UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 JULY 31, 2002:
FON COMMON STOCK 892,787,064
PCS COMMON STOCK 997,003,914
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) 5
Consolidated Balance Sheets 9
Consolidated Statements of Cash Flows 13
Consolidated Statement of Shareholders' Equity 15
Condensed Notes to Consolidated Financial Statements 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
Part II - Other Information
Item 1. Legal Proceedings 51
Item 2. Changes in Securities 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 5. Other Information 53
Item 6. Exhibits and Reports on Form 8-K 53
Signature 55
Part I.
Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Quarters Ended June 30, 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,829 $ 6,446
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 3,117 3,091
Selling, general and administrative 1,770 1,754
Depreciation 1,200 1,047
Amortization 2 116
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 6,089 6,008
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 740 438
Interest expense (385) (310)
Intergroup interest charge - -
Other expense, net (285) (29)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) before income taxes 70 99
Income tax benefit (expense) (138) (56)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) (68) 43
Preferred stock dividends (paid) received (2) (2)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ (70) $ 41
-- ------------- --- -------------
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
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (154) $ (154) $ 3,965 $ 4,310 $ 3,018 $ 2,290
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(154) (154) 1,836 2,084 1,435 1,161
(8) (2) 959 1,118 819 638
- - 659 609 541 438
- - - 6 2 110
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(162) (156) 3,454 3,817 2,797 2,347
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
8 2 511 493 221 (57)
- 6 (77) (89) (308) (227)
- - 92 73 (92) (73)
(8) (8) (208) (6) (69) (15)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 318 471 (248) (372)
- - (216) (181) 78 125
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 102 290 (170) (247)
- - 1 1 (3) (3)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 103 $ 291 $ (173) $ (250)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.12 $ 0.33 $ (0.17) $ (0.26)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
893.4 887.5 1,013.9 980.0
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.12 $ 0.33 $ (0.17) $ (0.26)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
891.1 886.3 1,013.9 980.0
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Year-to-Date June 30, 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 13,591 $ 12,700
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 6,327 6,197
Selling, general and administrative 3,541 3,525
Depreciation 2,372 2,028
Amortization 3 256
Restructuring 23 -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 12,266 12,006
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 1,325 694
Interest expense (699) (617)
Intergroup interest charge - -
Other expense, net (319) (55)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes 307 22
Income tax benefit (expense) (235) (56)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations 72 (34)
Extraordinary items, net - (1)
Cumulative effect of change in
accounting principles, net - 2
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 72 (33)
Preferred stock dividends (paid) received (4) (4)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 68 $ (37)
-- ------------- --- -------------
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
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (269) $ (283) $ 7,994 $ 8,668 $ 5,866 $ 4,315
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(269) (283) 3,758 4,185 2,838 2,295
(16) (4) 1,956 2,253 1,601 1,276
- - 1,305 1,189 1,067 839
- - - 12 3 244
- - - - 23 -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(285) (287) 7,019 7,639 5,532 4,654
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
16 4 975 1,029 334 (339)
- 11 (157) (180) (542) (448)
- - 173 137 (173) (137)
(16) (15) (209) (5) (94) (35)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 782 981 (475) (959)
- - (394) (375) 159 319
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 388 606 (316) (640)
- - - (1) - -
- - - - - 2
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 388 605 (316) (638)
- - 3 3 (7) (7)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 391 $ 608 $ (323) $ (645)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.44 $ 0.68 $ (0.32) $ (0.66)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
892.9 887.6 1,011.9 979.0
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.44 $ 0.69 $ (0.32) $ (0.66)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
890.4 885.8 1,011.9 979.0
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.25 $ 0.25 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- -------------------------------
Quarters Ended June 30, 2002 2001
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ (68) $ 43
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (24) 22
Income tax benefit (expense) 7 (8)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period (17) 14
Reclassifications adjustment for gains included
in net income (loss) (1) -
Foreign currency translation adjustments 6 (8)
Unrealized gains on qualifying
cash flow hedges 20 -
Income tax expense (8) -
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains on qualifying
cash flow hedges during the period 12 -
Total other comprehensive income (loss) - 6
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (68) $ 49
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ------------------------------- -- ----------------------------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 102 $ 290 $ (170) $ (247)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- (3) (24) 25 - -
- 1 7 (9) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- (2) (17) 16 - -
- - (1) - - -
- - - (7) 6 (1)
- - 20 - - -
- - (8) - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 12 - - -
- (2) (6) 9 6 (1)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ (2) $ 96 $ 299 $ (164) $ (248)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- -------------------------------
Year-to-Date June 30, 2002 2001
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 72 $ (33)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (30) 28
Income tax benefit (expense) 12 (10)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period (18) 18
Reclassifications adjustment for gains included in
net income (loss) (1) -
Foreign currency translation adjustments 3 (12)
Unrealized gains (losses) on qualifying
cash flow hedges 28 (6)
Income tax expense (6) -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized gains (losses) on qualifying
cash flow hedges 22 (6)
Cumulative effect of change in accounting
principle - (9)
- ------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) 6 (9)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 78 $ (42)
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ------------------------------- -- ----------------------------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 388 $ 605 $ (316) $ (638)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 4 (30) 24 - -
- (1) 12 (9) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 3 (18) 15 - -
- - (1) - - -
- - (2) (11) 5 (1)
- - 28 (6) - -
- - (6) - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 22 (6) - -
- - - (9) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- 3 1 (11) 5 (1)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ 3 $ 389 $ 594 $ (311) $ (639)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 648 $ 313
Accounts receivable, net of consolidated allowance for doubtful accounts of
$569 and $484 3,734 3,806
Inventories 571 690
Prepaid expenses 573 388
Intergroup receivable - -
Current tax benefit receivable from the FON Group - -
Other 330 365
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 5,856 5,562
Property, plant and equipment
FON Group 34,865 34,113
PCS Group 16,061 14,634
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 50,926 48,747
Accumulated depreciation (21,760) (19,770)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 29,166 28,977
Investments in and advances to affiliates 223 288
Intangibles
Goodwill 4,400 4,737
Spectrum licenses 4,620 4,995
Other intangibles 761 839
- -------------------------------------------------------------------------------------------------------------------------
Total intangibles 9,781 10,571
Accumulated amortization (738) (1,509)
- -------------------------------------------------------------------------------------------------------------------------
Net intangibles 9,043 9,062
Other assets 1,271 1,904
- -------------------------------------------------------------------------------------------------------------------------
Total $ 45,559 $ 45,793
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ----------------------------------- -----------------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2002 2001 2002 2001 2002 2001
- ------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 46 $ 134 $ 602 $ 179
- - 2,233 2,415 1,501 1,391
- - 209 248 362 442
- - 340 253 233 135
(67) (234) - 234 67 -
(20) - - - 20 -
- - 167 201 163 164
- ---------------------------------------- ------------------------------- -----------------------------------
(87) (234) 2,995 3,485 2,948 2,311
- - 34,865 34,113 - -
- - - - 16,061 14,634
- ------------------------------------- ----------------------------------- -----------------------------------
- - 34,865 34,113 16,061 14,634
(48) (47) (17,557) (16,605) (4,155) (3,118)
- ------------------------------------- ----------------------------------- -----------------------------------
(48) (47) 17,308 17,508 11,906 11,516
(280) (280) 416 417 87 151
- - 28 31 4,372 4,706
- - 1,519 1,566 3,101 3,429
- - 23 47 738 792
- ------------------------------------- ----------------------------------- -----------------------------------
- - 1,570 1,644 8,211 8,927
- - (2) (77) (736) (1,432)
- ------------------------------------- ----------------------------------- -----------------------------------
- - 1,568 1,567 7,475 7,495
- - 911 1,187 360 717
- ------------------------------------- ----------------------------------- -----------------------------------
$ (415) $ (561) $ 23,198 $ 24,164 $ 22,776 $ 22,190
- ------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 776 $ 4,401
Accounts payable 2,227 2,900
Accrued interconnection costs 712 588
Accrued taxes 510 468
Advance billings 791 731
Accrued restructuring costs 230 390
Payroll and employee benefits 506 569
Accrued interest 462 309
Intergroup payable - -
Other 971 1,080
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,185 11,436
Noncurrent liabilities
Long-term debt and capital lease obligations 20,349 16,501
Equity unit notes 1,725 1,725
Deferred income taxes 1,766 1,553
Postretirement and other benefit obligations 933 948
Other 761 758
- -------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 25,534 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, 891.9 and 888.8
shares issued and outstanding 1,784 1,778
PCS, par value $1.00 per share, 4,600.0 shares authorized, 993.9 and 986.7
shares issued and outstanding 994 987
Capital in excess of par or stated value 9,954 10,076
Retained deficit (190) (261)
Accumulated other comprehensive income 20 14
Combined attributed net assets - -
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 12,584 12,616
- -------------------------------------------------------------------------------------------------------------------------
Total $ 45,559 $ 45,793
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------ ----------------------------------- -----------------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2002 2001 2002 2001 2002 2001
- ------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 717 $ 2,056 $ 59 $ 2,345
- - 739 1,432 1,488 1,468
- - 695 569 17 19
(20) - 283 239 247 229
- - 510 499 281 232
- - 215 390 15 -
- - 407 449 99 120
- - 45 47 417 262
(67) (234) 67 - - 234
(48) (47) 552 617 467 510
- ------------------------------------ ----------------------------------- -----------------------------------
(135) (281) 4,230 6,298 3,090 5,419
- - 4,064 3,258 16,285 13,243
- - - - 1,725 1,725
- - 1,766 1,552 - 1
- - 933 948 - -
- - 356 394 405 364
- ------------------------------------ ----------------------------------- -----------------------------------
- - 7,119 6,152 18,415 15,333
(280) (280) 10 10 526 526
22 22 - - - -
1,784 1,778 - - - -
994 987 - - - -
9,954 10,076 - - - -
(190) (261) - - - -
20 14 - - - -
(12,584) (12,616) 11,839 11,704 745 912
- ------------------------------------ ----------------------------------- -----------------------------------
- - - - - -
- ------------------------------------ ----------------------------------- -----------------------------------
$ (415) $ (561) $ 23,198 $ 24,164 $ 22,776 $ 22,190
- ------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
- ------------------------------------------------------------------ ----------------- ----------------------------------
Year-to-Date June 30, 2002 2001
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ 72 $ (33)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Equity in net losses (income) of affiliates 102 89
Depreciation and amortization 2,375 2,284
Deferred income taxes 621 44
Losses on write-down of assets 254 -
Changes in assets and liabilities:
Accounts receivable, net 66 (36)
Inventories and other current assets (123) (76)
Accounts payable and other current liabilities (630) (627)
Current tax benefit receivable from the FON Group - -
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net 20 (34)
Other, net 25 31
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities 2,782 1,642
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (2,510) (4,314)
Investments in affiliates, net 12 (49)
Proceeds from sales of assets 60 58
Other, net - 33
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (2,438) (4,272)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt 5,980 4,647
Payments on debt (5,777) (1,879)
Dividends paid (226) (226)
Intergroup advances, net - -
Other, net 14 25
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities (9) 2,567
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 335 (63)
Cash and Equivalents at Beginning of Period 313 239
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 648 $ 176
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2002 2001 2002 2001 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 388 $ 605 $ (316) $ (638)
- - 14 42 88 47
- - 1,305 1,201 1,070 1,083
- - 240 140 381 (96)
- - 253 - 1 -
- - 182 160 (116) (196)
- (2) (106) (21) (17) (53)
(20) 28 (782) (484) 172 (171)
20 (26) - - (20) 26
- - 157 221 (157) (221)
- - (8) (71) 28 37
- - (12) 3 37 28
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,631 1,796 1,151 (154)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,082) (2,602) (1,428) (1,712)
- - (26) (32) 38 (17)
- - 60 15 - 43
- - - 33 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,048) (2,586) (1,390) (1,686)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,244 1,324 4,736 3,323
- - (1,781) (226) (3,996) (1,653)
- - (219) (219) (7) (7)
- - 158 - (158) -
- - (73) (171) 87 196
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (671) 708 662 1,859
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (88) (82) 423 19
- - 134 122 179 117
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 46 $ 40 $ 602 $ 136
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
Year-to-Date June 30, 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 (loss) - - - -
FON common stock dividends - - - (221)
PCS preferred stock dividends - - - (5)
FON Series 1 common stock issued - 6 - 29
PCS Series 1 common stock issued - - 7 72
Tax benefit from stock compensation - - - 2
Intergroup stock compensation - - - -
Other, net - - - 1
- ----------------------------------------------------------------------------------------------------------------
June 2002 balance $ 22 $ 1,784 $ 994 $ 9,954
------------------------------------------------------------------
Shares Outstanding
- ------------------------------------------------------------------------------------------------
Beginning 2002 balance 43.1 888.8 986.7
FON Series 1 common stock issued - 3.1 -
PCS Series 1 common stock issued - - 7.2
- ------------------------------------------------------------------------------------------------
June 2002 balance 43.1 891.9 993.9
--------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
- ------------------------------------------------------------------------------------
Accumulated
Other Combined Attributed Net Assets
Retained Comprehensive Consolidated ------------------------------
Deficit Income Total Sprint FON Group Sprint PCS Group
- ------------------------------------------------------------------------------------
$ (261) $ 14 $ 12,616 $ 11,704 $ 912
72 - 72 388 (316)
- - (221) (221) -
- - (5) 2 (7)
- - 35 35 -
- - 79 - 79
- - 2 2 -
- - - (71) 71
(1) 6 6 - 6
- ------------------------------------------------------------------------------------
$ (190) $ 20 $ 12,584 $ 11,839 $ 745
- ------------------------------------------------------------------------------------
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 year-to-date period 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.
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 the costs that would be
incurred if the groups would have been operating on a stand-alone basis. Costs
for shared services totaled approximately $129 million in both the 2002 and 2001
second quarters and $252 million and $270 million in the 2002 and 2001
year-to-date periods, respectively. The percentage of these costs allocated to
the PCS Group were approximately 29% and 20% in the 2002 and 2001 second
quarters and 28% and 20% in the 2002 and 2001 year-to-date periods,
respectively, with the balance remaining in the FON Group. The allocation of
shared services may change at the discretion of Sprint'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 $92 million and $73 million in
the 2002 and 2001 second quarters and $173 million and $137 million in the 2002
and 2001 year-to-date periods, 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
- --------------------------------------------------------------------------------
Investments in Securities
In the 2002 second quarter, Sprint completed an analysis of the valuation of its
cost method investment in EarthLink preferred shares which resulted in a
write-down of $241 million to market value. This charge is included in "Other
income (expense), net" on Sprint's Consolidated Statements of Operations.
Investments in and Advances to Affiliates
At the end of June 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. (BidCo), and Virgin Mobile, U.S.A. In
2001, investments accounted for using the equity method also included the FON
Group's investments in Intelig Telecomunicacoes, Ltda., Call-Net Enterprises
Inc., (Call-Net) and other investments.
In the second quarter of 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 since
the 2000 fourth quarter. 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 to a
new ten year branding and technology services agreement for which Sprint will
receive royalties.
In the second quarter of 2002, Sprint reached a definitive agreement to sell its
investment in Pegaso to Telefonica Moviles. Sprint also reached an agreement
with Pegaso and the other shareholders of Pegaso for payment in connection with
the cancellation of the Company's Services Contract. Due to the recognition of
Sprint's share of Pegaso losses, Sprint's net book investment in Pegaso was
reduced to zero during the 2002 second quarter.
In the second quarter of 2002, Sprint received $38 million from BidCo
representing its share of the FCC's return of 85% of the deposit for licenses in
the NextWave spectrum auction.
Also in the second quarter of 2002, a new agreement was entered into with the
Virgin Group for funding of Virgin Mobile USA. Under the terms of the agreement,
Sprint will fund up to $150 million, with the majority in the form of discounted
network services and the remainder in cash, and the Virgin Group will fund up to
$150 million in cash. Virgin Mobile USA announced it launched services in June.
Combined, unaudited, summarized financial information (100% basis) of entities
accounted for using the equity method was as follows:
Quarters Ended Year-to-Date
June 30, June 30,
--- ------------------------------- -- -------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
Net operating revenues $ 65 $ 122 $ 130 $ 350
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (81) $ (118) $ (111) $ (286)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (208) $ (99) $ (271) $ (308)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (82) $ (28) $ (102) $ (73)
--- ------------- -- -------------- -- ------------- --- -------------
- --------------------------------------------------------------------------------
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
Year-to-Date June 30, 2002 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 108 $ 274 $ (166)
Effect of:
State income taxes, net of federal income tax effect 16 30 (14)
Equity in losses of foreign joint ventures 25 1 24
Write-down of cost-method investment 84 84 -
Other, net 2 5 (3)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 235 $ 394 $ (159)
--- ------------- --- -------------- -- --------------
Effective income tax rate 76.5% 50.4% 33.5%
--- ------------- --- -------------- -- --------------
Sprint Sprint Sprint
Corporation FON PCS
Year-to-Date June 30, 2001 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 8 $ 343 $ (335)
Effect of:
State income taxes, net of federal income tax effect 11 31 (20)
Equity in losses of foreign joint ventures 18 - 18
Goodwill amortization 24 5 19
Other, net (5) (4) (1)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 56 $ 375 $ (319)
--- ------------- --- -------------- -- --------------
Effective income tax rate NM 38.2% 33.3%
--- ------------- --- -------------- -- --------------
NM = Not meaningful
- --------------------------------------------------------------------------------
4. Accounting for Derivative Instruments
- --------------------------------------------------------------------------------
Sprint's derivative instruments include interest rate swaps, stock warrants, net
purchased equity options embedded in forward sale contracts and foreign currency
forward contracts. Sprint's derivative transactions are used principally for
hedging purposes and comply with Board-approved policies. Senior finance
management receives frequent status updates of all outstanding derivative
positions.
Interest Rate Swaps
The interest rate swaps met 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. Sprint held both cash flow hedges and fair value hedges in
interest rate swaps. At June 30, 2002, Sprint no longer held any interest rate
swaps.
Sprint recorded a $6 million increase to other comprehensive income in the 2002
second quarter and a $12 million increase in the year-to-date period resulting
from gains on cash flow hedges. The changes in other comprehensive income are
included in "Net unrealized gains (losses) on qualifying cash flow hedges" on
the Consolidated Statements of Comprehensive Income (Loss).
There were no material fluctuations in the valuation of cash flow hedges during
the 2001 second quarter. Sprint recorded a $6 million reduction in other
comprehensive income in the 2001 year-to-date period as a result of losses on
cash flow hedges.
Stock Warrants
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.
Sprint recorded net derivative losses in earnings of $1 million net of tax
benefit for the 2002 second quarter and net derivative losses in earnings of $3
million (net of tax benefit of $1 million) for the year-to-date period due to
changes in the fair value of the stock warrants.
Sprint's activity associated with stock warrants was immaterial in the 2001
second quarter and year-to-date periods.
Net Purchased Equity Options
The net purchased equity options are designated as cash flow hedges and changes
in value are recognized in other comprehensive income.
Sprint recorded a $14 million increase to other comprehensive income in the 2002
second quarter and a $16 million increase in the year-to-date period resulting
from gains on these cash flow hedges. There were no net purchased equity options
held during the 2001 second quarter or the 2001 year-to-date period. The changes
in other comprehensive income are included in "Net unrealized gains (losses) on
qualifying cash flow hedges" on the Consolidated Statements of Comprehensive
Income (Loss).
Foreign Currency Forward Contracts
Foreign currency forward contracts held during the period were not designated as
hedges and changes in the fair value of these derivative instruments are
recognized in earnings during the period of change. The activity associated with
these contracts was immaterial in all periods presented.
Cumulative Effect Upon Adoption
Sprint adopted Financial Accounting Standards Board Statement (SFAS) No. 133 on
January 1, 2001, which resulted in a cumulative reduction in net loss of $2
million (net of tax of $1 million) and a cumulative reduction in other
comprehensive income of $9 million. The reduction in 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). The net derivative gains and losses
are included in "Other income (expense), net" on the Consolidated Statements of
Operations.
- --------------------------------------------------------------------------------
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, which include related microwave relocation
costs, 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 periods to exclude amortization, net of any
related tax effects on goodwill and indefinite lived intangibles.
Consolidated FON Group PCS Group
--------- -- ---------- --------- -- ---------- ---------- -- ---------
Quarters ended June 30, 2002 2001 2002 2001 2002 2001
- ----------------------------------- -- --------- -- ---------- -- --------- -- ---------- - ---------- -- ---------
(millions, except per share amounts)
Reported net income (loss) $ (68) $ 43 $ 102 $ 290 (170) $ (247)
Add back:
Goodwill amortization - 31 - - - 31
Spectrum license amortization
- 20 - 6 - 14
-- --------- -- ---------- -- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ (68) $ 94 $ 102 $ 296 (170) $ (202)
Basic and diluted earnings (loss)
per share
Reported net income (loss) $ 0.12 $ 0.33 (0.17) $ (0.26)
Add back:
Goodwill amortization - - - 0.03
Spectrum license amortization
- - - 0.02
-- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ 0.12 $ 0.33 (0.17) $ (0.21)
Consolidated FON Group PCS Group
--------- -- ---------- --------- -- ---------- ---------- -- ---------
Year-to-date June 30, 2002 2001 2002 2001 2002 2001
- ----------------------------------- -- --------- -- ---------- -- --------- -- ---------- - ---------- -- ---------
(millions, except per share amounts)
Reported net income (loss) $ 72 $ (33) $ 388 $ 605 (316) $ (638)
Add back:
Goodwill amortization - 62 - - - 62
Spectrum license amortization
- 38 - 11 - 27
-- --------- -- ---------- -- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ 72 $ 67 $ 388 $ 616 (316) $ (549)
Diluted earnings (loss) per share
Reported net income (loss) $ 0.44 $ 0.68 (0.32) $ (0.66)
Add back:
Goodwill amortization - - - 0.06
Spectrum license amortization
- 0.02 - 0.03
-- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ 0.44 $ 0.70 (0.32) $ (0.57)
Basic earnings (loss)
per share
Reported net income (loss) $ 0.44 $ 0.69 (0.32) $ (0.66)
Add back:
Goodwill amortization - - - 0.06
Spectrum license amortization
- 0.01 - 0.03
-- --------- -- ---------- - ---------- -- ---------
Adjusted net income (loss) $ 0.44 $ 0.70 (0.32) $ (0.57)
- --------------------------------------------------------------------------------
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
by the first quarter of 2003.
The severance charge is associated with the expected involuntary employee
separation of approximately 2,600 employees. As of June 30, 2002, nearly 1,600
of the employee separations had been completed.
Activity relating to the 2002 first quarter restructuring in the 2002
year-to-date period is summarized as follows:
Activity
--------------------------
Total June 30, 2002
Restructuring Charge Cash Payments Liability Balance
- -------------------------------------------------------------------------------------------------------------
Severance $ 13 $ 7 $ 6
Other exit costs 10 1 9
- -------------------------------------------------------------------------------------------------------------
Total $ 23 $ 8 $ 15
-----------------------------------------------------------------------
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 second quarter and $12 million in the
year-to-date period compared to $176 million and $321 million for the same
periods a year ago.
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 June 30, 2002, substantially all of the
employee separations had been completed.
Activity relating to the 2001 fourth quarter restructuring in the 2002
year-to-date period is summarized as follows:
Activity
--------------------------
December 31, 2001 June 30, 2002
Liability Balance Cash Payments Liability Balance
- -------------------------------------------------------------------------------------------------------------
Severance $ 160 $ 95 $ 65
Other exit costs 230 80 150
- -------------------------------------------------------------------------------------------------------------
Total $ 390 $ 175 $ 215
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
At the end of June 2002, Sprint had short-term borrowings of $895 million
consisting of $695 million of borrowings secured by trade receivables and $200
million of 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 were 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 allowed the original securities to be
exchanged for substantially identical securities registered with the SEC. This
exchange offer was completed in June 2002.
- --------------------------------------------------------------------------------
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.
On July 3, 2002, the Federal Communications Commission released a declaratory
ruling in a matter referred to it by the federal district court for the Western
District of Missouri in Sprint's suit against AT&T Corp for the collection of
terminating access charges. The FCC ruled that although nothing prohibited
wireless carriers from charging for access to their networks, interexchange
carriers were not required to pay such charges absent a contractual obligation
to do so. The FCC referred the matter back to the Western District of Missouri.
AT&T has appealed this decision to the D.C. Circuit Court of Appeals. 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.
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
- --------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Sprint's allowance for doubtful accounts are as follows:
---------------- ----------------
June 30, December 31,
2002 2001
--------------------------------------------------- ---------------------------------
(millions)
FON Group $ 312 $ 276
PCS Group 257 208
--------------------------------------------------- -- ------------- -- -------------
Consolidated $ 569 $ 484
-- ------------- -- -------------
Supplemental Cash Flows Information
Sprint's cash paid (received) for interest and income taxes was as follows:
Year-to-Date
June 30,
-- ------------- -- -------------
2002 2001
--------------------------------------------------- -- ------------- -- -------------
(millions)
Interest (net of capitalized interest) $ 558 $ 562
-- ------------- -- -------------
Income taxes $ (384) $ 2
-- ------------- -- -------------
Sprint's noncash activities included the following:
Year-to-Date
June 30,
-- ------------- -- -------------
2002 2001
--------------------------------------------------- -- ------------- -- -------------
(millions)
Common stock issued under employee stock benefit
plans $ 114 $ 93
-- ------------- -- -------------
Tax benefit from stock compensation $ 2 $ 11
-- ------------- -- -------------
Contribution to equity investment $ 35 $ -
-- ------------- -- -------------
- --------------------------------------------------------------------------------
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.
Segment financial information was as follows:
- ----------------------------------------------------------------------------------------------------------------
Product
Global Distribution Corporate
Quarters Ended Markets Local & Directory PCS and
June 30, Division(1) Division Publishing Group(1) Eliminations(2) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2002
Net operating revenues $ 2,275 $ 1,535 $ 366 $ 3,018 $ (365) $ 6,829
Affiliated revenues 176 72 138 (21) (365) -
Operating income (loss) (30) 481 66 221 2 740
2001
Net operating revenues $ 2,563 $ 1,552 $ 474 $ 2,290 $ (433) $ 6,446
Affiliated revenues 153 67 200 13 (433) -
Operating income (loss) (47) 466 84 (57) (8) 438
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Product
Global Distribution Corporate
Year-to-date Markets Local & Directory PCS and
June 30, Division(1) Division Publishing Group(1) Eliminations(2) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2002
Net operating revenues $ 4,617 $ 3,088 $ 696 $ 5,866 $ (676) $ 13,591
Affiliated revenues 324 150 254 (52) (676) -
Operating income (loss) (105) 962 127 334 7 1,325
2001
Net operating revenues $ 5,130 $ 3,105 $ 968 $ 4,315 $ (818) $ 12,700
Affiliated revenues 283 123 388 24 (818) -
Operating income (loss) (22) 904 166 (339) (15) 694
- ----------------------------------------------------------------------------------------------------------------
(1) Affiliate revenues in the 2002 second quarter and year-to-date periods
reflect the adjustment of the wireless access revenue previously recorded
regarding inter-segment revenue between the Global Markets Division and the
PCS Group.
(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 handset purchases from the PCS
Group.
Net operating revenues by product and services were as follows:
- ----------------------------------------------------------------------------------------------------------------------
Product
Global Distribution
Quarters Ended Markets Local & Directory PCS
June 30, Division(1) Division Publishing Group Eliminations(2) Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2002
Voice $ 1,468 $ - $ - $ - $ (176) $ 1,292
Data 467 - - - - 467
Internet 247 - - - - 247
Local service - 763 - - - 763
Network access - 503 - - (53) 450
Long distance - 156 - - - 156
Product distribution - - 227 - (138) 89
Directory publishing - - 139 - - 139
Wireless services - - - 3,018 21 3,039
Other 93 113 - - (19) 187
----------------------------------------------------------------------------------
Total net operating revenues $ 2,275 $ 1,535 $ 366 $ 3,018 $ (365) $ 6,829
----------------------------------------------------------------------------------
2001
Voice $ 1,701 $ - $ - $ - $ (153) $ 1,548
Data 487 - - - - 487
Internet 251 - - - - 251
Local service - 735 - - (1) 734
Network access - 509 - - (52) 457
Long distance - 177 - - - 177
Product distribution - - 334 - (200) 134
Directory publishing - - 140 - - 140
Wireless services - - - 2,290 (13) 2,277
Other 124 131 - - (14) 241
----------------------------------------------------------------------------------
Total net operating revenues $ 2,563 $ 1,552 $ 474 $ 2,290 $ (433) $ 6,446
----------------------------------------------------------------------------------
(1) Beginning in the 2002 first quarter, equipment revenue for the periods
presented is reported as part of Other revenues. This reclassification 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 handset purchases from the PCS
Group.
- ----------------------------------------------------------------------------------------------------------------------
Product
Global Distribution
Year-to-date Markets Local & Directory PCS
June 30, Division(1) Division Publishing Group Eliminations(2) Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2002
Voice $ 3,004 $ - $ - $ - $ (324) $ 2,680
Data 951 - - - - 951
Internet 492 - - - - 492
Local service - 1,524 - - - 1,524
Network access - 1,008 - - (112) 896
Long distance - 324 - - - 324
Product distribution - - 420 - (254) 166
Directory publishing - - 276 - - 276
Wireless services - - - 5,866 52 5,918
Other 170 232 - - (38) 364
----------------------------------------------------------------------------------
Total net operating revenues $ 4,617 $ 3,088 $ 696 $ 5,866 $ (676) $ 13,591
----------------------------------------------------------------------------------
2001
Voice $ 3,427 $ - $ - $ - $ (283) $ 3,144
Data 959 - - - - 959
Internet 485 - - - - 485
Local service - 1,467 - - (2) 1,465
Network access - 1,014 - - (95) 919
Long distance - 363 - - - 363
Product distribution - - 693 - (388) 305
Directory publishing - - 275 - - 275
Wireless services - - - 4,315 (24) 4,291
Other 259 261 - - (26) 494
----------------------------------------------------------------------------------
Total net operating revenues $ 5,130 $ 3,105 $ 968 $ 4,315 $ (818) $ 12,700
----------------------------------------------------------------------------------
(1) Beginning in the 2002 first quarter, equipment revenue for the periods
presented is reported as part of Other revenues. This reclassification 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 handset purchases from the PCS
Group.
- --------------------------------------------------------------------------------
11. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections."
The primary impact of this action on Sprint will be the reporting of gains and
losses from the early extinguishment of debt in other income or expense instead
of as extraordinary items unless the criteria in APB Opinion 30 of unusual in
nature and infrequent in occurrence are met. Once adopted in 2003, restatement
will be required of extraordinary items resulting from the early extinguishment
of debt that do not meet the criteria of APB Opinion 30.
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 and, accordingly, has not yet determined the
expected impact of adopting this standard. This statement is effective for
fiscal years beginning after June 15, 2002. Sprint will adopt this standard on
January 1, 2003.
- --------------------------------------------------------------------------------
12. Subsequent Events
- --------------------------------------------------------------------------------
FON Group Restructuring
In July 2002, Sprint announced a restructuring that will integrate its
E|Solutions' Web hosting sales, mobile computing consulting, marketing, and
product and sales support capabilities into Sprint Business while integrating
its customer service operations into Network Services. Additionally, Sprint
announced that its global markets division will discontinue offering and
supporting facilities-based DSL services to customers. Sprint is finalizing the
plan associated with these actions and expects to incur a charge in the third
quarter of 2002.
Investment in Pegaso
In the second quarter of 2002, Sprint reached a definitive agreement to sell its
investment in Pegaso to Telefonica Moviles. Sprint also reached an agreement
with Pegaso and the other shareholders of Pegaso for payment in connection with
the cancellation of the Company's Services Contract. In July 2002, the Mexican
anti-trust authorities approved Telefonica's proposed purchase of Sprint's
interest in Pegaso. Sprint expects to receive proceeds of approximately $65
million for its Pegaso shares, its investment in subordinated convertible notes,
and the Company's Services Contract settlement. Sprint expects the transaction
to close in the third quarter of 2002 generating a one-time gain. Due to the
recognition of Sprint's share of Pegaso losses, Sprint's net book investment in
Pegaso was zero at the end of the 2002 second quarter.
Revolving Credit Facility
Sprint has an existing $2 billion, five-year agreement scheduled to expire in
August 2003. Its $3 billion, 364-day facility expired in early August. Sprint
has obtained commitments for a new $1.5 billion revolving bank facility. The
facility is unsecured, with no springing liens and is structured as a 364-day
credit line with a subsequent one-year term-out option. The new facility is
expected to close in August. This new facility will replace the existing $2
billion facility that would have expired in August 2003.
Sprint has reduced its outstanding commercial paper from peak levels of nearly
$4 billion earlier this year to zero today. In addition, Sprint expects
continued improvements in operating cash flows and has multiple sources of
liquidity. As a result, the Company believes the new facility provides ample
capacity.
Industry Activity
In July 2002, WorldCom Inc., a telecommunications company, filed for Chapter 11
bankruptcy protection. Sprint's net receivable exposure is less than $50 million
as of July 31, 2002. This exposure is spread approximately equally between the
FON and PCS Groups. Sprint continues to evaluate its risk regarding its WorldCom
receivables and its ongoing business relationship with WorldCom.
Dividend Declaration
In August 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 September 30, 2002.
Part I.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Corporation
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 extent and duration of the current economic downturn;
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 adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations;
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 and unexpected announcements or developments from others in
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 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 to the entire United States population using a
single frequency band and a single technology.
Sprint operates in industries that have been and continue to be subject to
consolidation and dynamic change. Therefore, Sprint routinely reassesses its
business strategies. In light of current events and specific changes in
telecommunications, including bankruptcies, over-capacity and the economic
downturn, Sprint intends to assess implications. Any such assessment may impact
the valuation of its long-lived assets.
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 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 over existing copper telephone lines and over MMDS spectrum.
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies. 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.
The global markets division also reflects the costs of establishing
international IP operations.
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, nationwide long distance services to business and residential 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 is considering the sale
of the Directory Publishing Business and is awaiting final offers. A decision
regarding the sale is expected around the end of August.
- --------------------------------------------------------------------------------
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
services to the entire U.S. population 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 100 largest U.S.
metropolitan areas. The PCS Group's service, including third party affiliates,
now reaches a quarter billion 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).
Sprint plans to introduce nationwide 3G service this summer and to offer a wide
selection of devices, new applications and enhancements to existing services and
data speeds up to 144 kbps (with average speeds of 50 to 70 kbps).
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. (Virgin
Mobile), 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 and expects to close the sale in the 2002 third
quarter.
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
- --------------------------------------------------------------------------------
In Sprint's 2001 Form 10-K/A, it reported that the PCS Group and AT&T had filed
petitions for a declaratory ruling with the Federal Communications Commission
(FCC) regarding the lawfulness of the PCS Group's practice of charging AT&T for
terminating AT&T's long distance calls to the PCS Group's wireless customers.
Sprint also disclosed this issue in its discussion of the PCS Group in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in its 2001 Form 10-K/A and its first quarter 2002 Form 10-Q. On July
3, 2002, the FCC released a ruling affirming that nothing prohibited wireless
carriers from imposing access charges for the use of their networks; however,
the FCC also stated that interexchange carriers could not be unilaterally
required to pay these charges without a contractual obligation to do so. The FCC
referred the dispute back to the Federal District Court for the Western District
of Missouri for a determination whether the PCS Group has stated a claim under
Missouri state law. AT&T has filed a Notice of Appeal at the DC Circuit Court of
Appeals challenging the ruling. In light of this ruling, the PCS Group recorded
an additional provision in the 2002 second quarter of $61 million related to
amounts previously billed. To reflect its share of the disputed charges, the
global markets division reduced access costs, $17 million for amounts previously
billed by the PCS Group.
In Sprint's 2001 Form 10-K/A, it also reported that all covered commercial
mobile radio service providers must offer a database solution for local number
portability by November 24, 2002. Local number portability (LNP) allows
customers to retain, at the same location, existing telephone numbers when
switching from one telecommunications carrier to another. The FCC has extended
the deadline to November 24, 2003.
On June 6, 2002, the California Public Utility Commission proposed new rules
that, if adopted, would impose significant restrictions on how
telecommunications services are offered, subscribed to and billed. If adopted,
these rules would significantly constrain new wireless and long distance
customer acquisition, new service roll-out and service growth in the state, and
would impose substantial incremental costs across the industry.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 3,965 $ 4,310 $ 7,994 $ 8,668
PCS Group 3,018 2,290 5,866 4,315
Intergroup eliminations (154) (154) (269) (283)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 6,829 $ 6,446 $ 13,591 $ 12,700
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues increased 6% in the 2002 second quarter and 7% in the
2002 year-to-date period compared to the same 2001 periods reflecting growth in
the PCS Group offset somewhat by declining FON Group long distance voice
revenues and product distribution revenues.
Income (Loss) from continuing operations was as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 102 $ 290 $ 388 $ 606
PCS Group (170) (247) (316) (640)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations $ (68) $ 43 $ 72 $ (34)
--- ------------- -- -------------- -- ------------- --- -------------
In the 2002 second quarter, loss from continuing operations includes the effect
of net one-time charges of $216 million. This amount includes a $25 million gain
relating to the sale of TranXact customer contracts and a write-down of our
investment in EarthLink of $241 million to current market value.
In the 2001 first quarter, loss from continuing operations includes a one-time
gain of $9 million from investment activities.
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 second
quarter and $120 million in the 2002 year-to-date period from the same 2001
periods. Amortization expense decreased an additional $54 million in the 2002
second quarter and $133 million year-to-date due to the full amortization of
some intangibles in 2001.
- --------------------------------------------------------------------------------
Segmental Results of Operations
- --------------------------------------------------------------------------------
Global Markets Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues(1)
Voice $ 1,468 $ 1,701 $ (233) (13.7)%
Data 467 487 (20) (4.1)%
Internet 247 251 (4) (1.6)%
Other 93 124 (31) (25.0)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 2,275 2,563 (288) (11.2)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,329 1,528 (199) (13.0)%
Selling, general and administrative 612 748 (136) (18.2)%
Depreciation and amortization 364 334 30 9.0%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,305 2,610 (305) (11.7)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (30) $ (47) $ 17 36.2%
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues(1)
Voice $ 3,004 $ 3,427 $ (423) (12.3)%
Data 951 959 (8) (0.8)%
Internet 492 485 7 1.4%
Other 170 259 (89) (34.4)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 4,617 5,130 (513) (10.0)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 2,750 3,017 (267) (8.8)%
Selling, general and administrative 1,251 1,499 (248) (16.5)%
Depreciation and amortization 721 636 85 13.4%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 4,722 5,152 (430) (8.3)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (105) $ (22) $ (83) NM
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
NM = Not meaningful
(1) Equipment revenue for the periods presented is reported as a part of Other
revenues. This reclassification had no impact on total net operating
revenues.
Net Operating Revenues
Net operating revenues decreased 11% in the 2002 second quarter and 10% in the
2002 year-to-date period from the same 2001 periods. The overall revenue
decrease reflects pricing pressures on voice services and a decline in
professional services, legacy data services, and other data services revenues.
Revenues 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 which increases
competition.
Voice Revenues
Voice revenues decreased 14% in the 2002 second quarter and 12% in the 2002
year-to-date period from the same 2001 periods due to a decline in consumer
voice revenues resulting from a more competitive pricing environment, wireless
and e-mail substitution, and RBOC entry. Business voice revenues also declined
as the traffic mix shifted toward lower yield customers, including affiliates.
Minute growth was 11% in the 2002 second quarter and 12% in the 2002
year-to-date period compared to the same 2001 periods. The minute growth, driven
in part by the increase in business minutes sold to the PCS Group, was more than
offset by the continued competitive pricing environment.
Data Revenues
Data revenues decreased 4% in the 2002 second quarter and 1% in the 2002
year-to-date period from the same 2001 periods due to declines in frame relay
and private line services partially offset by increases in asynchronous transfer
mode (ATM) services; however, ATM pricing continues to be competitive.
Internet Revenues
Internet revenues decreased 2% in the 2002 second quarter and increased 1% in
the 2002 year-to-date period from the same 2001 periods. Dial-up Internet
service provider-related revenues continue to decline due to pricing declines
with Sprint's largest customer for these services. Increases in dedicated IP and
Web hosting offset the dial-up decline, however, growth in dedicated IP slowed
from 33% in the 2002 first quarter to 14% in the 2002 second quarter.
Other Revenues
Other revenues decreased 25% in the 2002 second quarter and 34% in the 2002
year-to-date period from the same 2001 periods. The decrease is due to declines
in professional services, equipment sales 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 is 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 13% in the 2002 second quarter and 9% in the 2002
year-to-date period from the same 2001 periods.
Interconnection costs decreased 9% in the 2002 second quarter and 6% in the 2002
year-to-date period from the same 2001 periods due to regulatory rate reductions
and lower negotiated rates, partially offset by volume growth. Additionally,
interconnection costs were favorably impacted in the 2002 second quarter by the
$17 million adjustment related to terminating access charges billed by the PCS
Group detailed in "Regulatory Developments."
All other costs of services and products decreased 21% in the 2002 second
quarter and 14% in the 2002 year-to-date period compared to the same 2001
periods mainly due to decreased network operating costs derived from Sprint's
2001 fourth quarter restructuring actions, as well as other cost containment
efforts.
Total costs of services and products for the global markets division were 58.4%
of net operating revenues in the 2002 second quarter and 59.6% in the 2002
year-to-date period compared to 59.6% and 58.8% for the same periods a year ago.
Excluding Sprint ION related costs, total costs of services and products for the
global markets division were 58.2% of net operating revenues in the 2002 second
quarter and 59.4% in the 2002 year-to-date period compared to 57.1% and 56.4%
for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses decreased 18% in the 2002
second quarter and 17% in the 2002 year-to-date period from the same 2001
periods. The decrease is due to the 2001 fourth quarter restructuring and a
strong emphasis on cost control. SG&A expense was 26.9% of net operating
revenues in the 2002 second quarter and 27.1% in the 2002 year-to-date period
compared to 29.2% for the same periods 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, regulatory decisions 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 second
quarter and year-to-date period compared to 3.6% and 3.5% in the same 2001
periods. Reserve for bad debt as a percent of outstanding accounts receivable
was 14.2% at the end of the 2002 second quarter and 12.7% at year-end 2001.
Excluding Sprint ION related costs, SG&A expense was 26.8% of net operating
revenue in the 2002 second quarter and 27.0% in the 2002 year-to-date period
compared to 26.7% and 26.8% for the same periods 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 9% in the
2002 second quarter and 13% in the 2002 year-to-date period from the same
periods a year ago. These increases are attributable 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 16.0% of net operating revenues in the
2002 second quarter and 15.6% in the 2002 year-to-date period compared to 13.0%
and 12.4% for the same periods a year ago.
Excluding Sprint ION related costs, depreciation and amortization expense was
16.0% of net operating revenue in the 2002 second quarter and 15.6% in the 2002
year-to-date period compared to 11.3% and 11.0% in the same periods a year ago.
Restructuring Charge and Asset Impairment
In July 2002, Sprint announced a restructuring that will integrate its
E|Solutions' Web hosting sales, mobile computing consulting, marketing, and
product and sales support capabilities into Sprint Business while integrating
its customer service operations into Network Services. Additionally, Sprint will
employ a more cost effective approach to high speed DSL customer acquisition.
Sprint is finalizing the plan associated with these actions and expects to incur
a restructuring charge in the third quarter of 2002.
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.
Local Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
2002 2001 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 763 $ 735 $ 28 3.8%
Network access 503 509 (6) (1.2)%
Long distance 156 177 (21) (11.9)%
Other 113 131 (18) (13.7)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,535 1,552 (17) (1.1)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 461 484 (23) (4.8)%
Selling, general and administrative 305 327 (22) (6.7)%
Depreciation and amortization 288 275 13 4.7%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,054 1,086 (32) (2.9)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 481 $ 466 $ 15 3.2%
--- ------------- -- -------------- -- -------------
Operating margin 31.3% 30.0%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
2002 2001 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 1,524 $ 1,467 $ 57 3.9%
Network access 1,008 1,014 (6) (0.6)%
Long distance 324 363 (39) (10.7)%
Other 232 261 (29) (11.1)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 3,088 3,105 (17) (0.5)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 929 980 (51) (5.2)%
Selling, general and administrative 623 665 (42) (6.3)%
Depreciation and amortization 574 556 18 3.2%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 2,126 2,201 (75) (3.4)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 962 $ 904 $ 58 6.4%
--- ------------- -- -------------- -- -------------
Operating margin 31.2% 29.1%
--- ------------- -- --------------
Net Operating Revenues
Net operating revenues decreased 1% in the 2002 second quarter and year-to-date
periods from the same 2001 periods as growth in local services was offset by
declines in long distance services and equipment sales. The local division ended
the 2002 second 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 10%
during the past 12 months. This growth reflects 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 second quarter and year-to-date periods from the same 2001 periods
primarily on the strength of a 15% year-to-date increase in vertical service
revenue driven by the success of bundled offerings. Revenues from prison
contracts implemented last year also aided local service revenues. The strong
growth was partially offset by a 3% year-to-date decline in basic area services
due to the overall decline in access lines.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, decreased 1% in the 2002 second quarter and
year-to-date periods from the same 2001 periods. Strong growth in special access
services in the 2002 second quarter was offset by a 5% 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 nationwide long
distance services to residential customers within Sprint's local franchise
territories and other long distance services within specified regional calling
areas, or LATAs, to residential and business customers. These revenues declined
12% in the 2002 second quarter and 11% in the 2002 year-to-date period from the
same 2001 periods. This was primarily due to a decline in total long distance
minutes of use and in yield, as customers shifted more of their communications
to wireless, e-mail and instant messaging.
Other Revenues
Other revenues decreased 14% in the 2002 second quarter and 11% in the 2002
year-to-date period from the same 2001 periods. This is principally due to
reduced 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 5% in the 2002
second quarter and year-to-date periods from the same 2001 periods. This
reduction is driven mainly by decreases in access expense, cost of equipment
sales, and a decline in other taxes due to changes in certain state tax laws.
Costs of services and products were 30.0% of net operating revenues in the 2002
second quarter and 30.1% in the 2002 year-to-date period compared to 31.2% and
31.6% for the same periods a year ago.
Selling, General and Administrative Expense
SG&A expense decreased 7% in the 2002 second quarter and 6% in the 2002
year-to-date period from the same 2001 periods. This decrease is due to a
decline in advertising expenses and bad debt and the success of cost containment
initiatives including the benefits of the restructuring announced in the 2001
fourth quarter. SG&A expense was 19.9% of net operating revenues in the 2002
second quarter and 20.2% in the 2002 year-to-date period compared to 21.1% and
21.4% for the same periods 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,
regulatory decisions 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 second quarter and year-to-date periods compared to 2.7% and 2.6% in
the same periods a year ago. Reserve for bad debt as a percent of account
receivables was 9.6% at the end of the 2002 second quarter compared to 6.9% at
year-end 2001. Improved bad debt experience with end user customers was mostly
offset by the need to establish reserves for some competitive local exchange
carriers and long distance companies with financial difficulties. Lower accounts
receivable driven by decreased revenues impacted the reserve as a percent of
outstanding accounts receivable.
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 5% in the
2002 second quarter and 3% in the 2002 year-to-date period from the same 2001
periods reflecting additional capital spending to support voice-grade equivalent
growth and service improvements. Depreciation and amortization expense was 18.8%
of net operating revenues in the 2002 second quarter and 18.6% in the 2002
year-to-date period compared to 17.7% and 17.9% for the same periods a year ago.
Product Distribution and Directory Publishing Businesses
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
2002 2001 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Affiliated revenue $ 138 $ 200 $ (62) (31.0)%
Non-affiliated revenue 228 274 (46) (16.8)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 366 474 (108) (22.8)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 249 339 (90) (26.5)%
Selling, general and administrative 42 46 (4) (8.7)%
Depreciation and amortization 9 5 4 80.0%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 300 390 (90) (23.1)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 66 $ 84 $ (18) (21.4)%
--- ------------- -- -------------- -- -------------
Operating margin 18.0% 17.7%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
2002 2001 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Affiliated revenue $ 254 $ 388 $ (134) (34.5)%
Non-affiliated revenue 442 580 (138) (23.8)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 696 968 (272) (28.1)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 471 699 (228) (32.6)%
Selling, general and administrative 82 94 (12) (12.8)%
Depreciation and amortization 16 9 7 77.8%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 569 802 (233) (29.1)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 127 $ 166 $ (39) (23.5)%
--- ------------- -- -------------- -- -------------
Operating margin 18.2% 17.1%
--- ------------- -- --------------
Net operating revenues decreased 23% in the 2002 second quarter and 28% in the
2002 year-to-date period compared to the same 2001 periods. Nonaffiliated
revenues accounted for 62.3% of revenues in the 2002 second quarter and 63.5% in
the 2002 year-to-date period compared to 57.8% and 59.9% for the same 2001
periods. Nonaffiliated revenues decreased 17% in the 2002 second quarter and 24%
in the 2002 year-to-date period from the same 2001 periods reflecting lower
revenues in the product distribution unit because of an overall slowdown in
capital spending in the telecommunications industry.
Affiliated revenues decreased 31% in the 2002 second quarter and 35% in the 2002
year-to-date period from the same 2001 periods reflecting a slowdown in capital
spending and discontinuation of the ION project.
Operating expenses decreased 23% in the 2002 second quarter and 29% in the 2002
year-to-date compared to the same 2001 periods. This decrease reflects decreased
costs of services and products due to the decline in equipment sales.
PCS Group
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 3,018 $ 2,290 $ 728 31.8%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,435 1,161 274 23.6%
Selling, general and administrative 819 638 181 28.4%
Depreciation 541 438 103 23.5%
Amortization 2 110 (108) (98.2)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,797 2,347 450 19.2%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ 221 $ (57) $ 278 NM
-- ------------- -- -------------- -- -------------
Operating income before depreciation
and amortization $ 764 $ 491 $ 273 55.6%
-- ------------- -- -------------- -- -------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
2002 2001 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 5,866 $ 4,315 $ 1,551 35.9%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 2,838 2,295 543 23.7%
Selling, general and administrative 1,601 1,276 325 25.5%
Depreciation 1,067 839 228 27.2%
Amortization 3 244 (241) (98.8)%
Restructuring costs 23 - 23 NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 5,532 4,654 878 18.9%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ 334 $ (339) $ 673 NM
-- ------------- -- -------------- -- -------------
Operating income before depreciation
and amortization $ 1,404 $ 744 $ 660 88.7%
-- ------------- -- -------------- -- -------------
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 second quarter and
year-to-date periods. These revenues were also 23% of net operating revenues in
the 2001 second quarter and year-to-date periods.
Net Operating Revenues
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Customers (millions) 14.6 11.2 14.6 11.2
--- ------------- -- -------------- -- ------------- --- -------------
Average monthly service revenue
per user (ARPU)(1),(2) $ 61 $ 62 $ 61 $ 60
--- ------------- -- -------------- -- ------------- --- -------------
Customer churn rate 2.9% 2.2% 3.0% 2.3%
--- ------------- -- -------------- -- ------------- --- -------------
(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 (loss), it did affect ARPU. The 2001 periods have
been restated to be in conformity with current year presentation.
(2) In the second quarter of 2002, the PCS Group recorded a wireless access
revenue provision for amounts previously billed of $61 million. Excluding
this amount, ARPU for the current quarter would have been $63. In any single
prior period ARPU was not significantly impacted by this provision.
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 a pro rata portion of activation fees associated with
the PCS Group's subscriber base. Service revenues increased 32% in the 2002
second quarter and 36% in the 2002 year-to-date period from the same 2001
periods mainly reflecting an increase in the number of customers and stable
ARPU.
The PCS Group added approximately 308,000 customers in the 2002 second quarter
ending the period with approximately 14.6 million customers compared to
approximately 11.2 million customers at the end of the 2001 second 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 our largest reseller
exiting the business. The PCS Group affiliates added approximately 86,000
customers in the 2002 second quarter, bringing the total number of customers
added in the quarter by the PCS Group and its affiliates to 347,000. The total
number of customers served on the PCS network, including affiliates, at the end
of the quarter is more than 17 million.
Although the 2.9% customer churn rate in the 2002 second quarter is an increase
over the same 2001 period, there was a decline from 3.0% in the 2002 first
quarter. The increase, year-over-year, resulted from company initiated churn in
the sub-prime customer segment.
Revenues from sales of handsets and accessories were approximately 10% of net
operating revenues in the 2002 second quarter and year-to-date periods. These
revenues as a percentage of net operating revenues were also approximately 10%
in the 2001 second quarter and year-to-date periods. 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 is based on historical
trending, industry norms, regulatory decisions and recognition of current market
indicators about general economic conditions.
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.
On July 3, 2002, the FCC released a ruling affirming that nothing prohibited
wireless carriers from imposing access charges for the use of their networks;
however, the FCC also stated that interexchange carriers could not be
unilaterally required to pay these charges without a contractual obligation to
do so. The FCC referred the dispute back to the Federal District Court for the
Western District of Missouri for a determination whether the PCS Group has
stated a claim under Missouri state law. AT&T has filed a Notice of Appeal at
the DC Circuit Court of Appeals challenging the ruling. In light of this ruling,
the PCS Group recorded an additional provision in the 2002 second quarter of $61
million related to amounts previously billed.
Operating Expenses
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Acquisition costs per gross customer
addition (CPGA)(1) $ 350 $ 300 $ 325 $ 310
--- ------------- -- -------------- -- ------------- --- -------------
Monthly cash costs per user (CCPU)(1) $ 32 $ 35 $ 32 $ 35
--- ------------- -- -------------- -- ------------- --- -------------
(1) Beginning in 2002, PCS changed its method of calculating both CPGA and CCPU.
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.
CPGA is a measure of the costs of acquiring a new subscriber, consisting of
equipment subsidies and marketing costs, divided by handset activations for new
PCS customers. CPGA increased approximately 17% in the 2002 second quarter and
5% in the 2002 year-to-date period from the same 2001 periods. The CPGA increase
is primarily attributable to additional equipment subsidies and rebates, as well
as marketing costs being spread across lower gross customer additions in the
2002 second quarter.
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 9% in the
2002 second quarter and year-to-date periods from the same 2001 periods.
Improvements realized in the second quarter of 2002 were driven by lower
customer solutions, network and information technology costs per user partially
offset by higher retention costs per user. The gains are largely driven by scale
efficiencies and cost containment efforts in customer solutions.
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 second quarter and
year-to-date periods from the same 2001 periods reflecting an increase in
handset subsidies, network support of a larger customer base and expanded market
coverage. These increases are somewhat offset by scale benefits resulting from
the increased customer base and decreases in customer solutions expense. Handset
and equipment costs were 37% of total costs of services and products in the 2002
second quarter and 38% in the 2002 year-to-date period compared to 32% and 33%
for the same periods a year ago. Costs of services and products were 47.5% of
net operating revenues in the 2002 second quarter and 48.4% in the 2002
year-to-date period compared to 50.7% and 53.2% for the same periods a year ago.
SG&A expense mainly includes marketing costs to promote products and services as
well as related salary and benefit costs. SG&A expense increased 28% in the 2002
second quarter and 25% in the 2002 year-to-date period from the same 2001
periods reflecting an expanded workforce to support subscriber growth, increased
marketing costs and increased bad debt expense. SG&A expense was 27.1% of net
operating revenues in the 2002 second quarter and 27.3% in the 2002 year-to-date
period compared to 27.9% and 29.6% for the same periods 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,
regulatory decisions and recognition of current market indicators about general
economic conditions. Bad debt expense as a percentage of net revenues was 5.2%
in the 2002 second quarter and 4.8% in the 2002 year-to-date period compared to
3.3% and 3.2% in the same periods a year ago. Reserve for bad debt as a percent
of outstanding accounts receivable was 14.6% at the end of the 2002 second
quarter and 13.0% at year-end 2001. Bad debt expense, as well as the reserve,
increased in the second quarter due to aging deterioration in some customer
segments. Additionally, both the establishment of a reserve for late fee
billings and a $61 million reduction in gross accounts receivable for the access
revenue provision effected the reserve as a percentage of outstanding accounts
receivable.
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 expense increased 24% in the 2002 second quarter and 27% in the
2002 year-to-date period from the same 2001 periods mainly reflecting
depreciation of the network assets placed in service during 2001 and the first
half of 2002.
Amortization expense decreased to $2 million in the 2002 second quarter and $3
million in the 2002 year-to-date period from $110 million and $244 million in
the same periods a year ago. Amortization of goodwill and indefinite life
intangibles ceased upon adoption of SFAS No. 142 at January 1, 2002. Periodic
impairment testing of indefinite life intangibles is now required. This
implementation is discussed in Note 5 of the Condensed Notes to Consolidated
Financial Statements. Intangibles becoming fully amortized in the second quarter
of 2001 accounts for $54 million of the quarter-over-quarter decline and $133
million of the year-to-date decline, while SFAS No. 142 implementation accounts
for the remaining $54 million quarter-over-quarter decline and $108 million of
the year-to-date decline.
Depreciation and amortization expense was 18.1% of net operating revenues in the
2002 second quarter and 18.3% in the 2002 year-to-date period compared to 23.9%
and 25.1% for the same periods a year ago.
Restructuring Charge
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.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 7.1% in the 2002 second
quarter and 6.9% in the 2002 year-to-date period compared to 6.9% in both 2001
periods. The increase in interest rate is primarily due to additional borrowings
with higher interest rates. 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. See "Liquidity and Capital Resources"
for more information on Sprint's financing activities.
Other Income (Expense), net
Other income (expense), net consisted of the following:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Dividend and interest income $ 13 $ 8 $ 21 $ 17
Equity in net losses of affiliates (82) (28) (102) (73)
Net losses from investments (243) (2) (253) (2)
Gains on sales of assets 50 - 50 10
Royalties 3 - 6 -
Other, net (26) (7) (41) (7)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (285) $ (29) $ (319) $ (55)
--- ------------- -- -------------- -- ------------- --- -------------
In the 2002 second quarter and year-to-date periods, equity in net losses of
affiliates was driven by the PCS Group's investments in Pegaso and Virgin Mobile
and the FON Group's investment in Call-Net. In May 2002, Sprint signed a
definitive agreement to sell its investment in Pegaso. The Mexican anti-trust
authorities recently approved Telefonica's purchase of Sprint's interest in
Pegaso. Final telecommunications agency regulatory approvals are expected in
August 2002. Sprint expects to receive proceeds of approximately $65 million for
its Pegaso shares, its investment in subordinated convertible notes, and the
Company's Services Contract settlement. Sprint expects the transaction to close
in the third quarter of 2002 generating a one-time gain. Sprint's net book
investment in Pegaso was zero at the end of the 2002 second quarter. In the 2001
second quarter and year-to-date periods, equity in net losses of affiliates was
driven by the PCS Group's investment in Pegaso and the FON Group's investment in
Intelig.
Net losses from investments in the 2002 second quarter and year-to-date periods
mainly include the write-down of EarthLink preferred shares to current market
value and equity investments in Intelig.
In the 2002 second quarter, gains on sales of assets were driven by the sale of
certain customer contracts and stock received during a company's
demutualization. In the 2001 year-to-date period, gains on sales of assets
mainly include the sale of PCS customers to a PCS third party affiliate.
Beginning in January 2002, Call-Net began making a royalty payment of 2.5% of
revenues to Sprint. Currently, this is approximately $3 million per quarter.
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:
June 30, December 31,
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 23,198 $ 24,164
PCS Group 22,776 22,190
Intergroup eliminations (415) (561)
------------------------------------------------------------------------
Consolidated assets $ 45,559 $ 45,793
----------------------------------
Sprint's consolidated assets decreased $234 million in the 2002 year-to-date
period. Cash and equivalents increased $335 million. Net property, plant, and
equipment increased $189 million reflecting capital expenditures to continue PCS
network expansion and fill-in, and the deployment of 3G technology, as well as
expenditures by the FON Group for network enhancements and data product
offerings. These expenditures were offset by depreciation and network asset
sales. Other assets decreased approximately $633 million due to the receipt of a
$400 million tax refund generated by the economic stimulus bill passed in the
2002 first quarter and the write-down of our investment in EarthLink. See
"Liquidity and Capital Resources" for more information about changes in Sprint's
Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Sprint's Board of Directors has the power to make determinations that may impact
the financial and liquidity position of each of the tracking stock groups. This
power includes the ability to prioritize the use of capital and debt capacity,
to determine cash management policies and to make decisions regarding the timing
and amount of capital expenditures. The actions of the Board of Directors are
subject to its fiduciary duties to all shareholders of Sprint, and not just to
the holders of a particular class of common stock. Given the above, it may be
difficult for investors to assess each group's liquidity and capital resources
and in turn the future prospects of each group based on past performance.
Operating Activities
Year-to-Date
June 30,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ 1,631 $ 1,796
PCS Group 1,151 (154)
------------------------------------------------------------------------
Cash flows provided by operating
activities $ 2,782 $ 1,642
----------------------------------
Cash flow from operations increased $1.1 billion in the 2002 year-to-date period
from the same 2001 period. This increase was driven mainly by improved operating
results and the receipt of a $400 million tax refund generated by the economic
stimulus bill passed in the 2002 first quarter. Sprint's improved operating
results were driven mainly by the PCS Group's EBITDA (operating income (loss)
plus depreciation, amortization and one-time items) improvement of $660 million.
The FON Group also contributed to the improvement with $50 million in EBITDA
growth, as cost controls and reductions have mitigated the revenue erosion seen
in the global markets division.
Investing Activities
Year-to-Date
June 30,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ (1,048) $ (2,586)
PCS Group (1,390) (1,686)
------------------------------------------------------------------------
Cash flows used by investing
activities$ (2,438) $ (4,272)
----------------------------------
The FON Group's capital expenditures totaled $1.1 billion in the 2002
year-to-date period and $2.6 billion in the same 2001 period. Global markets
division capital expenditures were incurred mainly to enhance network
reliability 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 $1.4 billion in the
2002 year-to-date period and $1.7 billion 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 later in the summer of 2002.
"Investments in affiliates, net" consist of either cash contributions to or
distributions from Sprint's investments. The FON Group's investments in
affiliates consist of cash contributions to Call-Net and Intelig in the 2002
year-to-date period and cash contributions to Intelig in the 2001 year-to-date
period. The PCS Group's investments in affiliates mainly reflect a refund from
BidCo in the 2002 year-to-date period and cash contributions to Pegaso in the
2001 year-to-date period. The refund from BidCo resulted from a FCC decision to
return 85% of the deposits from the Nextwave Spectrum auction due to significant
delays in awarding the licenses arising from various legal and regulatory
issues. See Note 2 of the Condensed Notes to Consolidated Financial Statements
for more information on Sprint's investments.
Proceeds from sales of assets in the 2002 year-to-date period mainly include
proceeds from sales of certain customer contracts, investment securities, and
other administrative assets. The 2001 year-to-date period mainly includes
proceeds from sales of PCS customers to an affiliate and certain network and
administrative assets.
Financing Activities
Year-to-Date
June 30,
----------------------------------
2002 2001
------------------------------------------------------------------------
(millions)
FON Group $ (671) $ 708
PCS Group 662 1,859
------------------------------------------------------------------------
Cash flows provided (used) by
financing activities $ (9) $ 2,567
----------------------------------
Financing activities include net borrowings of $203 million in the 2002
year-to-date period and $2.8 billion in the same 2001 period. The reduced
borrowing needs in the 2002 year-to-date period were due to the Company's
continuing operating cash flow improvement and reduced capital expenditures.
Sprint paid cash dividends of $226 million in the 2002 and 2001 year-to-date
periods.
Capital Requirements
Sprint's 2002 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to total $5.9 billion. This excludes
any funding for Nextwave spectrum, as there have been significant delays in
awarding the licenses arising from various legal and regulatory issues. This
potential funding would be approximately $300 million. FON Group capital
expenditures are expected to be $2.5 billion. PCS Group capital expenditures are
expected to be $3.3 billion. Sprint continues to review capital expenditures and
will adjust 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. Sprint expects these capital
requirements and dividend payments to be funded by cash generated from
operations and other investment activities.
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 were 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 allowed the original securities to be
exchanged for substantially identical securities registered with the SEC. This
exchange offer was completed in June 2002.
In March 2002, Sprint entered into a nine-month $700 million term loan facility
secured by assets related to Sprint's directory publishing business. To date, we
have not drawn against the facility.
In June 2002, Sprint closed a new PCS Group accounts receivable asset
securitization facility. This facility provides Sprint with up to $500 million
of additional liquidity. Although this is a three-year facility, it does include
an annual renewal provision. The maximum amount of funding available is based on
numerous factors and will fluctuate each month. Currently, slightly more than
$400 million would be available. To date, we have not drawn against the
facility.
Sprint has an existing $2 billion, five-year agreement scheduled to expire in
August 2003. Its $3 billion, 364-day facility expired in early August. Sprint
has obtained commitments for a new $1.5 billion revolving bank facility. The new
facility is unsecured, with no springing liens and is structured as a 364-day
credit line with a subsequent one-year term-out option. The new facility is
expected to close in August and will replace the existing $2 billion facility
that would have expired in August 2003.
Sprint has reduced its outstanding commercial paper from peak levels of nearly
$4 billion earlier this year to zero today. In addition, Sprint expects
continued improvements in operating cash flows and has multiple sources of
liquidity. As a result, the Company believes the new facility provides ample
capacity.
Certain other notes payable relate to a separate revolving credit facility of
$200 million which expires in December 2002. In July 2002, the commitment under
this facility was reduced to $150 million.
Debt maturities for the remainder of 2002 total approximately $430 million. The
above sources of liquidity, in addition to Sprint's $648 million cash balance at
June 30, 2002, are expected to more than fund this requirement, 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. A decision regarding the sale of this asset is expected around the
end of August 2002.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $2.7 billion at the end of
June 2002 under the most restrictive of its debt covenants. Sprint is currently
in compliance with all debt covenants associated with its borrowings.
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.
Standard & Poor's Corporate Ratings (Standard & Poor's) currently rates Sprint's
long-term senior unsecured debt at BBB- with a stable outlook. Standard & Poor's
rates Sprint's short-term debt at A3.
Moody's Investors Service (Moody's) currently rates Sprint's long-term senior
unsecured debt at Baa3 with a negative outlook. Moody's rates Sprint's
short-term debt at P3.
The undrawn loan facilities described above have interest rates equal to LIBOR
or Prime Rate plus a spread that varies depending on our credit ratings. A
ratings downgrade to below Baa3 by Moody's or below BBB- by Standard and Poor's
may result in the acceleration of the $695 million currently outstanding under
the global markets division's accounts receivable financing facility. Sprint is
currently working with the lenders to remove the ratings trigger from this
facility and expects the process to be completed in August 2002.
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 currently does not plan
to access the commercial paper market as a result of the downgrade of its
short-term debt rating to A3/P3.
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. As of June 30, 2002, Sprint had no
outstanding fair value hedges.
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. As
of June 30, 2002, Sprint had no outstanding interest rate cash flow hedges.
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 2002, 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 payments made to and received from overseas
telecommunications companies for completing international calls made by Sprint's
domestic customers. These international operations were not material to the
consolidated financial position at June 30, 2002 or results of operations or
cash flows for the quarter ended June 30, 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 91%
of Sprint's debt at June 30, 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 $17
million pre-tax impact on the statements of operations and cash flows at June
30, 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 foreign currency exposure related to
settlement of international telecommunications access charges. The dollar
equivalent of Sprint's net foreign currency receivables was $1 million at June
30, 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 less than $1 million.
PART II.
Other Information
PART II. - Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended June 30, 2002.
Item 2. Changes in Securities
Articles Amendment
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.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended June 30, 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 1.24 in the 2002 second
quarter and 1.36 in the 2002 year-to-date period. Sprint's ratio of
earnings to fixed charges was 1.19 in the 2001 second quarter and 1.03
in the 2001 year-to-date period. 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 (filed as Exhibit
3(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, and
incorporated herein by reference).
(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 incorporated herein by
reference), as amended by the Master Transfer Agreement
dated January 21, 2000 between and among France
Telecom, Deutsche Telekom AG, NAB Nordamerika
Beteiligungs Holding GmbH, Atlas Telecommunications,
S.A., Sprint Corporation, Sprint Global Venture, Inc.
and the JV Entities set forth in Schedule II thereto
(filed as Exhibit 2 to Sprint Corporation's Current
Report on Form 8-K dated January 26, 2000 and
incorporated herein by reference).
(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) Material Contracts -- Executive Compensation Plans and
Arrangements:
(a) Letter Agreement dated May 17, 2002 between Sprint
Corporation and Arthur B. Krause.
(12) Computation of Ratios of Earnings to Fixed Charges
(99) Additional Exhibits
(a) Certification by Chief Executive Officer pursuant to
18 U.S.C.ss.1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Certification by Chief Financial Officer pursuant to 18
U.S.C.ss.1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
Sprint will furnish to the Securities and Exchange Commission, upon request, a
copy of the instruments defining the rights of holders of long-term debt that
does not exceed 10% of the total assets of Sprint.
(b) Reports on Form 8-K
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: August 6, 2002