2001
year-to-date period compared to 33.2% and 31.9% for the same periods a year ago.
Selling, General and Administrative Expense
SG&A expense decreased 3% in the 2001 third quarter and increased 1% in the 2001
year-to-date period compared to the same 2000 periods. The third quarter
decrease is primarily due to the success of cost containment initiatives,
somewhat offset by an increase in bad debt expense related to retail and
wholesale customer accounts. The year-to-date increase is due to an increase in
bad debt expense. SG&A expense was 19.6% of net operating revenues in the 2001
third quarter and 20.8% in the 2001 year-to-date period compared to 20.6% and
21.1% for the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense was flat in the 2001 third quarter and in
the 2001 year-to-date period compared to the same 2000 periods. Depreciation and
amortization expense was 18.2% of net operating revenues in the 2001 third
quarter and 18.0% in the 2001 year-to-date period compared to 18.3% and 18.6%
for the same periods a year ago.
Product Distribution and Directory Publishing Businesses
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
----------------------------------- -------------------------------
2001 2000 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 434 $ 496 $ (62) (12.5)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 313 375 (62) (16.5)%
Selling, general and administrative 43 42 1 2.4%
Depreciation and amortization 5 4 1 25.0%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 361 421 (60) (14.3)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 73 $ 75 $ (2) (2.7)%
--- ------------- -- -------------- -- -------------
Operating margin 16.8% 15.1%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
----------------------------------- -------------------------------
2001 2000 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 1,402 $ 1,428 $ (26) (1.8)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,021 1,085 (64) (5.9)%
Selling, general and administrative 137 121 16 13.2%
Depreciation and amortization 14 12 2 16.7%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,172 1,218 (46) (3.8)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 230 $ 210 $ 20 9.5%
--- ------------- -- -------------- -- -------------
Operating margin 16.4% 14.7%
--- ------------- -- --------------
Net operating revenues decreased 13% in the 2001 third quarter and 2% 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
third quarters and year-to-date periods. Nonaffiliated revenues decreased 19% in
the 2001 third quarter and 9% in the 2001 year-to-date period compared to the
same 2000 periods reflecting lower revenues in our product distribution unit
because of the slow down in capital spending in the telecommunications industry.
These decreases more than offset increased revenues in our directory publishing
unit. Beginning in the 2000 third quarter, the unit's 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 decreased 1% in the 2001 third quarter and increased 10% 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 beginning in the 2000 third quarter.
Operating expenses decreased 14% in the 2001 third quarter and 4% in the 2001
year-to-date period compared to the same 2000 periods. The decreases in the 2001
third quarter and year-to-date periods reflect 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.
PCS Group
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2001 2000 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 2,651 $ 1,707 $ 944 55.3%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,516 982 534 54.4%
Selling, general and administrative 733 603 130 21.6%
Depreciation and amortization 518 489 29 5.9%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,767 2,074 693 33.4%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (116) $ (367) $ 251 68.4%
-- ------------- -- -------------- -- -------------
Operating income before depreciation
and amortization $ 402 $ 122 $ 280 NM
-- ------------- -- -------------- -- -------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2001 2000 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 6,966 $ 4,403 $ 2,563 58.2%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 3,811 2,813 998 35.5%
Selling, general and administrative 2,009 1,638 371 22.6%
Depreciation and amortization 1,601 1,366 235 17.2%
Merger related costs - 24 (24) (100.0)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 7,421 5,841 1,580 27.1%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (455) $ (1,438) $ 983 68.4%
-- ------------- -- -------------- -- -------------
Operating income (loss) before depreciation
and amortization and merger related costs $ 1,146 $ (48) $ 1,194 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 third
quarter and year-to-date periods. These revenues were 24% of net operating
revenues in the 2000 third quarter and year-to-date periods.
Net Operating Revenues
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Customers (millions) 12.4 8.3 12.4 8.3
--- ------------- -- -------------- -- ------------- --- -------------
Average monthly service revenue
per user (ARPU) $ 62 $ 61 $ 61 $ 59
--- ------------- -- -------------- -- ------------- --- -------------
Customer churn rate 2.6% 3.0% 2.4% 2.8%
--- ------------- -- -------------- -- ------------- --- -------------
The PCS Group's net operating revenues include service revenues and sales of
handsets and accessory equipment. Service revenues consist of monthly recurring
charges, usage charges and activation fees associated with the PCS Group's
subscriber base. Service revenues also include reseller and affiliate charges,
and interconnection access charges for calls terminating on the PCS Group's
network. Service revenues increased 54% in the 2001 third quarter and 63% 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. The
improvement in ARPU was mainly due to customers subscribing to higher usage
service plans and an increase in billed minutes over plan.
The PCS Group added more than 1.2 million customers in the 2001 third quarter
ending the period with over 12.4 million customers compared to 8.3 million
customers at the end of the 2000 third quarter. The companies that the PCS Group
serves on a wholesale basis reported a decline of 61,000 customers for the
quarter, which is largely due to the discontinuation of one reseller program.
The PCS Group affiliates added approximately 384,000 customers in the 2001 third
quarter, bringing the total number of customers added in the quarter by the PCS
Group and its affiliates to over 1.5 million. The total number of customers
served on the PCS network at the end of the quarter is nearly 14.4 million.
Although the customer churn rate improved in the 2001 third quarter and
year-to-date periods over the same 2000 periods, there was an increase from the
2001 second quarter resulting from customer fulfillment of contract terms, the
softness of the economy, and the impact of a new marketing initiative.
Revenues from sales of handsets and accessories were approximately 14% of net
operating revenues in the 2001 third quarter and 12% in the year-to-date period.
These revenues as a percentage of net operating revenues were approximately 14%
in the 2000 third 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
September 30, September 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Acquisition costs per gross customer
addition (CPGA) $ 320 $ 340 $ 340 $ 360
--- ------------- -- -------------- -- ------------- --- -------------
Monthly cash costs per user (CCPU) $ 33 $ 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 54% in the 2001 third quarter and 35% 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 22% in the 2001 third
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, which includes equipment subsidies and marketing costs, has improved more
than 6% in the 2001 third quarter and 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. CCPU improved from prior periods mainly due to the
leverage achieved through the significant increase in the subscriber base.
Depreciation and amortization expense consists mainly of depreciation of network
assets and amortization of intangible assets. The intangible assets include
goodwill, PCS licenses, customer base, microwave relocation costs and assembled
workforce, which are being amortized over 30 months to 40 years.
Depreciation and amortization expense increased 6% in the 2001 third quarter and
17% 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, the PCS Group increased depreciation of certain network assets 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 $72 million decrease in the 2001 third quarter amortization expense and a $96
million decrease in the 2001 year-to-date period compared to the same 2000
periods.
--------------------------------------------------------------------------------
Nonoperating Items
--------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 6.9% in both the 2001 and
2000 third quarter and year-to-date periods. 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
September 30, September 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Dividend and interest income $ 7 $ 9 $ 24 $ 20
Equity in net losses of affiliates (55) (120) (128) (181)
Net gains (losses) from investments (177) 13 (177) 35
Gains on sales of other assets - - 10 79
OPEB liability curtailment gain 120 - 120 -
Other, net 10 9 14 (1)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (95) $ (89) $ (137) $ (48)
--- ------------- -- -------------- -- ------------- --- -------------
Dividend and interest income for both the 2001 and 2000 third quarter and
year-to-date periods reflect dividends earned on cost method investments and
interest earned on temporary investments.
In the 2001 third quarter and year-to-date periods, investments accounted for
using the equity method consisted of the FON Group's investment in Intelig, a
long distance operation in Brazil, and the PCS Group's investment in Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico.
Pegaso is currently experiencing financial difficulties and is evaluating
various restructuring alternatives. In the 2000 third quarter and year-to-date
periods, 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.
Net losses from investments in the 2001 third quarter and year-to-date periods
mainly include the write-down of an equity investment and a loss on the sale of
an investment. The gain in the 2000 third quarter results from the sale of an
investment. The 2000 year-to-date period also includes a gain associated with
equity securities used to retire debt instruments.
Gains on sales of other assets in the 2001 year-to-date period results from the
sale of PCS customers to an affiliate. The gains in the 2000 year-to-date period
result from the sale of an independent directory publishing operation and the
sale of PCS network infrastructure and the right to manage customers to a PCS
affiliate.
The OPEB liability curtailment gain in the 2001 third quarter and year-to-date
periods resulted from an amendment to certain retirement plan benefits.
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:
September 30, December 31,
2001 2000
-----------------------------------------------------
(millions)
FON Group $ 24,956 $ 23,649
PCS Group 21,384 19,763
Intergroup
eliminations (769) (811)
-----------------------------------------------------
Consolidated assets $ 45,571 $ 42,601
--------------------------------
Sprint's consolidated assets increased $3.0 billion in the 2001 year-to-date
period. Net property, plant and equipment increased $3.6 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. In October 2001, Sprint decided to
terminate its efforts to develop and deploy Sprint ION. The decision to
terminate these services will result in asset impairments in the 2001 fourth
quarter. 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 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
September 30,
-------------------------------
2001 2000
------------------------------------------------------
(millions)
FON Group $ 2,761 $ 2,691
PCS Group 385 223
------------------------------------------------------
Cash flows provided
by operating
activities $ 3,146 $ 2,914
-------------------------------
In the 2001 year-to-date period, operating cash flows increased $232 million
from the same 2000 period. This was primarily driven by the PCS Group's improved
operating results partly offset by its increased working capital requirements.
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
September 30,
-------------------------------
2001 2000
------------------------------------------------------
(millions)
FON Group $ (3,649) $ (1,864)
PCS Group (2,853) (2,118)
Eliminations - (17)
------------------------------------------------------
Cash flows used by
investing
activities $ (6,502) $ (3,999)
-------------------------------
The FON Group's capital expenditures totaled $3.9 billion in the 2001
year-to-date period and $2.7 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 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 $2.9 billion in
the 2001 year-to-date period and $2.1 billion in the same 2000 period. Capital
expenditures in both years were mainly for the continued buildout and expansion
of the PCS network.
In August 2001, Sprint received $228 million from the sale of a portion of its
investment in EarthLink.
In February 2000, Sprint received $1.4 billion from the sale of its interest in
Global One. The proceeds were used mainly 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 Intelig and Pegaso in the 2001 year-to-date period. The 2000
year-to-date period also included Sprint's investment in EarthLink.
Financing Activities
Year-to-Date
September 30,
-------------------------------
2001 2000
------------------------------------------------------
(millions)
FON Group $ 830 $ (802)
PCS Group 2,492 1,969
Eliminations - 17
------------------------------------------------------
Cash flows provided
by financing
activities $ 3,322 $ 1,184
-------------------------------
Financing activities mainly reflect net borrowings of $3.0 billion in the 2001
year-to-date period and $1.2 billion in the 2000 year-to-date period.
Sprint also received from the issuance of common stock $605 million in the 2001
year-to-date period and $264 million in the 2000 year-to-date period.
Sprint paid cash dividends of $340 million in the 2001 year-to-date period and
$333 million in the 2000 year-to-date period.
Capital Requirements
Sprint's 2001 investing activities, mainly consisting of capital expenditures,
are expected to be $9 billion. FON Group capital expenditures are expected to be
$5.4 billion, and PCS Group capital expenditures are expected to be $3.6
billion. 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 incurred and 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 was 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 $1.7 billion of equity units and $561 million of PCS common
stock. See Notes 6 and 7 of Condensed Notes to Consolidated Financial Statements
for more details on these issuances. The remaining funds were raised from the
sale of a portion of Sprint's investment in EarthLink in August 2001.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $7.5 billion at the end of
September 2001 under the most restrictive of its debt covenants. The October
2001 announcement regarding the termination of Sprint ION and other actions
necessary to reduce operating costs is expected to result in an approximate $2
billion pre-tax charge in the fourth quarter. A charge of this magnitude in the
third quarter would have reduced Sprint's additional borrowing capacity, under
current arrangements, to approximately $4.1 billion.
--------------------------------------------------------------------------------
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 September 30, 2001 or results of operations
or cash flows for the quarter ended September 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 67%
of Sprint's debt at September 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 $42 million pre-tax impact on the statements of operations and cash flows
at September 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 $6 million at September
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
Sprint and the Environmental Protection Agency have executed a consent
decree assessing Sprint with $250,975 in penalties in connection with
Sprint's failure to maintain certain records and file certain reports
for a portion of its facilities (reported in Sprint's Annual Report on
Form 10-K/A for the year ended December 31, 2000). The consent decree
is expected to receive court approval in the 2001 fourth quarter.
Item 2. Changes in Securities
There were no reportable events during the quarter ended September 30,
2001.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended September 30,
2001.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended September 30,
2001.
Item 5. Other Information
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed
Charges and Preferred Stock Dividends
Sprint's earnings, as adjusted, were inadequate to cover fixed charges
by $72 million in the 2001 third quarter and inadequate to cover fixed
charges by $49 million in the 2001 year-to-date period. Sprint's
earnings, as adjusted, were inadequate to cover combined fixed charges
and preferred stock dividends by $74 million in the 2001 third quarter
and inadequate to cover combined fixed charges and preferred stock
dividends by $57 million in the 2001 year-to-date period. Sprint's
ratio of earnings to fixed charges was 1.30 in the 2000 third quarter.
Sprint's earnings, as adjusted, were inadequate to cover fixed charges
by $63 million in the 2000 year-to-date period. Sprint's ratio of
earnings to combined fixed charges and preferred stock dividends was
1.28 in the 2000 third quarter. Sprint's earnings, as adjusted, were
inadequate to cover combined fixed charges and preferred stock
dividends by $72 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 income
(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 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 registering 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).
(e) Purchase Contract Agreement, dated as of August 10, 2001,
between Sprint Corporation and Bank One, National
Association, as purchase contract agent.
(f) Form of Corporate Units Certificates, including the form of
Purchase Contract (included as Exhibit A to the Purchase
Contract Agreement filed as Exhibit 4(e)).
(g) Pledge Agreement, dated as of August 10, 2001, among Sprint
Corporation and Bank One, National Association, as
collateral agent and as purchase contract agent.
(h) Remarketing Agreement, dated as of August 10, 2001, among
Sprint Corporation, Sprint Capital Corporation, Bank One,
National Association, as purchase contract agent, and UBS
Warburg LLC, as remarketing agent.
(i) Terms of 6% notes due 2006, including form of note.
(j) Indenture, dated as of October 1, 1998, among Sprint Capital
Corporation, Sprint Corporation and Bank One, N.A., as
Trustee (filed as Exhibit 4(b) to Sprint Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein by reference),
as supplemented by the First Supplemental Indenture, dated
as of January 15, 1999, among Sprint Capital Corporation,
Sprint Corporation and Bank One, N.A., as Trustee (filed as
Exhibit 4(b) to Sprint Corporation's Current Report on Form
8-K dated February 2, 1999, and incorporated herein by
reference), and as supplemented by the Second Supplemental
Indenture, dated as of October 15, 2001, among Sprint
Capital Corporation, Sprint Corporation and Bank One, N.A.,
as Trustee (filed as Exhibit 99 to Sprint Corporation's
Current Report on Form 8-K/A dated October 17, 2001 and
incorporated herein by reference).
(10) Material Agreements:
(a) 364-Day Credit Agreement, dated as of August 3, 2001, among
Sprint Corporation and Sprint Capital Corporation, as
Borrowers, and the initial lenders named therein, as Initial
Lenders, and Citibank, N.A., as Administrative Agent, and
Salomon Smith Barney Inc. and J.P. Morgan Securities Inc.,
as Joint Lead Arrangers and Book Managers, and The Chase
Manhattan Bank, as Syndication Agent, and Bank of America,
N.A., Deutsche Bank AG New York Branch and First Union
National Bank, as Documentation Agents.
(10) Executive Compensation Plans and Arrangements:
(b) Summary of Executive Officer Benefits and Board of Directors
Benefits and Fees.
(c) Executive Agreement dated as of July 30, 2001 by and among
Sprint Corporation, Sprint/United Management Company and
Charles E. Levine.
(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
Sprint will furnish to the Securities and Exchange Commission, upon request, a
copy of the instruments defining the rights of holders of its long-term debt.
The total amount of securities authorized under any of said instruments (other
than those listed above) does not exceed 10% of the total assets of Sprint.
(b) Reports on Form 8-K
Sprint filed a Current Report on Form 8-K dated 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.
Sprint filed a Current Report on Form 8-K/A dated October 17, 2001 in
which it reported that it had announced third quarter 2001 results and
that it had announced that it will terminate its effort's to develop
and provide Sprint ION services along with additional steps to improve
the competitive positioning and reduce operating costs in the FON
Group.
The news release regarding third quarter 2001 results, which was
included in the Current Report, included the following financial
information:
Sprint Corporation Consolidated Statements of Operations
Sprint Corporation Selected Operating Results
Sprint Corporation Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
Sprint Corporation Pro Forma Selected Operating Results
Sprint Corporation PCS Group Net Customer Additions
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: November 13, 2001