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 March 31, 2002
----------------------
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 APRIL 30, 2002:
FON COMMON STOCK 891,083,159
PCS COMMON STOCK 992,513,576
CLASS A COMMON STOCK 43,118,018
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) 3
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 9
Consolidated Statement of Shareholders' Equity 11
Condensed Notes to Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
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 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 43
Item 6. Exhibits and Reports on Form 8-K 43
Signature 45
Exhibits
(12) Computation of Ratios of Earnings to Fixed Charges
Part I.
Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
--------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Quarters Ended March 31, 2002 2001
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,762 $ 6,254
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 3,214 3,110
Selling, general and administrative 1,771 1,771
Depreciation 1,172 981
Amortization 1 140
Restructuring 23 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 6,181 6,002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 581 252
Interest expense (314) (307)
Intergroup interest charge - -
Other income (expense), net (30) (22)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes 237 (77)
Income tax benefit (expense) (97) -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations 140 (77)
Extraordinary items, net - (1)
Cumulative effect of change in
accounting principles, net - 2
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 140 (76)
Preferred stock dividends (paid) received (2) (2)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) applicable to
common stock $ 138 $ (78)
-- ------------- --- -------------
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
------------------------------------- ---------------------------------- ----------------------------------
2002 2001 2002 2001 2002 2001
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (115) $ (129) $ 4,029 $ 4,358 $ 2,848 $ 2,025
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(115) (129) 1,926 2,105 1,403 1,134
(8) (2) 997 1,135 782 638
- - 646 580 526 401
- - - 6 1 134
- - - - 23 -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(123) (131) 3,569 3,826 2,735 2,307
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
8 2 460 532 113 (282)
- 5 (80) (91) (234) (221)
- - 81 64 (81) (64)
(8) (7) 3 5 (25) (20)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 464 510 (227) (587)
- - (178) (194) 81 194
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 286 316 (146) (393)
- - - (1) - -
- - - - - 2
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 286 315 (146) (391)
- - 2 2 (4) (4)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 288 $ 317 $ (150) $ (395)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.32 $ 0.36 $ (0.15) $ (0.40)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
891.5 887.4 1,009.9 977.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.32 $ 0.36 $ (0.15) $ (0.40)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
889.6 885.3 1,009.9 977.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
--------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Quarters Ended March 31, 2002 2001
--------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 140 $ (76)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (6) 6
Income tax benefit (expense) 5 (2)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses)
on securities (1) 4
Foreign currency translation adjustments (3) (4)
Unrealized gains (losses) on qualifying
cash flow hedges 8 (6)
Income tax benefit 2 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized gains (losses) on qualifying
cash flow hedges 10 (6)
Cumulative effect of change in accounting
principle - (9)
------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) 6 (15)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 146 $ (91)
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ------------------------------- -- ----------------------------------
2002 2001 2002 2001 2002 2001
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 286 $ 315 $ (146) $ (391)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 7 (6) (1) - -
- (2) 5 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 5 (1) (1) - -
- - (2) (4) (1) -
- - 8 (6) - -
- - 2 - - -
----- ------------- --- ------------- ------------- -- ------------- -- ------------- --- -------------
- - 10 (6) - -
- - - (9) - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 5 7 (20) (1) -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ 5 $ 293 $ 295 $ (147) $ (391)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
-------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 2,166 $ 313
Accounts receivable, net of consolidated allowance for doubtful accounts of
$468 and $484 3,690 3,806
Inventories 646 690
Prepaid expenses 493 388
Receivables from the PCS Group - -
Current tax benefit receivable from the FON Group - -
Income tax receivable 402 -
Other 341 365
-------------------------------------------------------------------------------------------------------------------------
Total current assets 7,738 5,562
Property, plant and equipment
FON Group 34,474 34,113
PCS Group 15,122 14,634
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 49,596 48,747
Accumulated depreciation (20,631) (19,770)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 28,965 28,977
Investments in and advances to affiliates 265 288
Intangibles
Goodwill 4,400 4,737
Spectrum licenses 4,624 4,995
Other intangibles 769 839
-------------------------------------------------------------------------------------------------------------------------
Total intangibles 9,793 10,571
Accumulated amortization (745) (1,509)
-------------------------------------------------------------------------------------------------------------------------
Net intangibles 9,048 9,062
Other assets 1,603 1,904
-------------------------------------------------------------------------------------------------------------------------
Total $ 47,619 $ 45,793
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ----------------------------------- -----------------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2002 2001 2002 2001 2002 2001
------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 434 $ 134 $ 1,732 $ 179
- - 2,293 2,415 1,397 1,391
- - 240 248 406 442
- - 255 253 238 135
(120) (234) 120 234 - -
(447) - - - 447 -
- - 402 - - -
- - 179 201 162 164
---------------------------------------- ------------------------------- -----------------------------------
(567) (234) 3,923 3,485 4,382 2,311
- - 34,474 34,113 - -
- - - - 15,122 14,634
------------------------------------- ----------------------------------- -----------------------------------
- - 34,474 34,113 15,122 14,634
(47) (47) (17,070) (16,605) (3,514) (3,118)
------------------------------------- ----------------------------------- -----------------------------------
(47) (47) 17,404 17,508 11,608 11,516
(280) (280) 416 417 129 151
- - 28 31 4,372 4,706
- - 1,519 1,566 3,105 3,429
- - 22 47 747 792
------------------------------------- ----------------------------------- -----------------------------------
- - 1,569 1,644 8,224 8,927
- - (2) (77) (743) (1,432)
------------------------------------- ----------------------------------- -----------------------------------
- - 1,567 1,567 7,481 7,495
- - 1,222 1,187 381 717
------------------------------------- ----------------------------------- -----------------------------------
$ (894) $ (561) $ 24,532 $ 24,164 $ 23,981 $ 22,190
------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
-------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 2,086 $ 4,401
Accounts payable 1,713 2,323
Construction obligations 365 577
Accrued interconnection costs 651 588
Accrued taxes 491 468
Advance billings 701 731
Accrued restructuring costs 299 390
Payroll and employee benefits 489 569
Accrued interest 444 309
Payables to the FON Group - -
Other 1,039 1,080
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,278 11,436
Noncurrent liabilities
Long-term debt and capital lease obligations 21,301 16,501
Equity unit notes 1,725 1,725
Deferred income taxes 1,641 1,553
Postretirement and other benefit obligations 942 948
Other 761 758
-------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 26,370 21,485
Redeemable preferred stock 256 256
Shareholders' equity
Common stock
Class A FT, par value $.50 per share, 100.0 shares authorized, 43.1 shares
issued and outstanding 22 22
FON, par value $2.00 per share, 4,200.0 shares authorized, 890.3 and 888.8
shares issued and outstanding 1,781 1,778
PCS, par value $1.00 per share, 4,600.0 shares authorized, 989.6 and 986.7
shares issued and outstanding 990 987
Capital in excess of par or stated value 10,024 10,076
Retained deficit (122) (261)
Accumulated other comprehensive income 20 14
Combined attributed net assets - -
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 12,715 12,616
-------------------------------------------------------------------------------------------------------------------------
Total $ 47,619 $ 45,793
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------ ----------------------------------- -----------------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2002 2001 2002 2001 2002 2001
------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 777 $ 2,056 $ 1,309 $ 2,345
- - 828 1,432 885 891
- - - - 365 577
- - 633 569 18 19
(447) - 696 239 242 229
- - 446 499 255 232
- - 277 390 22 -
- - 374 449 115 120
- - 2 47 442 262
(120) (234) - - 120 234
(47) (47) 597 617 489 510
------------------------------------ ----------------------------------- -----------------------------------
(614) (281) 4,630 6,298 4,262 5,419
- - 5,023 3,258 16,278 13,243
- - - - 1,725 1,725
- - 1,641 1,552 - 1
- - 942 948 - -
- - 380 394 381 364
------------------------------------ ----------------------------------- -----------------------------------
- - 7,986 6,152 18,384 15,333
(280) (280) 10 10 526 526
22 22 - - - -
1,781 1,778 - - - -
990 987 - - - -
10,024 10,076 - - - -
(122) (261) - - - -
20 14 - - - -
(12,715) (12,616) 11,906 11,704 809 912
------------------------------------ ----------------------------------- -----------------------------------
- - - - - -
------------------------------------ ----------------------------------- -----------------------------------
$ (894) $ (561) $ 24,532 $ 24,164 $ 23,981 $ 22,190
------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
------------------------------------------------------------------ ----------------- ----------------------------------
Quarters Ended March 31, 2002 2001
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ 140 $ (76)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Equity in net losses (income) of affiliates 20 59
Depreciation and amortization 1,173 1,121
Deferred income taxes 495 (10)
Changes in assets and liabilities:
Accounts receivable, net 116 49
Inventories and other current assets (468) (68)
Accounts payable and other current liabilities (811) (615)
Current tax benefit receivable from the FON Group - -
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net (47) (21)
Other, net 17 7
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities 635 446
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,146) (1,774)
Investments in and loans to affiliates (8) (46)
Other, net 3 40
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,151) (1,780)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt 5,704 3,067
Payments on debt (3,219) (1,702)
Dividends paid (114) (109)
Other, net (2) 19
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 2,369 1,275
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 1,853 (59)
Cash and Equivalents at Beginning of Period 313 239
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 2,166 $ 180
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2002 2001 2002 2001 2002 2001
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 286 $ 315 $ (146) $ (391)
- - (1) 25 21 34
- - 646 586 527 535
- - 128 69 367 (79)
- - 122 67 (6) (18)
- - (403) (32) (65) (36)
(447) (77) (376) (409) 12 (129)
447 77 - - (447) (77)
- - 121 42 (121) (42)
- - (62) (42) 15 21
- - 10 - 7 7
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 471 621 164 (175)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (543) (1,119) (603) (655)
- - (8) (46) - -
- - 3 17 - 23
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (548) (1,148) (603) (632)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 968 667 4,736 2,400
- - (483) (61) (2,736) (1,641)
- - (110) (105) (4) (4)
- - 2 (36) (4) 55
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 377 465 1,992 810
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 300 (62) 1,553 3
- - 134 122 179 117
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 434 $ 60 $ 1,732 $ 120
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
Quarter Ended March 31, 2002
----------------------------------------------------------------------------------------------------------------
Capital in
FON PCS Excess of
Class A FT Common Common Par or Stated
Common Stock Stock Stock Value
----------------------------------------------------------------------------------------------------------------
Beginning 2002 balance $ 22 $ 1,778 $ 987 $ 10,076
Net income - - - -
FON common stock dividends - - - (111)
PCS preferred stock dividends - - - (2)
FON Series 1 common stock issued - 3 - 20
PCS Series 1 common stock issued - - 3 39
Tax benefit from stock compensation - - - 1
Intergroup stock compensation - - - -
Other, net - - - 1
----------------------------------------------------------------------------------------------------------------
March 2002 balance $ 22 $ 1,781 $ 990 $ 10,024
------------------------------------------------------------------
Shares Outstanding
------------------------------------------------------------------------------------------------
Beginning 2002 balance 43.1 888.8 986.7
FON Series 1 common stock issued - 1.5 -
PCS Series 1 common stock issued - - 2.9
------------------------------------------------------------------------------------------------
March 2002 balance 43.1 890.3 989.6
--------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
------------------------------------------------------------------------------------
Accumulated
Other
Retained Comprehensive Consolidated Combined Attributed Net Assets
------------------------------
Deficit Income Total Sprint FON Group Sprint PCS Group
------------------------------------------------------------------------------------
$ (261) $ 14 $ 12,616 $ 11,704 $ 912
140 - 140 286 (146)
- - (111) (111) -
- - (2) 2 (4)
- - 23 23 -
- - 42 - 42
- - 1 1 -
- - - (5) 5
(1) 6 6 6 -
------------------------------------------------------------------------------------
$ (122) $ 20 $ 12,715 $ 11,906 $ 809
------------------------------------------------------------------------------------
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 2001 Form
10-K/A. Operating results for the 2002 first quarter do not necessarily
represent the results that may be expected for the year ending December 31,
2002.
--------------------------------------------------------------------------------
1. Basis of Consolidation and Presentation
--------------------------------------------------------------------------------
Tracking Stock
FON common stock and PCS common stock are intended to reflect the financial
results and economic value 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, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
as Sprint owns all of the assets and liabilities of both of the groups. Sprint's
Board 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.
Board Discretion Regarding Tracking Stocks
Sprint's Board 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 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.
Consolidation and Comparative 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).
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 allocation
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, or better than, the costs
that would be incurred if the groups would have been operating on a stand-alone
basis. Costs for shared services totaled approximately $123 million and $140
million in the 2002 and 2001 first quarters, respectively. The percentage of
these costs allocated to the PCS Group were approximately 27% and 20% in the
2002 and 2001 first quarters, respectively, with the balance remaining in the
FON Group. The allocation of shared services may change at the discretion of
Sprint's Board 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 wholly owned Sprint subsidiary, but without the benefit of any guarantee 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 $81 million and $64 million in
the 2002 and 2001 first quarters, respectively. These amounts are reflected in
the "Intergroup interest charge" on the Consolidated Statements of Operations.
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's Board 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. Sprint adopted a tax
sharing agreement which provided 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 original tax sharing agreement applied to tax years ending on or before
December 31, 2001. In December 2001, Sprint adopted a continuation of this tax
sharing arrangement except for the elimination of certain provisions addressing
certain types of acquisitions or restructurings, which never became operable
under the original agreement.
--------------------------------------------------------------------------------
2. Investments
--------------------------------------------------------------------------------
At the end of March 2002, investments accounted for using the equity method
consisted primarily of the PCS Group's investments in Pegaso Telecomunicaciones,
S.A. de C.V. (Pegaso), SVC BidCo L.P., and Virgin Mobile, U.S.A. In 2001,
investments accounted for using the equity method also included the FON Group's
investments in Intelig and other strategic investments.
Combined, unaudited, summarized financial information (100% basis) of entities
accounted for using the equity method was as follows:
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
Results of operations
Net operating revenues $ 65 $ 228
----------------------------------
Operating loss $ (30) $ (168)
----------------------------------
Net loss $ (63) $ (209)
----------------------------------
Equity in net losses of affiliates $ (20) $ (45)
----------------------------------
--------------------------------------------------------------------------------
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:
Sprint Sprint Sprint
Corporation FON PCS
Quarter Ended March 31, 2002 Consolidated Group Group
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 83 $ 162 $ (79)
Effect of:
State income taxes, net of federal income tax effect 6 14 (8)
Equity in losses of foreign joint ventures 8 - 8
Other, net - 2 (2)
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 97 $ 178 $ (81)
--- ------------- --- -------------- -- --------------
Effective income tax rate 40.9% 38.4% 35.7%
--- ------------- --- -------------- -- --------------
Sprint Sprint Sprint
Corporation FON PCS
Quarter Ended March 31, 2001 Consolidated Group Group
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ (27) $ 178 $ (205)
Effect of:
State income taxes, net of federal income tax effect 4 15 (11)
Equity in losses of foreign joint ventures 13 - 13
Goodwill amortization 10 - 10
Other, net - 1 (1)
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ - $ 194 $ (194)
--- ------------- --- -------------- -- --------------
Effective income tax rate - 38.0% 33.0%
--- ------------- --- -------------- -- --------------
--------------------------------------------------------------------------------
4. Accounting for Derivative Instruments
--------------------------------------------------------------------------------
The derivative instruments Sprint holds are interest rate swaps, stock warrants,
net purchased equity options embedded in forward sale contracts and foreign
currency forward contracts. The interest rate swaps meet all the required
criteria under derivative accounting rules 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.
The net purchased equity options are designated as cash flow hedges and changes
in value are recognized in other comprehensive income. Foreign currency forward
contracts held during the period were not designated as hedges.
Sprint adopted Financial Accounting Standard Board Statement (SFAS) No. 133 on
January 1, 2001, which resulted in a cumulative reduction in the net loss of $2
million (net of tax of $1 million) and a cumulative reduction in other
comprehensive income of $9 million. The reduction of the net loss was due to
changes in the fair value of the stock warrants that are not designated as
hedging instruments and is recorded as a cumulative effect of change in
accounting principles, net on the consolidated statements of operations. The
reduction in other comprehensive income results from a decrease in fair value of
cash flow hedges resulting from interest rate fluctuations. The decrease is
recorded in net unrealized losses on qualifying cash flow hedges on the
consolidated statements of comprehensive income (loss).
Sprint recorded net derivative losses in earnings of $1.5 million (net of tax
benefit of $0.8 million) for the 2002 first quarter and net derivative gains in
earnings of $0.5 million (net of tax of $0.3 million) for the same period a year
ago due to changes in the fair value of the stock warrants that are not
designated as hedging instruments. The net derivative gains and losses are
included in "Other income (expense), net" on the Consolidated Statements of
Operations. Sprint recorded a $10 million increase to other comprehensive income
in the 2002 first quarter and a $6 million reduction in the same period a year
ago resulting from losses on cash flow hedges. The changes in other
comprehensive income is included in "Net unrealized gains (losses) on qualifying
cash flow hedges" on the Consolidated Statements of Comprehensive Income (Loss).
--------------------------------------------------------------------------------
5. Goodwill and Other Intangible Assets
--------------------------------------------------------------------------------
Sprint adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January
1, 2002. This standard prescribes the accounting treatment for both identifiable
intangibles and goodwill after initial recognition. Upon adoption of the
standard, amortization of goodwill and indefinite life intangibles ceased and
accumulated amortization as of December 31, 2001 reduced the carrying value of
these assets. Periodic impairment testing of these assets is now required.
Definite life intangibles continue to be amortized over their useful lives.
Sprint identified spectrum licenses, including related microwave relocation
costs (spectrum licenses), and its trademark as indefinite life intangibles.
Concurrent with adoption, Sprint evaluated for impairment its goodwill and
indefinite life intangibles in accordance with the standard's guidance and
determined these assets were not impaired.
The following table adjusts net income (loss) and basic and diluted earnings
(loss) per share in the prior period to exclude amortization, net of any related
tax effects on goodwill and indefinite lived intangibles.
Consolidated FON Group PCS Group
--------- -- ---------- --------- -- ---------- ---------- -- ---------
Quarters ended March 31, 2002 2001 2002 2001 2002 2001
----------------------------------- -- --------- -- ---------- -- --------- -- ---------- - ---------- -- ---------
(millions, except per share amounts)
Reported net income (loss) $ 140 $ (76) $ 286 $ 315 (146) $ (391)
Add back:
Goodwill amortization - 31 - - - 31
Spectrum licenses amortization - 18 - 5 - 13
-- --------- -- ---------- -- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ 140 $ (27) $ 286 $ 320 (146) $ (347)
Basic and diluted earnings (loss)
per share
Reported net income (loss) $ 0.32 $ 0.36 (0.15) $ (0.40)
Add back:
Goodwill amortization - - - 0.03
Spectrum licenses amortization - - - 0.01
-- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ 0.32 $ 0.36 (0.15) $ (0.36)
--------------------------------------------------------------------------------
6. Restructuring Activity
--------------------------------------------------------------------------------
In the 2002 first quarter, the PCS Group announced plans to close five PCS
customer solution centers, as well as additional steps to reduce operating costs
in its network, sales and distribution, and customer solutions business units.
These decisions resulted in a $23 million pre-tax restructuring charge
consisting of severance costs associated with work force reductions of $13
million and other exit costs, primarily for the termination of real estate
leases, of $10 million. Sprint expects to pay the severance and other exit costs
in the next twelve months.
Total workforce reductions associated with these plans are expected to be
approximately 3,300 employees. The severance charge is associated with the
expected involuntary employee separation of approximately 2,600 employees. Most
of the involuntary employee separations will take place after the 2002 first
quarter.
In the 2001 fourth quarter, Sprint terminated its efforts to provide its Sprint
ION consumer and business offerings and announced plans to reduce operating
costs in the business units that comprise its FON Group. These efforts included
consolidation and streamlining of marketing and network operations, as well as
streamlining corporate support functions. Operating losses generated by ION were
approximately $6 million in the 2002 first quarter and approximately $145
million in the 2001 first quarter.
These decisions resulted in a $1,814 million pre-tax charge consisting of asset
write-offs, severance costs associated with work force reductions, and
termination of supplier agreements, real estate leases, and other contractual
obligations. The charge for asset impairments was $1,327 million, severance
costs totaled $231 million, and the remaining $256 million was accrued for other
exit costs associated with the restructuring. Sprint expects to pay the
severance and other exit costs during 2002.
The severance charge is associated with the involuntary employee separation of
approximately 6,000 employees. As of March 31, 2002, nearly 5,500 of the
employee separations had been completed.
Activity relating to the 2001 fourth quarter restructuring in the current period
is summarized as follows:
----------------------------------------------------------------------------------------------------------------
Activity
-------------------------------------
December 31, March 31, 2002
2001 Liability
Liability Balance
Balance Cash Non-cash
----------------------------------------------------------------------------------------------------------------
(millions)
Severance $ 160 $ (50) $ - $ 110
Other exit costs 230 (63) - 167
----------------------------------------------------------------------------------------------------------------
Total $ 390 $ (113) $ - $ 277
--------------------------------------------------------------------------
--------------------------------------------------------------------------------
7. Debt and Capital Lease Obligations
--------------------------------------------------------------------------------
At the end of March 2002, Sprint had short-term borrowings of $1.8 billion
consisting mainly of commercial paper and other bank notes. Though these
borrowings are renewable at various dates during the year, 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 supported by the unused capacity of Sprint's
long-term credit facilities.
In March 2002, Sprint issued $5 billion of debt securities through a private
placement. These borrowings have a weighted average interest rate of 8.4% and
have maturities ranging from 2005 to 2032. The proceeds were allocated 5% to the
FON Group and 95% to the PCS Group and have been and will continue to be used to
repay debt and for general corporate purposes. As a condition to the sale of the
securities, Sprint agreed to conduct an exchange offer that will allow the
original securities to be exchanged for substantially identical securities
registered with the SEC.
--------------------------------------------------------------------------------
8. Litigation, Claims and Assessments
--------------------------------------------------------------------------------
A number of putative class action cases that allege Sprint failed to obtain
easements from property owners during the installation of its fiber optic
network are in process, some of them seeking certification as nationwide
classes. Settlement negotiations directed to a nationwide, industry-wide
settlement of these claims have resulted in an agreement, not yet approved by
the Court. Sprint has previously accrued for the estimated settlement costs of
these suits.
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its current
and former officers and directors in the Jackson County, Missouri, Circuit
Court. The complaint alleges that the individual defendants breached their
fiduciary duties to Sprint and were unjustly enriched by making undisclosed
amendments to Sprint's stock option plans, by failing to disclose certain
information concerning regulatory approval of the proposed merger of Sprint and
WorldCom, and by overstating Sprint's earnings for the first quarter of 2000.
The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two
additional, substantially identical, derivative actions by other shareholders
have been filed.
Various other suits arising in the ordinary course of business are pending
against Sprint.
Management cannot predict the final outcome of these actions, but believes they
will not be material to Sprint's consolidated financial statements.
--------------------------------------------------------------------------------
9. Other Financial Information
--------------------------------------------------------------------------------
Operating Leases
Sprint's remaining minimum rental commitments from December 31, 2001 for all
noncancelable operating leases, consisting mainly of leases for data processing
equipment, real estate, cell and switch sites, and office space, are as follows:
Sprint Sprint Sprint
Corporation FON PCS
Consolidated Group Group
------------------------------------------------------------------------------------------------
(millions)
April 1 - December 31, 2002 $ 596 $ 294 $ 302
2003 600 275 325
2004 426 175 251
2005 311 129 182
2006 196 95 101
2007 88 65 23
Thereafter 357 297 60
------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Sprint's allowance for doubtful accounts are as follows:
---------------- ----------------
March 31, December 31,
2002 2001
------------------------------------- ---------------------------------
(millions)
FON Group $ 279 $ 276
PCS Group 189 208
------------------------------------- -- ------------- -- -------------
Consolidated $ 468 $ 484
-- ------------- -- -------------
Supplemental Cash Flows Information
Sprint's cash paid (received) for interest and income taxes was as follows:
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 186 $ 122
----------------------------------
Income taxes $ 2 $ (17)
----------------------------------
Sprint's noncash activities included the following:
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
Common stock issued under employee
stock benefit plans $ 64 $ 52
----------------------------------
Tax benefit from stock compensation $ 1 $ 7
----------------------------------
Stock received for stock options
exercised $ - $ 1
----------------------------------
--------------------------------------------------------------------------------
10. Segment Information
--------------------------------------------------------------------------------
Sprint is divided into four lines of business: the global markets division, the
local division, the product distribution and directory publishing businesses and
the PCS wireless telephony products and services business, also known as the PCS
Group.
Sprint manages its segments to the operating income (loss) level of reporting.
Items below operating income (loss) are held at a corporate level and only
attributed to the group level. The reconciliation from operating income to net
income is shown on the face of the Consolidated Statements of Operations in the
consolidating information.
Sprint generally accounts for transactions between segments based on fully
distributed costs, which Sprint believes approximates fair value.
Segment financial information was as follows:
----------------------------------------------------------------------------------------------------------------
Product
Quarters Ended Global Distribution Corporate
March 31, Markets Local & Directory PCS and
Division(1) Division Publishing Group(1) Eliminations(2) Consolidated
----------------------------------------------------------------------------------------------------------------
(millions)
2002
Net operating revenues $ 2,342 $ 1,553 $ 330 $ 2,848 $ (311) $ 6,762
Affiliated revenues 148 78 116 (31) (311) -
Operating income (loss) (75) 481 57 113 5 581
2001
Net operating revenues $ 2,567 $ 1,553 $ 494 $ 2,025 $ (385) $ 6,254
Affiliated revenues 130 56 188 11 (385) -
Operating income (loss) 25 438 78 (282) (7) 252
----------------------------------------------------------------------------------------------------------------
(1) Affiliate revenues in the 2002 first quarter reflect the revision of
estimates regarding inter-segment revenue between the Global Markets
Division and the PCS Group. These revisions had a negligible impact on
reported segment operating results.
(2) 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.
Net operating revenues by product and services were as follows:
----------------------------------------------------------------------------------------------------------------------
Product
Global Distribution &
Quarters Ended Markets Local Directory PCS
March 31, Division(1) Division Publishing Group Eliminations(2) Consolidated
----------------------------------------------------------------------------------------------------------------------
(millions)
2002
Voice $ 1,536 $ - $ - $ - $ (148) $ 1,388
Data 484 - - - - 484
Internet 245 - - - - 245
Local service - 761 - - - 761
Network access - 505 - - (59) 446
Long distance - 168 - - - 168
Product distribution - - 193 - (116) 77
Directory publishing - - 137 - - 137
Wireless services - - - 2,848 31 2,879
Other 77 119 - - (19) 177
----------------------------------------------------------------------------------
Total net operating revenues $ 2,342 $ 1,553 $ 330 $ 2,848 $ (311) $ 6,762
----------------------------------------------------------------------------------
2001
Voice $ 1,726 $ - $ - $ - $ (130) $ 1,596
Data 472 - - - - 472
Internet 234 - - - - 234
Local service - 732 - - (1) 731
Network access - 505 - - (43) 462
Long distance - 186 - - - 186
Product distribution - - 359 - (188) 171
Directory publishing - - 135 - - 135
Wireless services - - - 2,025 (11) 2,014
Other 135 130 - - (12) 253
----------------------------------------------------------------------------------
Total net operating revenues $ 2,567 $ 1,553 $ 494 $ 2,025 $ (385) $ 6,254
----------------------------------------------------------------------------------
(1) Equipment revenue for the periods presented is reported as part of Other
revenues. This reclass had no impact on total net operating revenues. 2001
results have been restated to conform to the current year presentation.
(2) 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.
--------------------------------------------------------------------------------
11. Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
On January 1, 2002, Sprint adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This new standard supersedes both SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and sections of Accounting Principles Board Opinion
No. 30, providing one accounting model with which to review for asset
impairment.
SFAS No. 144 retains much of the recognition and measurement provision of SFAS
No. 121, but removes goodwill from its scope. It also alters the criteria of
classifying long-lived assets to be disposed of by sale and changes the method
for accounting for the disposal of long-lived assets if other than through sale.
Finally, while this statement retains the basic presentation provisions for the
disposal of a segment of a business or discontinued operation, it broadens the
definition of a discontinued operation to include a component of an entity.
Adoption of this statement had no material impact on Sprint's consolidated
financial statements.
In July 2001, the FASB issued SFAS 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. Sprint will adopt this standard on January 1,
2003.
--------------------------------------------------------------------------------
12. Subsequent Events
--------------------------------------------------------------------------------
Dividend Declaration
In April 2002, Sprint's Board of Directors declared a dividend of 12.5 cents per
share on the FON common stock. The dividend will be paid June 28, 2002.
Investment in Call-Net
In April 2002, Call-Net, a Canadian long-distance provider, finalized a
comprehensive recapitalization proposal that altered Sprint's existing ownership
in this investment which has been carried at zero value. Sprint invested
approximately $16 million in new Call-Net shares as part of this proposal. Since
this is an equity method investment, Sprint recognized previously unrecognized
losses in the amount of this additional investment. Additionally, Sprint and
Call-Net have agreed, in principle, to a new ten year branding and technology
services agreement.
Investment in Pegaso
In May 2002, Sprint announced that the Company had reached a definitive
agreement to sell its investment in Pegaso to Telefonica Moviles. Sprint also
announced that it had settled with Telefonica and the other shareholders of
Pegaso for payment on the cancellation of the Company's Services Contract.
Sprint expects to receive approximately $65 million for its Pegaso shares, its
investment in subordinated convertible notes and the Services Contract
settlement. Sprint had a net book investment in Pegaso of approximately $40
million at the end of the 2002 first quarter.
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 (Telecom Act), 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 (SEC).
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. Sprint provides a detailed discussion of risk
factors in various SEC filings, including its 2001 Form 10-K/A, and you are
encouraged to review these filings.
--------------------------------------------------------------------------------
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 other backbone providers. 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, the local division
currently serves approximately 8.2 million access lines in 18 states. Sprint
also operates a 100% digital 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.
Sprint operates in industries that have been and continue to be subject to
consolidation and dynamic change. As part of its overall business strategy,
Sprint regularly evaluates opportunities to expand and complement its business
and may at any time be discussing or negotiating a transaction that, if
consummated, could have a material effect on its business, financial condition,
liquidity or results of operations.
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. The PCS Group includes
the PCS wireless telephony products and services business. The FON common stock
is intended to reflect the financial results and economic value of the global
markets division, the local division and the product distribution and directory
publishing businesses. The PCS common stock is intended to reflect the financial
results and economic value of the PCS wireless telephony products and services
business.
Board Discretion Regarding Tracking Stocks
FON common stock and PCS common stock are intended to reflect the financial
results and economic value 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, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
as Sprint owns all of the assets and liabilities of both of the groups. Sprint's
Board 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.
Sprint's Board 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 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.
--------------------------------------------------------------------------------
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; data communications using various protocols such as
Internet protocol (IP) and frame relay (a data service that transfers packets of
data over Sprint's network), and managed network services. In addition, the
global markets division provides web and applications hosting, consulting
services, and colocation services. Through this division Sprint also provides
broadband services and digital subscriber line (DSL) services, which enable
high-speed transmission of data over existing copper telephone lines.
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by
Multipoint Multichannel Distribution Services (MMDS) capabilities from cable TV
services to high-speed data services. MMDS is a fixed wireless network that can
be built either using a system of interconnected smaller cells or as a single
tower that distributes signals through microwave from a single transmission
point to multiple receiving points. The global markets division's operating
results reflect the development costs and the operating revenues and expenses of
these broadband fixed wireless services. In the 2001 fourth quarter Sprint
announced it would halt further deployment of MMDS services using current direct
sight access technology. Current customers will continue to receive service and
Sprint will wait for development of second generation technology. Sprint will
also pursue alternative strategies for the spectrum leases and licenses.
In the 2001 fourth quarter, a decision was made to abandon the ION initiative
and restructure operations in the global markets division to respond to the
national economic downturn, industry-wide pricing pressures and excess capacity.
These actions, which resulted in a $1.7 billion charge, were taken to respond to
these unprecedented changes in the industry in an effort to better focus on
enterprise data and Internet services and aggressively manage costs.
The global markets division also reflects the costs of establishing
international IP operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada; Intelig
Telecommunicacoes Ltda. (Intelig), a long distance provider in Brazil; and
certain other telecommunications investments and ventures.
Local Division
The local division (LTD) consists mainly of regulated local phone companies
serving approximately 8.2 million access lines in 18 states. LTD provides local
voice and data services, including DSL, for customers within its franchise
territories, access by phone customers and other carriers to LTD's 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. Sprint has retained investment
bankers to explore values that Sprint could obtain if it were to sell the
directory publishing business.
--------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
--------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates a 100%
digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency band and a single technology. The
PCS Group, together with third party affiliates, operates PCS systems in over
300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The
PCS Group has licenses to serve the entire U.S. population including Puerto Rico
and the U.S. Virgin Islands. The PCS Group's service, including third party
affiliates, now reaches slightly under 249 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 multi-mode
handsets, and
o roaming on other providers' digital 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 acquisition
and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones,
S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico, SVC BidCo L.P., a
joint venture to acquire wireless spectrum rights, and Virgin Mobile U.S.A., a
joint venture to market wireless services. These investments are accounted for
using the equity method. Sprint has reached a definitive agreement to sell its
interest in Pegaso.
The wireless industry, including the PCS Group, typically generates a
significantly 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.
--------------------------------------------------------------------------------
Regulatory Developments
--------------------------------------------------------------------------------
As reported by Sprint in its 2001 Form 10-K/A, the local division requested an
extension, until June 30, 2002, to comply with the Communications Assistance for
Law Enforcement Act (CALEA). CALEA was enacted in 1994 to preserve electronic
surveillance capabilities authorized by federal and state law. The FCC granted
the extension until June 30, 2002, and the local division expects to have a
majority of its switches equipped with basic CALEA functionality by this
deadline. The local division also plans to request an additional two-year
extension to upgrade the remainder of its switches and to incorporate
enhancements made necessary by the FCC's recent order requiring additional
monitoring capabilities. Sprint believes that other carriers will also find it
necessary to request extensions and that the FBI will support and the FCC will
grant an extension of the deadline; however, if the extension request is not
granted, the local division could be subjected to fines.
In Sprint's 2001 Form 10-K/A, it reported that the PCS Group expected to meet
the 10/15 MHz five-year buildout requirements in its BTA markets by the April
2002 deadline. Sprint has now received confirmation from the FCC that the PCS
Group met the applicable five-year buildout deadlines for its BTA markets.
--------------------------------------------------------------------------------
Results of Operations
--------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 4,029 $ 4,358
PCS Group 2,848 2,025
Intergroup eliminations (115) (129)
------------------------------------------------------------------------
Net operating revenues $ 6,762 $ 6,254
----------------------------------
Net operating revenues increased 8% in the 2002 first quarter compared to the
same 2001 quarter reflecting growth in the PCS Group offset somewhat by
declining long distance voice revenues.
Income (Loss) from continuing operations was as follows:
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 286 $ 316
PCS Group (146) (393)
------------------------------------------------------------------------
Income (Loss) from continuing
operations $ 140 $ (77)
----------------------------------
In the 2002 first quarter, income from continuing operations includes a $15
million restructuring charge representing the closing of five PCS customer
solution centers, as well as additional steps to reduce operating costs in the
PCS business units. This charge was offset by favorable true-ups of unrelated
items. In total, the charge and true-ups had no effect on net loss or loss per
share.
Effective January 1, 2002, Sprint adopted SFAS No. 142 which resulted in the
elimination of the ongoing amortization of goodwill, spectrum licenses, and
other indefinite life intangible assets. As a result of this change,
amortization expense decreased approximately $60 million in the 2002 first
quarter from the same 2001 period. Amortization expense decreased an additional
$79 million due to the full amortization of some intangibles in 2001.
In the 2001 first quarter, loss from continuing operations includes a one-time
gain of $9 million from investment activities. Excluding this one-time item,
loss from continuing operations was $86 million.
--------------------------------------------------------------------------------
Segmental Results of Operations
--------------------------------------------------------------------------------
Global Markets Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
---------------------------------- -------------------------------
2002 2001 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues(1)
Voice $ 1,536 $ 1,726 $ (190) (11.0)%
Data 484 472 12 2.5%
Internet 245 234 11 4.7%
Other 77 135 (58) (43.0)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 2,342 2,567 (225) (8.8)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,421 1,489 (68) (4.6)%
Selling, general and administrative 639 751 (112) (14.9)%
Depreciation and amortization 357 302 55 18.2%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,417 2,542 (125) (4.9)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ (75) $ 25 $ (100) NM
-- ------------- -- -------------- -- -------------
Operating margin NM 1.0%
-- ------------- -- --------------
NM = Not meaningful
(1) Equipment revenue for the periods presented is reported as a part of Other
revenues. This reclassification has no impact on total net operating
revenues.
Net Operating Revenues
Net operating revenues decreased 9% in the 2002 first quarter from the same 2001
period. Minute use was 13% higher in the 2002 first quarter than it was in the
same 2001 period. The calling volume growth, driven in part by the increase in
business minutes sold to the PCS Group, was more than offset by a highly
competitive pricing environment. The decrease also reflects a decline in
professional services and legacy data services, partly offset by growth in
Internet communications and data services revenues. Revenue growth will likely
continue to be negatively impacted by pricing pressures. In addition, the
Regional Bell Operating Companies (RBOCs) continue to obtain regulatory
clearance to provide in-region long distance services.
Voice Revenues
Voice revenues decreased 11% in the 2002 first quarter from the same 2001 period
due to a decline in consumer voice revenues resulting from a more competitive
pricing environment, wireless substitution and RBOC entry. Business voice
revenues also declined in first quarter 2002 as the traffic mix shifted toward
lower yield customers, including affiliate sales.
Data Revenues
Data revenues increased 3% in the 2002 first quarter from the same 2001 period
due to increased sales in asynchronous transfer mode and managed network
services, partially offset by a decline in frame relay services.
Internet Revenues
Internet revenues increased 5% in the 2002 first quarter from the same 2001
period due to strong growth in dedicated IP and Web hosting services. These
gains were partially offset by a decline in dial-up Internet service
provider-related revenues driven by pricing declines with Sprint's largest
customer for these services.
Other Revenues
Other revenues decreased 43% in the 2002 first quarter from the same 2001
period. The decrease is due to declines in professional services and legacy data
services.
Revenue Reserves
All revenues are recognized when the earnings process is complete in accordance
with SEC Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial
Statements (SAB101). Significant estimates and assumptions are required,
however, to determine the expected conversion of these revenues into cash
collected. Because of this, the global markets division recognizes several types
of reserves and adjustments against revenue. These reserves include:
o billing adjustment reserves for pricing changes and usage disputes
with customers (principally related to our business and wholesale
customer base),
o discount reserves for special pricing agreements and volume based
incentives, and
o fraud reserves for unauthorized usage.
Each of these reserves requires management's judgment and are based on
historical trending, industry norms, regulatory decisions and recognition of
current market indicators regarding general economic conditions.
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 IP network, and costs of equipment.
These costs decreased 5% in the 2002 first quarter from the same 2001 period.
Interconnection costs decreased 3% in the 2002 first quarter from the same 2001
period due to regulatory rate reductions and lower negotiated CLEC rates,
partially offset by the impact of growth in minutes of use.
All other costs of services and products decreased 7% in the 2002 first quarter
compared to the same 2001 period mainly due to decreased network operating costs
associated with Sprint's 2001 fourth quarter restructuring, as well as other
cost containment efforts.
Total costs of services and products for global markets were 60.7% of net
operating revenues in the 2002 first quarter compared to 58.0% for the same
period a year ago.
Excluding Sprint ION related costs, total costs of services and products for
global markets were 60.5% of net operating revenues in the 2002 first quarter
compared to 55.7% for the same period a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses decreased 15% in the 2002
first quarter from the same 2001 period. The decrease is due to the 2001 fourth
quarter restructuring and a strong emphasis on cost control. SG&A expense was
27.3% of net operating revenues in the 2002 first quarter compared to 29.3% for
the same period a year ago.
SG&A includes charges for estimated bad debt expense. The reserve for bad debts
requires management's judgment and is based on customer specific indicators, as
well as historical trending, industry norms and recognition of current market
indicators about general economic conditions. Bad debt expense as a percentage
of net revenues was 3.4% in both the 2002 and 2001 first quarters. Reserve for
bad debt as a percent of outstanding accounts receivable was 12.3% in the 2002
first quarter and 12.7% at year-end 2001.
Excluding Sprint ION related costs, SG&A expense was 27.2% of net operating
revenue in the 2002 first quarter compared to 27.0% for the same period a year
ago.
Depreciation and Amortization Expense
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense increased 18% in the
2002 first quarter from the same period 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. This relatively large year over
year increase in depreciation expense is expected to continue throughout 2002.
Depreciation and amortization expense was 15.2% of net operating revenues in the
2002 first quarter compared to 11.8% for the same period a year ago.
Excluding Sprint ION related costs, depreciation and amortization expense was
15.3% of net operating revenue in the 2002 first quarter compared to 10.7% in
the same period a year ago.
Local Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
----------------------------------- -------------------------------
2002 2001 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 761 $ 732 $ 29 4.0%
Network access 505 505 - -
Long distance 168 186 (18) (9.7)%
Other 119 130 (11) (8.5)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,553 1,553 - -
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 468 496 (28) (5.6)%
Selling, general and administrative 318 338 (20) (5.9)%
Depreciation and amortization 286 281 5 1.8%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,072 1,115 (43) (3.9)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 481 $ 438 $ 43 9.8%
--- ------------- -- -------------- -- -------------
Operating margin 31.0% 28.2%
--- ------------- -- --------------
Net Operating Revenues
Net operating revenues remained flat in the 2002 first quarter from the same
2001 period as growth in local services was offset by declines in long distance
services and equipment sales. The local division ended the 2002 first quarter
with approximately 8.2 million switched access lines, a 1% decrease during the
past 12 months. The reduction in access lines is driven by the economic
slowdown, wireless and cable substitution, and losses to competitive local
providers. The reduction in access lines is expected to continue as Sprint
believes access line losses in 2002 will approximate the 2001 loss. On a
voice-grade equivalent basis, which includes both traditional switched services
and high capacity lines, voice- grade equivalents grew 12% during the past 12
months. This growth reflects many business customers switching from individual
lines to high capacity dedicated circuits.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 4% in the
2002 first quarter from the same 2001 period primarily on the strength of a 12%
increase in vertical services revenue driven by the success of bundled
offerings. Local service revenues were also aided by additional revenues from
prison contracts implemented last year.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, remained flat in the 2002 first quarter
compared to a year ago. Strong growth in special access services in the 2002
first quarter was offset by a 4% decline in access minutes of use, as well as by
regulator-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 declined 10% in the 2002 first
quarter from the same 2001 period. Sales of consumer long distance continued to
increase reflecting the success of bundled services; however, these increases
were more than offset by an 8% decline in long distance minutes of use as
customers shifted more of their communications to wireless, e-mail and instant
messaging.
Other Revenues
Other revenues decreased 8% in the 2002 first quarter from the same 2001 period
principally due to a 13% decline in equipment sales.
Revenue Reserves
All revenues are recognized when the earnings process is complete in accordance
with SAB101. Significant estimates and assumptions are required, however, to
determine the expected conversion of these revenues into cash collected. Because
of this, the local division recognizes several types of reserves and adjustments
against revenues. These reserves include:
o billing adjustment reserves for pricing changes, volume discounts and
usage disputes with customers (principally related to our business and
wholesale customer base),
o fraud reserves for unauthorized usage, and
o return and rebate reserves for equipment sales.
Each of these reserves requires management's judgment and is based on historical
trending, industry norms, regulatory decisions and recognition of current market
indicators about general economic conditions.
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 6% in the 2002 first
quarter compared to the same 2001 period. This reduction is driven mainly by
decreases in access expense, cost of equipment sales and cost containment
initiatives including the benefits of the restructuring announced in the 2001
fourth quarter. Costs of services and products were 30.1% of net operating
revenues in the 2002 first quarter compared to 31.9% for the same period a year
ago.
Selling, General and Administrative Expense
SG&A expense decreased 6% in the 2002 first quarter compared to the same 2001
period. This decrease is primarily due to the success of cost containment
initiatives including the benefits of the restructuring announced in the 2001
fourth quarter. SG&A expense was 20.5% of net operating revenues in the 2002
first quarter compared to 21.8% for the same period a year ago.
The reserve for bad debts requires management's judgment and is based on
customer specific indicators, as well as historical trending, industry norms and
recognition of current market indicators about general economic conditions. Bad
debt expense as a percentage of net revenues was 2.5% in the 2002 first quarter
and 2.6% in the same period a year ago. Reserve for bad debt as a percent of
outstanding accounts receivable was 8.1% in the 2002 first quarter and 6.9% at
year-end 2001.
Depreciation and Amortization Expense
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense increased 2% in the
2002 first quarter compared to the same 2001 period reflecting additional
capital spending to support voice-grade equivalent growth, service improvements
and the ongoing buildout of DSL services. Depreciation and amortization expense
was 18.4% of net operating revenues in the 2002 first quarter compared to 18.1%
for the same period a year ago.
Product Distribution and Directory Publishing Businesses
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
----------------------------------- -------------------------------
2002 2001 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 330 $ 494 $ (164) (33.2)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 226 364 (138) (37.9)%
Selling, general and administrative 40 48 (8) (16.7)%
Depreciation and amortization 7 4 3 75.0%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 273 416 (143) (34.4)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 57 $ 78 $ (21) (26.9)%
--- ------------- -- -------------- -- -------------
Operating margin 17.3% 15.8%
--- ------------- -- --------------
Net operating revenues decreased 33% in the 2002 first quarter compared to the
same 2001 period. Nonaffiliated revenues accounted for over 60% of revenues in
both the 2002 and 2001 first quarters. Nonaffiliated revenues decreased 30% in
the 2002 first quarter compared to the same 2001 period 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.
Affiliated revenues decreased 38% in the 2002 first quarter compared to the same
2001 period reflecting a slow down in capital spending by other Sprint divisions
as well.
Operating expenses decreased 34% in the 2002 first quarter compared to the same
2001 period. This decrease reflects decreased costs of services and products due
to the decline in equipment sales.
PCS Group
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
---------------------------------- -------------------------------
2002 2001 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 2,848 $ 2,025 $ 823 40.6%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,403 1,134 269 23.7%
Selling, general and administrative 782 638 144 22.6%
Depreciation and amortization 527 535 (8) (1.5)%
Restructuring costs 23 - 23 NM
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,735 2,307 428 18.6%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ 113 $ (282) $ 395 NM
-- ------------- -- -------------- -- -------------
Operating income before depreciation
and amortization $ 640 $ 253 $ 387 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 service revenues generated by sales to its customers
accounted for 23% of net operating revenues in the 2002 and 2001 first quarters.
Net Operating Revenues
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
Customers
(millions) 14.3 10.4
----------------------------------
Average monthly service revenue per
user (ARPU)(1) $ 60 $ 59
----------------------------------
Customer churn rate 3.0% 2.5%
----------------------------------
(1) In the second quarter of 2001, contract cancellation fees began to be
reported net of anticipated write-offs. While this reclassification had no
impact on operating income, it did affect ARPU. 2001 periods have been
restated to be in conformity with current year presentation.
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 increased 41% in the 2002 first quarter from
the same 2001 period mainly reflecting an increase in the average number of
customers and an increase in ARPU. The improvement in ARPU was mainly due to a
richer mix of service plans and increased usage.
The PCS Group assesses access charges to long distance carriers for the
termination of landline originated calls. Though regulations generally entitle a
carrier that terminates a call on behalf of another to be compensated for
providing that service, these regulations were developed in a period where
services of this nature were provided exclusively by local exchange carriers.
Certain long distance carriers have disputed the PCS Group's assessment of these
charges as well as the corresponding rate at which the charges were determined.
The issue is currently pending before the FCC. Management cannot predict, with
certainty, the final outcome of this action, but believes adequate provisions
have been recorded in the PCS Group's results of operations.
The PCS Group added approximately 725,000 customers in the 2002 first quarter
ending the period with approximately 14.3 million customers compared to nearly
10.4 million customers at the end of the 2001 first quarter. The companies that
the PCS Group serves on a wholesale basis reported a decline of 47,000 customers
for the quarter, which is largely due to reduced sales with our largest
reseller. The PCS Group affiliates added approximately 228,000 customers in the
2002 first quarter, bringing the total number of customers added in the quarter
by the PCS Group and its affiliates to over 900,000. The total number of
customers served on the PCS network, including affiliates, at the end of the
quarter is more than 16.7 million.
Although the customer churn rate increased in the 2002 first quarter over the
same 2001 period, there was no change from the 2001 fourth quarter. The
increase, year-over-year, resulted from customer fulfillment of contract terms,
the softness of the economy, and the impact of a new program targeting sub-prime
customers.
Revenues from sales of handsets and accessories were approximately 10% of net
operating revenues in the 2002 and 2001 first quarters. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
Revenue Reserves
All revenues are recognized when the earnings process is complete in accordance
with SAB101. Significant estimates and assumptions are required, however, to
determine the expected conversion of these revenues into cash collected. Because
of this, the PCS Group recognizes several types of reserves and adjustments
against revenue. These reserves include:
o billing adjustment reserves for disputes with customers,
o fraud reserves for unauthorized usage,
o access reserves for disputed charges with local exchange carriers
and inter-exchange carriers, and
o return and rebate reserves for equipment sales.
Each of these reserves requires management's judgment and are based on
historical trending, industry norms, regulatory decisions and recognition of
current market indicators about general economic conditions.
Operating Expenses
Quarters Ended
March 31,
----------------------------------
2002 2001
--------------------------------------------------------------------------
Acquisition costs per gross customer
addition (CPGA)(1) $ 305 $ 325
----------------------------------
Monthly cash costs per user (CCPU)(1) $ 31 $ 35
----------------------------------
(1) Beginning in 2002, PCS changed its method of calculating both CCPU and CPGA.
Customer service provided in Sprint retail stores and handset subsidies for
existing customers, both previously part of the calculation of CPGA, are now
included in the calculation of CCPU. Activation customer care cost has been
removed from the calculation of CCPU and is now included in the calculation
of CPGA. Prior period metrics have been restated to be in conformity with
current year presentation.
The PCS Group's costs of services and products mainly include handset and
accessory costs, switch and cell site expenses, customer care costs and other
network-related costs. These costs increased 24% in the 2002 first quarter from
the same 2001 period reflecting an increase in gross customer acquisitions, a
larger customer base, and expanded market coverage. Handset and equipment costs
were 39% of total costs of services and products in the 2002 first quarter
compared to 34% in the 2001 first quarter. Costs of services and products were
49.3% of net operating revenues in the 2002 first quarter compared to 56.0% for
the same period a year ago.
SG&A expense mainly includes marketing costs to promote products and services as
well as salary and benefit costs. SG&A expense increased 23% in the 2002 first
quarter from the same 2001 period reflecting an expanded workforce to support
subscriber growth and increased marketing and selling costs. SG&A expense was
27.5% of net operating revenues in the 2002 first quarter compared to 31.5% for
the same period a year ago.
CPGA is a measure of the sales and marketing efforts computed as the costs of
acquiring a new subscriber, including equipment subsidies and marketing costs
divided by handset activations. CPGA improved more than 6% in the 2002 first
quarter from the same 2001 period. Lower selling and distribution costs
resulting from scale benefits have contributed to the improvement.
CCPU is a measure of the cash costs to operate the business on a per user basis
consisting of costs of service revenues, service delivery and other general and
administrative costs divided by average subscribers. CCPU decreased 11% in the
2002 first quarter from the same 2001 period. Improvements realized in the first
quarter of 2002 were driven by lower customer solutions, network, information
technology and administrative costs per user. These gains are largely driven by
scale efficiencies and cost containment efforts in customer solutions.
The reserve for bad debts requires management's judgment and is based on
customer specific indicators, as well as historical trending, industry norms and
recognition of current market indicators about general economic conditions. Bad
debt expense as a percentage of net revenues was 4.3% in the 2002 first quarter
and 3.2% in the same period a year ago. Reserve for bad debt as a percent of
outstanding accounts receivable was 11.9% in the 2002 first quarter and 13.0% at
year-end 2001.
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense consists mainly of
depreciation of network assets and amortization of definite life intangible
assets. The definite life intangible assets include various customer bases which
are being amortized over 30 to 36 months.
Depreciation and amortization expense decreased slightly in the 2002 first
quarter from the same 2001 period mainly reflecting the full amortization of
some intangibles and the implementation of SFAS No. 142 offset by depreciation
of the network assets placed in service during 2001. Amortization of goodwill
and indefinite life intangibles ceased upon adoption of SFAS No. 142 at January
1, 2002. Periodic impairment testing of these indefinite life intangibles is now
required. This implementation is discussed in Note 5 of the Notes to
Consolidated Financial Statements.
Amortization expense decreased to $1 million in the 2002 first quarter from $134
million in the same period a year ago. Intangibles becoming fully amortized in
the second quarter of 2001 accounts for $79 million of the decline, while SFAS
No. 142 implementation accounts for the remaining $54 million decline.
Depreciation and amortization expense was 18.5% of net operating revenues in the
2002 first quarter compared to 26.4% for the same period a year ago.
Restructuring
In the first quarter of 2002, the PCS Group announced plans to reduce customer
solutions' operating costs through the closing of five PCS call centers, as well
as additional steps to reduce operating costs in the PCS business units. These
decisions resulted in a one-time charge of $23 million associated with the
severance costs of the work force reductions and the termination of real estate
leases.
--------------------------------------------------------------------------------
Nonoperating Items
--------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 6.7% in the 2002 first
quarter and 6.9% in the same 2001 period. The decrease in interest rate is
primarily due to additional borrowings with lower interest rates and lower rates
on variable-rate debt. Interest costs on short-term borrowings, including
short-term borrowings classified as long-term debt, and interest costs on
deferred compensation plans have been excluded so as not to distort the
effective interest rate on long-term debt.
Other Income (Expense), net
Other income (expense), net consisted of the following:
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
Dividend and interest income $ 8 $ 9
Equity in net losses of affiliates (20) (45)
Net losses from investments (10) -
Gain on sale of assets - 10
Other, net (8) 4
------------------------------------------------------------------------
Total $ (30) $ (22)
----------------------------------
Dividend and interest income for both the 2002 and 2001 first quarters reflect
dividends earned on cost method investments and interest earned on temporary
investments.
In the 2002 first quarter, equity in net losses of affiliates was driven by the
PCS Group's investment in Pegaso. In May 2002, Sprint signed a definitive
agreement to sell its investment in Pegaso. Sprint expects to receive
approximately $65 million for its Pegaso shares, its investment in subordinated
convertible notes, and the Company's Services Contract settlement. Sprint had a
net book investment in Pegaso of approximately $40 million at the end of the
2002 first quarter. In the 2001 first quarter, equity in net losses of
affiliates was also driven by the FON Group's investment in Intelig.
Net losses from investments in the 2002 first quarter mainly include the
write-down of an equity investment in Intelig.
Gains on sales of assets in the 2001 first quarter mainly include the sale of
PCS customers to a PCS third party affiliate.
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.
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
Total consolidated assets were as follows:
----------------------------------
March 31, December 31,
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 24,532 $ 24,164
PCS Group 23,981 22,190
Intergroup eliminations (894) (561)
------------------------------------------------------------------------
Consolidated assets $ 47,619 $ 45,793
----------------------------------
Sprint's consolidated assets increased $1.8 billion in the 2002 first quarter.
Cash and equivalents increased $1.9 billion due to proceeds from recent debt
issuances that have not yet been applied to outstanding debt. 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
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 471 $ 621
PCS Group 164 (175)
------------------------------------------------------------------------
Cash flows provided by operating
activities $ 635 $ 446
----------------------------------
Cash flow from operations increased $189 million in the 2002 first quarter from
the same 2001 period. This increase was driven mainly by the PCS Group's
improved operating results partly offset by increased working capital
requirements in the FON Group. The increase in working capital requirements was
caused primarily by a reduction in accounts payable from reduced capital
spending. While the tax receivable from the IRS increased working capital, it
was driven by a reduction in deferred income taxes, having no impact on
operating cash flows.
Investing Activities
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ (548) $ (1,148)
PCS Group (603) (632)
------------------------------------------------------------------------
Cash flows used by investing
activities $ (1,151) $ (1,780)
----------------------------------
The FON Group's capital expenditures totaled $543 million in the 2002 first
quarter and $1.1 billion in the same 2001 period. Global markets division
capital expenditures were incurred mainly to enhance network reliability, meet
increased demand for data-related services and upgrade capabilities for
providing new products and services. 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, which is nearing completion. The decline in FON Group
capital expenditures in 2002 was driven mainly by the termination of Sprint ION
and reduced spending for data-related services. PCS Group capital expenditures
were $603 million in the 2002 first quarter and $655 million in the same 2001
period. Capital expenditures in both years were mainly for the continued PCS
network expansion and fill-in, and the deployment of 3G technology which is
expected to be operational beginning in the summer of 2002.
"Investments in and loans to affiliates" consisted mainly of Sprint's
investments in Intelig.
Financing Activities
Quarters Ended
March 31,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 377 $ 465
PCS Group 1,992 810
------------------------------------------------------------------------
Cash flows provided by financing
activities $ 2,369 $ 1,275
----------------------------------
Financing activities mainly reflect net borrowings of $2.5 billion in the 2002
first quarter and $1.4 billion in the same 2001 period.
Sprint paid cash dividends of $114 million in the 2002 first quarter and $109
million in the same 2001 period.
Capital Requirements
Sprint's 2002 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to total $6.2 billion. This excludes
any funding for Nextwave spectrum, as Sprint believes the auction will be either
significantly delayed or terminated. This potential funding would be
approximately $300 million. FON Group capital expenditures are expected to be
$2.7 billion. PCS Group capital expenditures are expected to be $3.4 billion.
Sprint continues to review capital expenditures and will adjust spending and
capital investment in concert with growth. Cash investments in affiliates are
expected to be approximately $100 million. Dividend payments are expected to
approximate $459 million in 2002. After considering cash from operations, our
incremental cash needs are expected to be approximately $600 million.
Liquidity
In March 2002, Sprint issued $5 billion of debt securities through a private
placement. These borrowings have a weighted average interest rate of 8.4% and
have maturities ranging from 2005 to 2032. The proceeds were allocated 5% to the
FON Group and 95% to the PCS Group and have been and will continue to be used to
repay debt and for general corporate purposes. As a condition to the sale of the
securities, Sprint agreed to conduct an exchange offer that will allow the
original securities to be exchanged for substantially identical securities
registered with the SEC.
The above debt issuance, along with our planned expansion of the existing
accounts receivable financing program to include PCS Group receivables, will
more than fund the cash requirements detailed in the previous section and all of
our current maturities of long-term debt, with no dependence on the commercial
paper markets. In addition, the possible sale of the directory publishing
business could further augment Sprint's financial flexibility.
Sprint has revolving credit facilities with syndicates of domestic and
international banks totaling $5 billion; $3 billion of which is a 364-day
facility, expiring in August 2002, and $2 billion of which is a five year
facility expiring in August 2003. These facilities are unused; however, Sprint's
commercial paper borrowings are supported by these revolving credit facilities.
At March 31, 2002, Sprint had sufficient cash on hand to retire its outstanding
commercial paper borrowings as they mature. Certain other notes payable relate
to a separate revolving credit facility of $500 million which expires in
December 2002. In April 2002, the commitment under this facility was reduced to
$200 million.
In March 2002, Sprint entered into a $700 million term loan
facility. This commitment is for a nine-month loan secured by assets related to
Sprint's directory publishing business. To date, we have not drawn against the
facility.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $1.8 billion at the end of
March 2002 under the most restrictive of its debt covenants. Sprint is currently
in compliance with all debt covenants associated with its borrowings.
Standard & Poor's Corporate Ratings (Standard & Poor's) currently rates Sprint's
long-term senior unsecured debt at BBB+ with a negative outlook. Standard &
Poor's rates Sprint's short-term debt at A2.
Fitch Ratings (Fitch) currently rates Sprint's long-term senior unsecured debt
at BBB with a stable outlook. Fitch rates Sprint's short-term debt at F2.
Moody's Investors Service (Moody's) currently rates Sprint's long-term senior
unsecured debt at Baa2 and has the long-term debt on review for possible
downgrade. Moody's rates Sprint's short-term debt at P2 and has the short-term
debt on review for possible downgrade.
A downgrade of either of the Standard & Poor's or Moody's ratings may increase
the cost of future borrowings. A downgrade of the short-term debt rating would
prevent Sprint from gaining access to the commercial paper markets. A ratings
downgrade to below Baa3 or below BBB- would result in the acceleration of at
least $50 million in debt and potentially as much as $430 million. Management
maintains frequent communication with the rating agencies and considers a
downgrade below Baa3 or BBB- to be unlikely.
Sprint's ability to fund its capital needs is ultimately impacted by the overall
capacity and terms of the commercial paper, bank, term-debt and equity markets.
There is significant volatility in the markets at this time caused by the
economic downturn, recent business failures and reduced confidence in the
financial accounting process. Sprint continues to monitor the markets closely
and to take steps to maintain as much financial flexibility as possible, while
maintaining a reasonable capital structure cost.
Sprint does not participate in, nor secure, financings for any unconsolidated,
limited purpose entities (SPE).
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Financial Strategies
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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.
During the 2002 first quarter Sprint entered into forward sale contracts with
net purchased equity option derivatives to monetize equity securities held as
available for sale. The derivatives have been designated as cash flow hedges to
reduce the variability in expected cash flows related to the forecasted sale of
the underlying equity securities.
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 March 31, 2002 or results of operations or
cash flows for the quarter ended March 31, 2002. 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 84%
of Sprint's debt at March 31, 2002 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 1% change in interest rates would have a $36
million pre-tax impact on the statements of operations and cash flows at March
31, 2002. 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 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 $2 million at March 31,
2002. The potential immediate pre-tax loss to Sprint that would result from a
hypothetical 10% change in foreign currency exchange rates based on these
positions would be approximately $1 million.
PART II.
Other Information
PART II. - Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended March 31,
2002.
Item 2. Changes in Securities
Articles Amendments
Following the retirement of all outstanding shares of Class A Common
Stock-Series DT, Sprint filed a Certificate of Retirement with the
Kansas Secretary of State on January 25, 2002. This reduced the
authorized shares of Class A Common Stock-Series DT from 100 million to
0 and amended Sprint's Articles of Incorporation to eliminate all
reference to the Class A Common Stock-Series DT. Elimination of the
authorized shares of Class A Common Stock-Series DT also had the effect
of reducing the total authorized capital stock of Sprint from 9.02
billion shares to 8.92 billion shares.
Sprint filed a certificate changing its registered office with the
Kansas Secretary of State on April 19, 2002. This changed the
registered address of the corporation to 6200 Sprint Parkway, Overland
Park, Kansas 66251.
Bylaw Amendments
On April 16, 2002, Sprint's Board of Directors amended and restated
Sprint's Bylaws. The amendments included:
Sprint's principal office was changed to 6200 Sprint Parkway,
Overland Park, Kansas. Article I, Section 2.
The Bylaws were amended to provide that a special meeting of the
shareholders may be called only by the Chairman of the Board, the
President or the Board of Directors. Article III, Section 2.
A provision was added providing that only business specified in
the notice of the meeting, or in a supplement to the notice of the
meeting, given by or at the direction of Sprint's Board of
Directors, or otherwise properly brought before the meeting by or
at the direction of Sprint's Board of Directors, may be considered
at a special meeting of shareholders. Article III, Section 6.
The provisions requiring advance written notice for a shareholder
proposal or nominee to be considered at an annual meeting of
shareholders were amended to require that the notice must be
submitted in writing to the Secretary of Sprint at the principal
office of Sprint not less than 120 days nor more than 150 days
before the first anniversary of the preceding year's annual
meeting except when the annual meeting is advanced by more than 30
days or delayed more than 60 days from that anniversary date. If
the annual meeting is advanced more than 30 days or delayed more
than 60 days from the anniversary date of the preceding year's
annual meeting, the notice by the shareholder must be delivered
not earlier than the 150th day before the annual meeting and not
later than the later of the 120th day before the annual meeting or
the 10th day following the day on which public announcement of the
date of the annual meeting is first made. Article III, Sections 4
and 5.
Provisions were added confirming that the chairman of a
shareholders' meeting has authority on his own motion to adjourn
the meeting without the approval of the shareholders present at
the meeting and the Board of Directors may, to the extent not
prohibited by law, adopt rules and regulations for the conduct of
the meeting of shareholders. Article III, Section 7.
Sale of Unregistered Securities
On March 14, 2002, Sprint Capital Corporation, Sprint's finance
subsidiary, sold $1 billion of its 7.900% notes due 2005, $2 billion of
its 8.375% notes due 2012, and $2 billion of its 8.750% notes due 2032.
The notes were unconditionally guaranteed by Sprint. The notes were not
registered under the Securities Act of 1933. The sale of the notes by
Sprint Capital Corporation was exempt from registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of
the Securities Act because the notes were sold in transactions not
involving a public offering. The aggregate offering price was $4.985
billion and the aggregate initial purchasers' discount was $35 million.
Deutsche Banc Alex. Brown Inc., Salomon Smith Barney Inc., and UBS
Warburg LLC acted as joint book running managers for the offering. The
other investment banking firms that purchased the notes were ABN AMRO
Incorporated, J.P. Morgan Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, and Morgan Stanley & Co. Incorporated.
These institutions then sold the notes to "qualified institutional
buyers" as defined in Rule 144A under the Securities Act, in reliance
on rule 144A, and to persons in offshore transactions in reliance on
Regulation S under the Securities Act.
As a condition of the sale of the notes, Sprint Capital Corporation
agreed to conduct an exchange offer. Sprint and Sprint Capital
Corporation have filed a Form S-4 Registration Statement (No.
333-86684) with the SEC to register substantially identical notes to be
exchanged for the privately placed notes.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended March 31,
2002.
Item 4. Submission of Matters to a Vote of Security Holders
On April 16, 2002, Sprint held its Annual Meeting of Shareholders. In
addition to the election of three Class I Directors to serve a term of
three years, the shareholders approved performance goals under which
certain executives earn incentive compensation and approved the
appointment of Ernst & Young LLP as independent auditors of Sprint for
2002. The shareholders did not approve four shareholder proposals.
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
For Withheld
DuBose Ausley 1,298,337,874 53,121,243
Irvine O. Hockaday, Jr. 1,298,631,666 52,827,451
Ronald T. LeMay 1,298,279,002 53,180,115
The following votes were cast with respect to the proposal to approve
performance goals under which certain executives earn incentive
compensation so as to preserve Sprint's tax deduction under Section
162(m) of the Internal Revenue Code:
For 1,250,454,723
Against 84,181,625
Abstain 16,822,768
The following votes were cast with respect to the proposal to approve
the appointment of Ernst & Young LLP as independent auditors of Sprint
for 2002:
For 1,281,461,390
Against 60,632,735
Abstain 9,364,992
The following votes were cast with respect to a shareholder proposal
that Sprint report to shareholders on Sprint's total annual greenhouse
gas emissions and an estimate of the feasibility and cost of
substantially reducing these emissions:
For 76,064,518
Against 965,132,708
Abstain 77,749,372
Broker non-votes 232,512,519
The following votes were cast with respect to a shareholder proposal
urging the Sprint Board to seek shareholder approval for future
severance agreements with senior executives that provide benefits in an
amount exceeding two times the sum of the executive's base salary and
bonus:
For 543,343,496
Against 543,903,210
Abstain 31,699,892
Broker non-votes 232,512,519
The following votes were cast with respect to a shareholder proposal
urging the Sprint Board to adopt a policy that Sprint will not reprice,
or terminate and regrant, to a lower exercise price any stock option
granted to any employee or director of Sprint without the prior
approval of the holders of a majority of Sprint's outstanding shares of
common stock:
For 402,308,918
Against 701,501,265
Abstain 15,136,415
Broker non-votes 232,512,519
The following votes were cast with respect to a shareholder proposal
urging the Sprint Board to prepare a description of the Board's role in
the development and monitoring of Sprint's long-term strategic plan, to
be disseminated to shareholders:
For 97,270,989
Against 989,821,627
Abstain 31,853,981
Broker non-votes 232,512,519
Item 5. Other Information
Ratios of Earnings to Fixed Charges
Sprint's ratio of earnings to fixed charges was 1.50 in the 2002 first
quarter. Sprint's earnings, as adjusted, were inadequate to cover fixed
charges by $62 million in the 2001 first quarter. The ratio of earnings
to fixed charges was computed by dividing fixed charges into the sum of
earnings, after certain adjustments, and fixed charges. Earnings
include income or loss from continuing operations before income taxes
plus net losses in equity method investees, 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.
(b) Bylaws, as amended (filed as Exhibit 3.2 to Amendment
No. 4 to Sprint Corporation's Registration Statement on
Form 8-A relating to Sprint's Series 1 PCS Common
Stock, filed April 17, 2002, 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) Provisions regarding Stockholders' Meetings are set
forth in Article III of the Bylaws. Provisions
regarding the Capital Stock Committee are set forth
in Article IV, Section 12 of the Bylaws.
See Exhibit 3(b).
(c) Rights Agreement dated as of November 23, 1998, between
Sprint Corporation and UMB Bank, n.a. (filed as Exhibit
4.1 to Amendment No. 1 to Sprint Corporation's
Registration Statement on Form 8-A relating to Sprint's
PCS Group Rights, filed November 25, 1998, and
incorporated herein by reference).
(d) 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 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).
(e) Tracking Stock Policies of Sprint Corporation (filed as
Exhibit 4(c) to Sprint Corporation's Annual Report on
Form 10-K/A for the year ended December 31, 2001 and
incorporated herein by reference).
(10) Executive Compensation Plans and Arrangements:
(a) 1990 Restricted Stock Plan, as amended (filed as
Exhibit 99 to Sprint Corporation's Registration
Statement on Form S-8 (No. 333-86460) and incorporated
herein by reference).
(b) Special Compensation and Non-Compete Agreement dated
as of March 26, 2002, by and between Sprint Corporation
and Robert J. Dellinger.
(12) Computation of Ratios of Earnings to Fixed Charges
(b) Reports on Form 8-K
On February 7, 2002, Sprint filed a Current Report on Form 8-K dated
February 4, 2002, in which it reported that it had announced fourth
quarter 2001 and calendar year 2001 results.
The news release regarding fourth quarter 2001 and calendar year 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 FON Group Summary Financial Information
Sprint Corporation Pro Forma Selected Operating Results
Sprint Corporation PCS Group Net Customer Additions
On March 6, 2002, Sprint filed a Current Report on Form 8-K dated March
1, 2002, in which it reported that it had announced new sources of
financing and reduced cash needs and that the company was on track to
meet its financial targets for 2002. In addition, it provided a first
quarter outlook for both its PCS Group and its FON Group. Sprint also
reaffirmed previously disclosed information and provided certain
forward looking statements.
On March 7, 2002, Sprint filed a Current Report on Form 8-K dated March
6, 2002, in which it reported that it had announced a senior notes
offering.
On April 18, 2002, Sprint filed a Current Report on Form 8-K dated
April 15, 2002, in which it reported that it had announced first
quarter 2002 results.
The news release regarding first quarter 2002 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 Global Markets Group Selected Operating Results
Sprint Corporation Pro Forma Selected Operating Results
Sprint FON Group Summary Financial Information
Sprint Corporation PCS Group Net Customer Additions
Sprint Corporation PCS Group Metrics Restatement
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: May 10, 2002