-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CEVxLf3P/2SPFkTJFvPq117yilChA7kP4DPo7+UwaWPNTcs4c02m6bKxL5c4U+P4 GRWZ9JtHdy64MLIZkfc+LA== 0000101830-01-500006.txt : 20010516 0000101830-01-500006.hdr.sgml : 20010516 ACCESSION NUMBER: 0000101830-01-500006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPRINT CORP CENTRAL INDEX KEY: 0000101830 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 480457967 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04721 FILM NUMBER: 1637054 BUSINESS ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY CITY: WESTWOOD STATE: KS ZIP: 66205 BUSINESS PHONE: 9136243000 MAIL ADDRESS: STREET 1: 2330 SHAWNEE MISSION PKWY CITY: WESTWOOD STATE: KS ZIP: 66205 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TELECOMMUNICATIONS INC DATE OF NAME CHANGE: 19920316 FORMER COMPANY: FORMER CONFORMED NAME: UNITED UTILITIES INC DATE OF NAME CHANGE: 19731011 10-Q 1 spr1q01.txt SPRINT CORPORATION FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 ----------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------- --------------------- Commission file number 1-04721 --------------------------------------------------------- SPRINT CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) KANSAS 48-0457967 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) P.O. Box 11315, Kansas City, Missouri 64112 - ---------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (913) 624-3000 ---------------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file these reports), and (2) has been subject to these filing requirements for the past 90 days. Yes X No --------- ------- COMMON SHARES OUTSTANDING AT APRIL 30, 2001: FON COMMON STOCK 800,053,977 PCS COMMON STOCK 936,979,355 CLASS A COMMON STOCK 86,236,036
4 TABLE OF CONTENTS Page Reference Part I - Financial Information Item 1. Financial Statements Consolidated Financial Statements (including Consolidating Information) Consolidated Statements of Operations 1 Consolidated Statements of Comprehensive Income (Loss) 3 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 9 Consolidated Statement of Shareholders' Equity 11 Condensed Notes to Consolidated Financial Statements 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 Part II - Other Information Item 1. Legal Proceedings 30 Item 2. Changes in Securities 30 Item 3. Defaults Upon Senior Securities 30 Item 4. Submission of Matters to a Vote of Security Holders 30 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 Signature 34 Exhibits (12) Computation of Ratio of Earnings to Fixed Charges (99) Supplementary Information (a) Annex I - FON Group Combined Financial Information (b) Annex II - PCS Group Combined Financial Information
Part I. Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation ------------------------------- ------------------------------- (millions) Consolidated - --------------------------------------------- --- ------------- -- -------------- -- ------------------------------- - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended March 31, 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 6,280 $ 5,529 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 3,110 2,747 Selling, general and administrative 1,799 1,660 Depreciation 981 817 Amortization 140 149 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 6,030 5,373 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income (Loss) 250 156 Interest expense (307) (254) Other income (expense), net (20) 28 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income (Loss) from continuing operations before income taxes (77) (70) Income tax benefit (expense) - 5 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income (Loss) from Continuing Operations (77) (65) Discontinued operation, net - 675 Extraordinary items, net (1) (3) Cumulative effect of change in accounting principles, net 2 (2) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income (Loss) (76) 605 Preferred stock dividends (paid) received (2) (2) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Earnings (Loss) applicable to common stock $ (78) $ 603 -- ------------- --- ------------- Diluted Earnings (Loss) per Common Share Continuing operations Discontinued operation - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total Diluted weighted average common shares Basic Earnings (Loss) per Common Share Continuing operations Discontinued operation - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total Diluted weighted average common shares DIVIDENDS PER COMMON SHARE See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ---------------------------------- ---------------------------------- - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ (129) $ (95) $ 4,358 $ 4,404 $ 2,051 $ 1,220 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (129) (95) 2,105 1,948 1,134 894 - - 1,135 1,153 664 507 - - 580 528 401 289 - - 6 17 134 132 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- (129) (95) 3,826 3,646 2,333 1,822 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 532 758 (282) (602) 5 5 (27) (39) (285) (220) (5) (5) 5 7 (20) 26 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 510 726 (587) (796) - - (194) (281) 194 286 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 316 445 (393) (510) - - - 675 - - - - (1) - - (3) - - - (2) 2 - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 315 1,118 (391) (513) - - 2 2 (4) (4) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 317 $ 1,120 $ (395) $ (517) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 0.36 $ 0.50 $ (0.40) $ (0.54) - 0.75 - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 0.36 $ 1.25 $ (0.40) $ (0.54) --- ------------- -- ------------- -- ------------- --- ------------- 887.4 894.7 977.9 956.3 --- ------------- -- ------------- -- ------------- --- ------------- $ 0.36 $ 0.51 $ (0.40) $ (0.54) - 0.77 - - - ----- ------------- --- ------------- --- ------------- -- ------------- --- -- ------------- --- ------------- $ 0.36 $ 1.28 $ (0.40) $ (0.54) --- ------------- -- ------------- -- ------------- --- ------------- 885.3 875.6 977.9 956.3 --- ------------- -- ------------- -- ------------- --- ------------- $ 0.125 $ 0.125 $ - $ - --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Sprint Corporation ------------------------------- ------------------------------- (millions) Consolidated ------------------------------- - --------------------------------------------- ----------------- ----------------- -- ------------- --- ------------- Quarters Ended March 31, 2001 2000 - --------------------------------------------- ----------------- ----------------- -- ------------- --- ------------- Net Income (Loss) $ (76) $ 605 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income (Loss) Unrealized holding gains (losses) on securities 6 - Income tax benefit (expense) (2) - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding gains (losses) on securities during the period 4 - Reclassification adjustment for gains included in net income - (32) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total net unrealized holding gains (losses) on securities 4 (32) Net unrealized losses on qualifying cash flow hedges (6) - Cumulative effect of change in accounting principle, net (9) - Foreign currency translation adjustments, net (4) - - ------------------------------------------------- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income (loss) (15) (32) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Income (Loss) $ (91) $ 573 -- ------------- --- ------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ------------------------------- -- ---------------------------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 315 $ 1,118 $ (391) $ (513) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 7 - (1) (3) - 3 (2) - - 1 - (1) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 5 - (1) (2) - 2 - - - (32) - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 5 - (1) (34) - 2 - - (6) - - - - - (9) - - - - - (4) - - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 5 - (20) (34) - 2 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ 5 $ - $ 295 $ 1,084 $ (391) $ (511) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS Sprint Corporation ----------------------------------- ----------------------------------- (millions) Consolidated - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 180 $ 239 Accounts receivable, net of consolidated allowance for doubtful accounts of $378 and $389 3,979 4,028 Inventories 999 949 Prepaid expenses 441 366 Current tax benefit receivable from the FON Group - - Receivables from the PCS Group - - Other 266 391 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 5,865 5,973 Property, plant and equipment FON Group 32,037 30,998 PCS Group 12,747 12,117 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 44,784 43,115 Accumulated depreciation (18,705) (17,799) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 26,079 25,316 Investments in and advances to affiliates 457 607 Intangible assets Goodwill 5,426 5,425 PCS licenses 3,059 3,059 PCS customer base 745 747 PCS microwave relocation costs 405 411 Other intangibles 431 430 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 10,066 10,072 Accumulated amortization (1,272) (1,134) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 8,794 8,938 Other assets 1,951 1,767 - ------------------------------------------------------------------------------------------------------------------------- Total $ 43,146 $ 42,601 ----------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------- ----------------------------------- ----------------------------------- March 31, December 31, March 31, December 31, March 31, December 31, 2001 2000 2001 2000 2001 2000 - ------------------------------------- ----------------------------------- ----------------------------------- (Unaudited) (Unaudited) (Unaudited) $ - $ - $ 60 $ 122 $ 120 $ 117 - - 3,059 3,126 920 902 - - 429 434 570 515 - - 315 276 126 90 (103) (26) - - 103 26 (324) (361) 324 361 - - 2 (2) 167 193 97 200 - ---------------------------------------- ------------------------------- ----------------------------------- (425) (389) 4,354 4,512 1,936 1,850 - - 32,037 30,998 - - - - - - 12,747 12,117 - ------------------------------------- ----------------------------------- ----------------------------------- - - 32,037 30,998 12,747 12,117 (43) (39) (15,677) (15,165) (2,985) (2,595) - ------------------------------------- ----------------------------------- ----------------------------------- (43) (39) 16,360 15,833 9,762 9,522 (379) (383) 674 842 162 148 - - 878 877 4,548 4,548 - - - - 3,059 3,059 - - - - 745 747 - - - - 405 411 - - 385 384 46 46 - ------------------------------------- ----------------------------------- ----------------------------------- - - 1,263 1,261 8,803 8,811 - - (63) (57) (1,209) (1,077) - ------------------------------------- ----------------------------------- ----------------------------------- - - 1,200 1,204 7,594 7,734 (1) - 1,441 1,258 511 509 - ------------------------------------- ----------------------------------- ----------------------------------- $ (848) $ (811) $ 24,029 $ 23,649 $ 19,965 $ 19,763 - ------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued) Sprint Corporation ----------------------------------- ----------------------------------- (millions, except per share data) Consolidated - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Liabilities and Shareholders' Equity Current liabilities Short-term borrowings including current maturities of long-term debt $ 1,724 $ 1,205 Accounts payable 1,524 2,285 Construction obligations 896 997 Accrued interconnection costs 590 547 Accrued taxes 478 440 Advance billings 592 607 Payroll and employee benefits 464 498 Accrued interest 430 255 Payables to the FON Group - - Other 1,108 1,134 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 7,806 7,968 Long-term debt and capital lease obligations 18,368 17,514 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,330 1,360 Postretirement and other benefit obligations 1,082 1,077 Other 725 710 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 3,137 3,147 Redeemable preferred stock 256 256 Shareholders' equity Common stock Class A common stock, par value $2.50 per share, 200.0 shares authorized, 86.2 shares issued and outstanding (each share represents the right to one FON share and1/2PCS share) 216 216 FON, par value $2.00 per share, 4,200.0 shares authorized, 799.5 and 798.8 shares issued and 799.5 and 798.4 shares outstanding 1,599 1,598 PCS, par value $1.00 per share, 2,350.0 shares authorized, 935.6 and 933.1 shares issued and outstanding 936 933 Capital in excess of par or stated value 9,436 9,380 Retained earnings 1,386 1,578 Treasury stock, at cost, 0.0 and 0.4 shares - (10) Accumulated other comprehensive income 6 21 Combined attributed net assets - - - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 13,579 13,716 - ------------------------------------------------------------------------------------------------------------------------- Total $ 43,146 $ 42,601 ----------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ------------------------------------ ----------------------------------- ----------------------------------- March 31, December 31, March 31, December 31, March 31, December 31, 2001 2000 2001 2000 2001 2000 - ------------------------------------ ----------------------------------- ----------------------------------- (Unaudited) (Unaudited) (Unaudited) $ (67) $ (65) $ 1,113 $ 1,026 $ 678 $ 244 - - 1,066 1,598 458 687 - - - - 896 997 - - 590 547 - - (103) (27) 369 264 212 203 - - 428 462 164 145 - - 359 377 105 121 - - 142 136 288 119 (257) (296) - - 257 296 (43) (40) 566 594 585 580 - ------------------------------------ ----------------------------------- ----------------------------------- (470) (428) 4,633 5,004 3,643 3,392 (108) (104) 4,013 3,482 14,463 14,136 (4) (6) 1,310 1,276 24 90 - - 1,082 1,077 - - 2 - 452 457 271 253 - ------------------------------------ ----------------------------------- ----------------------------------- (2) (6) 2,844 2,810 295 343 (280) (280) 10 10 526 526 216 216 - - - - 1,599 1,598 - - - - 936 933 - - - - 9,436 9,380 - - - - 1,386 1,578 - - - - - (10) - - - - 6 21 - - - - (13,567) (13,709) 12,529 12,343 1,038 1,366 - ------------------------------------ ----------------------------------- ----------------------------------- 12 7 - - - - - ------------------------------------ ----------------------------------- ----------------------------------- $ (848) $ (811) $ 24,029 $ 23,649 $ 19,965 $ 19,763 - ------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Sprint Corporation ---------------------------------- ---------------------------------- (millions) Consolidated - ------------------------------------------------------------------ ----------------- ---------------------------------- - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Quarters Ended March 31, 2001 2000 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net income (loss) $ (76) $ 605 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Discontinued operation, net - (675) Equity in net losses of affiliates 59 25 Depreciation and amortization 1,121 966 Deferred income taxes and investment tax credits (10) 298 Changes in assets and liabilities: Accounts receivable, net 49 (32) Inventories and other current assets (68) 371 Accounts payable and other current liabilities (615) (594) Current tax benefit receivable from the FON Group - - Intergroup receivables and payables, net - - Noncurrent assets and liabilities, net (21) 22 Other, net 2 (56) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by operating activities 441 930 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (1,774) (1,451) Investments in and loans to affiliates, net (46) (130) Advances to the PCS Group - - Other, net 35 122 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by continuing operations (1,785) (1,459) Proceeds from sale of investment in Global One - 1,403 - ------------------------------------------------------------------------------------ --- ------------- -- ------------- Net cash used by investing activities (1,785) (56) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from debt 3,067 - Payments on debt (1,702) (751) Dividends paid (109) (109) Proceeds from common stock issued 9 66 Advances from the FON Group - - Other, net 20 50 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by financing activities 1,285 (744) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents (59) 130 Cash and Equivalents at Beginning of Period 239 120 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 180 $ 250 --- ------------- -- ------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). Eliminations/Reclassifications Sprint FON Group Sprint PCS Group - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- 2001 2000 2001 2000 2001 2000 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 315 $ 1,118 $ (391) $ (513) - - - (675) - - - - 25 25 34 - - - 586 545 535 421 - - 69 238 (79) 60 - - 67 (31) (18) (1) - 411 (32) (22) (36) (18) (77) (565) (409) (49) (129) 20 77 154 - - (77) (154) - - 42 (88) (42) 88 - - (42) 5 21 17 - - (5) (43) 7 (13) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 616 1,023 (175) (93) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - (1,119) (758) (655) (693) - - (46) (130) - - - 928 - (928) - - - - 12 - 23 122 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - 928 (1,153) (1,816) (632) (571) - - - 1,403 - - - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - 928 (1,153) (413) (632) (571) - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - 667 - 2,400 - - - (61) (381) (1,641) (370) - - (105) (105) (4) (4) - - 3 36 6 30 - (928) - - - 928 - - (29) (69) 49 119 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - (928) 475 (519) 810 703 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- - - (62) 91 3 39 - - 122 104 117 16 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- ------------- $ - $ - $ 60 $ 195 $ 120 $ 55 - ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation - ------------------------------------------------------------------------------------------- (millions) - ---------------------------------------------------------------------------------------------------------------------- Quarter Ended March 31, 2001 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Capital Class A FON In Excess Common Common PCS of Par or Retained Treasury Stock Stock Common Stated Earnings Stock Other Total Value - ---------------------------------------------------------------------------------------------------------------------- Beginning 2001 balance $ 216 $ 1,598 $ 933 $ 9,380 $ 1,578 $ (10) $ 21 $ 13,716 Net loss - - - - (76) - - (76) FON common stock dividends - - - - (100) - - (100) Class A common stock dividends - - - - (11) - - (11) PCS preferred stock dividends - - - - (2) - - (2) FON Series 1 common stock issued - 1 - 12 - - - 13 PCS Series 1 common stock issued - - 3 36 - - - 39 Treasury stock issued - - - - (2) 10 - 8 Tax benefit from stock compensation - - - 7 - - - 7 Other, net - - - 1 (1) - (15) (15) - ---------------------------------------------------------------------------------------------------------------------- March 2001 balance $ 216 $ 1,599 $ 936 $ 9,436 $ 1,386 $ - $ 6 $ 13,579 -------------------------------------------------------------------------------------- Shares Outstanding - ------------------------------------------------------------------ Beginning 2001 balance 86.2 798.4 933.1 FON Series 1 common stock issued - 0.7 - PCS Series 1 common stock issued - - 2.5 Treasury stock issued - 0.4 - ------------------------------- March 2001 balance 86.2 799.5 935.6 ------------------------------- See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
PART I. Item 1. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Sprint Corporation - -------------------------------------------------------------------------------- The information in this Form 10-Q has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the consolidated interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present Sprint Corporation's consolidated financial position, results of operations, cash flows and comprehensive income (loss). Certain information and footnote disclosures normally included in consolidated financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 2000 Form 10-K/A. Operating results for the 2001 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- 1. Basis of Consolidation and Presentation - -------------------------------------------------------------------------------- The consolidated financial statements include the accounts of Sprint and its wholly owned and majority-owned subsidiaries. Investments in entities in which Sprint exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). FON common stock and PCS common stock are intended to reflect the performance of the FON and PCS groups. However, they are classes of common stock of Sprint, not of the group they are intended to track. Accordingly, the PCS stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON stock is intended to reflect the financial results and economic value of the global markets division, the local division, and the product distribution and directory publishing businesses. Investors in FON and PCS common stock are shareholders of Sprint and are subject to the risks related to an equity investment in Sprint and all of Sprint's businesses, assets and liabilities. The assets and liabilities allocated by Sprint's board to the groups remain assets and liabilities of Sprint Corporation and are therefore subject to the claims of Sprint's creditors generally. In the event of the liquidation or winding up of Sprint Corporation, assets of Sprint remaining for distribution to Sprint's common shareholders will be distributed to holders of FON and PCS common stock based on the liquidation value of such shares as provided in Sprint's articles of incorporation, which may differ from the Board's allocation of assets and liabilities among the groups. The Board of Directors of Sprint may, subject to the restrictions in Sprint's articles of incorporation, change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The consolidated financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or shareholders' equity as previously reported. Allocations Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each group. Cost allocation methods other than time studies include factors (general, marketing or headcount) derived from the operating unit's relative share of the predefined category referenced (e.g. headcount). Sprint believes that the costs allocated are comparable to the costs that would be incurred if the groups would have been operating on a stand-alone basis. Allocated costs totaled approximately $138 million and $157 million in the 2001 and 2000 first quarters, respectively. The percentage of these costs allocated to the PCS Group were approximately 19% and 11% in the 2001 and 2000 first quarters, respectively, with the balance remaining in the FON Group. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Group Financing Financing activities for the groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the groups is specifically allocated to and reflected in the financial statements of the applicable group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense and totaled $ 64 million and $ 58 million in the 2001 and 2000 first quarters, respectively. Under Sprint's centralized cash management program, one group may advance funds to the other group. These advances are accounted for as short-term borrowings between the groups and bear interest at a market rate that is substantially equal to the rate that group would be able to obtain from third parties on a short-term basis. The allocation of group financing activities may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. - -------------------------------------------------------------------------------- 2. Investments - -------------------------------------------------------------------------------- At the end of March 2001, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance operation in Brazil, the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico, and other strategic investments. In the 2000 first quarter, investments accounted for using the equity method also included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long-distance provider in Canada. Combined, unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows: Quarters Ended March 31, ----------------------- 2001 2000 - ------------------ -- --------- - --------- -- -------- (millions) Results of operations Net operating revenues $ 228 $ 481 - --------- -- -------- Operating loss $ (168) $ (60) - --------- -- -------- Net loss $ (209) $ (137) - --------- -- -------- Equity in net losses of affiliates $ (45) $ (25) - --------- -- -------- - -------------------------------------------------------------------------------- 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: Quarters Ended March 31, ----------------------- 2001 2000 - --------------------------------------------------------- (millions) Income tax benefit at the federal statutory rate $ (27) $ (25) Effect of: State income taxes, net of federal income tax effect 5 2 Equity in losses of foreign joint ventures 13 10 Goodwill amortization 12 12 Other, net (3) (4) - --------------------------------------------------------- Income tax benefit $ - $ (5) ----------------------- Effective income tax rate - 7.1% ----------------------- - -------------------------------------------------------------------------------- 4. Cumulative Effect of Change in Accounting Principle - -------------------------------------------------------------------------------- Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management Policies Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating rate debt to a fixed rate. In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transactions and are not designated as hedging instruments. Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Forward contracts, which function as natural hedges, are used to offset the impact of foreign currency fluctuations in these payments. Adoption of the Accounting Standard The derivative instruments held by Sprint at the adoption of SFAS No. 133 are interest rate swaps and stock warrants. The interest rate swaps meet all the required criteria of SFAS No. 133 for the assumption of perfect effectiveness resulting in no recognition of changes in their fair value in earnings upon adoption or during the life of the swaps. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Forward contracts held during the period are not designated as hedges and, accordingly, not affected by the adoption of SFAS No. 133. The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative reduction in the net loss of $2 million (net of tax of $1 million) and a cumulative reduction in other comprehensive income of $9 million. The reduction of the net loss was due to changes in the fair value of the stock warrants that are not designated as hedging instruments and is recorded as a cumulative effect of change in accounting principles, net on the consolidated statements of operations. The reduction in other comprehensive income results from a decrease in fair value of cash flow hedges resulting from interest rate fluctuations. The decrease is recorded in net unrealized losses on qualifying cash flow hedges on the consolidated statements of comprehensive income (loss). The net derivative losses included in other comprehensive income as of January 1, 2001 are not expected to be reclassified into earnings within the next 12-month period because Sprint intends to hold the qualifying cash flow hedges until maturity in 2002. Sprint recorded a net derivative gain in earnings of $0.5 million (net of tax of $0.3 million) for the 2001 first quarter due to changes in the fair value of the stock warrants that are not designated as hedging instruments. The net derivative gain is included in other income (expense), net on the consolidated statements of operations. Sprint recorded a $6 million reduction in other comprehensive income in the 2001 first quarter resulting from losses on cash flow hedges. - -------------------------------------------------------------------------------- 5. Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of March 2001, short-term borrowings exceeded the long-term portion of those unused credit facilities. Accordingly, $518 million of commercial paper borrowings remained in current liabilities. In February 2001, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss. In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2 billion of unissued securities under its existing shelf registration statement with the SEC, and registered an additional $400 million prior to the issuance. These borrowings have interest rates ranging from 7.1% to 7.6% and have scheduled maturities in 2006 and 2011. The proceeds were used mainly to repay existing debt. - -------------------------------------------------------------------------------- 6. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to Sprint's consolidated financial statements. - -------------------------------------------------------------------------------- 7. 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 that level are held at a corporate level and only attributed to the group level. That reconciliation is shown on the face of the Consolidated Statements of Operations in the consolidating information. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value. Beginning in the 2000 fourth quarter, Sprint changed its segment reporting to align financial reporting with changes in how Sprint manages operations and assesses its performance. Using several factors, Sprint combined its long distance operation, Sprint ION, broadband fixed wireless services and certain other ventures into one division, global markets. The global markets division now includes four major revenue streams: voice, data, Internet, and other. Additionally, Sprint shifted the recognition of consumer long distance revenues and expenses associated with customers in its local franchise territories from the global markets division to the local division. The product distribution and directory publishing business segment is an aggregation of product and service lines that are provided to similar customers. The PCS Group is managed based on the products and services it provides to the market. As a result, all previously reported financial information relating to these segments has been restated to reflect the current composition of each segment. Segment financial information was as follows:
- ---------------------------------------------------------------------------------------------------------------- Product Global Distribution Corporate Quarters Ended Markets Local & Directory PCS and March 31, Division Division Publishing Group Eliminations(1) Consolidated - ---------------------------------------------------------------------------------------------------------------- (millions) 2001 Net operating revenues $ 2,567 $ 1,553 $ 494 $ 2,051 $ (385) $ 6,280 Affiliated revenues 130 56 188 11 (385) - Operating income (loss) 25 438 78 (282) (9) 250 2000 Net operating revenues $ 2,627 $ 1,529 $ 461 $ 1,220 $ (308) $ 5,529 Affiliated revenues 95 49 160 4 (308) - Operating income (loss) 265 433 67 (602) (7) 156 - ---------------------------------------------------------------------------------------------------------------- (1) Revenues eliminated in consolidation consist principally of local access charged to the global markets division, equipment purchases from the product distribution business, interexchange services provided to the local division, long-distance services provided to the PCS Group for resale to PCS customers and for internal business use, Caller ID services provided by the local division and access to the PCS network.
Net operating revenues by product and services were as follows:
- ---------------------------------------------------------------------------------------------------------------------- Product Global Distribution Quarters Ended Markets Local & PCS March 31, Division Division Directory Group Eliminations(1) Consolidated Publishing - ---------------------------------------------------------------------------------------------------------------------- (millions) 2001 Voice $ 1,736 $ - $ - $ - $ (130) $ 1,606 Data 502 - - - - 502 Internet 249 - - - - 249 Local service - 732 - - (1) 731 Network access - 505 - - (43) 462 Long distance - 186 - - - 186 Product distribution - - 359 - (188) 171 Directory publishing - - 135 - - 135 Wireless services - - - 2,051 (11) 2,040 Other 80 130 - - (12) 198 ------------------------------------------------------------------------------- Total net operating revenues $ 2,567 $ 1,553 $ 494 $ 2,051 $ (385) $ 6,280 ------------------------------------------------------------------------------- 2000 Voice $ 1,780 $ - $ - $ - $ (95) $ 1,685 Data 474 - - - - 474 Internet 218 - - - - 218 Local service - 696 - - (1) 695 Network access - 511 - - (30) 481 Long distance - 171 - - - 171 Product distribution - - 355 - (159) 196 Directory publishing - - 106 - - 106 Wireless services - - - 1,220 (4) 1,216 Other 155 151 - - (19) 287 ------------------------------------------------------------------------------- Total net operating revenues $ 2,627 $ 1,529 $ 461 $ 1,220 $ (308) $ 5,529 ------------------------------------------------------------------------------- (1) Revenues eliminated in consolidation consist principally of local access charged to the global markets division, equipment purchases from the product distribution business, interexchange services provided to the local division, long-distance services provided to the PCS Group for resale to PCS customers and for internal business use, Caller ID services provided by the local division and access to the PCS network.
- -------------------------------------------------------------------------------- 8. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- Sprint's cash paid (received) for interest and income taxes was as follows: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 122 $ 114 ------------------------- Income taxes $ (17) $ (414) ------------------------- Sprint's noncash activities included the following: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 52 $ 72 ------------------------- Tax benefit from stock compensation $ 7 $ 81 ------------------------- ------------------------- Stock received for stock options exercised $ 1 $ 19 ------------------------- Debt redeemed with investments in equity securities $ - $ 275 ------------------------- - -------------------------------------------------------------------------------- 9. Discontinued Operation - -------------------------------------------------------------------------------- In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom (FT) and Deutsche Telekom AG (DT). Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, Sprint's gain on the sale has been reported as a discontinued operation. Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million in the first quarter of 2000. - -------------------------------------------------------------------------------- 10. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. - -------------------------------------------------------------------------------- 11. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and provides consistent standards for distinguishing transfers from sales and secured borrowings. This statement is effective for transactions occurring after March 31, 2001 and is not expected to have a material impact on Sprint's consolidated financial statements. - -------------------------------------------------------------------------------- 12. Subsequent Events - -------------------------------------------------------------------------------- At the Annual Meeting of Shareholders of Sprint held on April 17, 2001, the shareholders approved an amendment to Sprint's Articles of Incorporation to o increase the authorized shares of Series 1 PCS Common Stock from 1.25 billion shares to 3 billion shares, o increase the authorized shares of Series 2 PCS Common Stock from 500 million shares to 1 billion shares, and o increase the total number of shares of authorized capital stock from 6.77 billion shares to 9.02 billion shares. In April 2001, Sprint's Board of Directors declared a dividend of 12.5 cents per share on the Sprint FON common stock and an equivalent dividend (12.5 cents per underlying share of Sprint FON common stock) on the Class A common stock. Dividends will be paid June 29, 2001. In February 2001, Sprint filed a registration statement with the SEC for a secondary offering of 174.8 million shares of FON common stock (including 22.8 million shares to cover over-allotments) owned by FT and DT, including the FON common stock underlying the Class A common stock. Sprint expects this offering to be completed during the 2001 second quarter with FT and DT receiving the related proceeds. Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Corporation - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: o the effects of vigorous competition in the markets in which Sprint operates; o the costs and business risks associated with providing new services and entering new markets necessary to provide nationwide or global services; o the ability of the PCS Group to continue to grow a significant market presence; o the effects of mergers and consolidations within the telecommunications industry; o the uncertainties related to Sprint's strategic investments; o the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; o unexpected results of litigation filed against Sprint; o the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes including the impact of the Telecommunications Act of 1996, or other external factors over which Sprint has no control; and o other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- Sprint is a global communications company and a leader in integrating long-distance, local service and wireless communications. Sprint is also one of the largest carriers of Internet traffic using its tier one Internet protocol network, which provides connectivity to any point on the Internet either through its own network or via direct connections with another backbone provider. Sprint is the nation's third-largest provider of long distance services and operates nationwide, all-digital long distance and tier one Internet protocol networks using fiber-optic and electronic technology. In addition, Sprint's local division currently serves approximately 8.3 million access lines in 18 states. Sprint also operates the only 100% digital personal communications service, or PCS, wireless network in the United States with licenses to provide service nationwide using a single frequency band and a single technology. Sprint owns PCS licenses to provide service to the entire United States population, including Puerto Rico and the U.S. Virgin Islands. In November 1998, Sprint's shareholders approved the allocation of all of Sprint's assets and liabilities into two groups, the FON Group and the PCS Group, as well as the creation of the FON common stock and the PCS common stock. At the same time, Sprint reclassified each share of its publicly traded common stock into one share of FON common stock and 1/2 share of PCS common stock. Operating Segments Sprint's business is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses and the PCS wireless telephony products and services business. The FON Group includes the global markets division, the local division and the product distribution and directory publishing businesses, and the PCS Group includes the PCS wireless telephony products and services business. The PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division and the product distribution and directory publishing businesses. For financial information relating to Sprint's segments, see Note 7 of Sprint's Condensed Notes to Consolidated Financial Statements. 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. The FON Group and PCS Group are part of Sprint and, as a result, separate financial statements for the groups are not required. Sprint has, however, included as Annex I and Annex II to this Form 10-Q additional financial information relating to each group to help investors assess the financial performance of the tracked businesses. - -------------------------------------------------------------------------------- General Overview of the Sprint FON Group - -------------------------------------------------------------------------------- Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; Internet; data communications such as frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(R). Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). Digital Subscriber Line technology enables high-speed transmission of data over existing copper telephone lines between the customer and the service provider, and MMDS is a fixed wireless network that distributes signals through microwave from a single transmission point to multiple receiving points. 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 MMDS capabilities from cable TV services to high-speed data services. Global markets division's operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. Local Division The local division consists mainly of regulated local phone companies serving approximately 8.3 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. - -------------------------------------------------------------------------------- General Overview of the Sprint PCS Group - -------------------------------------------------------------------------------- The PCS Group includes Sprint's wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. The PCS Group operates PCS systems in over 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to provide service to the entire United States population including Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including affiliates, now reaches more than 225 million people. The PCS Group provides nationwide service through: o operating its own digital network in major U.S. metropolitan areas, o affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, o roaming on other providers' analog cellular networks using dual-band/dual-mode handsets, and o roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS Group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of acquisition and customer service. The wireless industry, including the PCS Group, typically generates a higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions. - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Consolidated Total net operating revenues were as follows: Quarters Ended March 31, ------------------------ 2001 2000 - ------------------------------------------------------- (millions) FON Group $ 4,358 $ 4,404 PCS Group 2,051 1,220 Intergroup eliminations (129) (95) - ------------------------------------------------------- Net operating revenues $ 6,280 $ 5,529 ------------------------ Net operating revenues increased 14% in the 2001 first quarter compared to the same 2000 quarter mainly reflecting growth in the PCS Group. Income (Loss) from continuing operations was as follows: Quarters Ended March 31, ------------------------ 2001 2000 - ------------------------------------------------------- (millions) FON Group $ 316 $ 445 PCS Group (393) (510) - ------------------------------------------------------- Loss from continuing $ (77) $ (65) operations ------------------------ In the 2001 first quarter, loss from continuing operations includes net nonrecurring gains of $9 million from investment activities. In the 2000 first quarter, loss from continuing operations includes net nonrecurring gains of $17 million from investment activities as well as $18 million from the sale of customers and network infrastructure to a PCS affiliate. Excluding nonrecurring items, loss from continuing operations was $86 million in the 2001 first quarter and $100 million in the 2000 first quarter. - -------------------------------------------------------------------------------- Segmental Results of Operations - -------------------------------------------------------------------------------- Global Markets Division
Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Voice $ 1,736 $ 1,780 $ (44) (2.5)% Data 502 474 28 5.9% Internet 249 218 31 14.2% Other 80 155 (75) (48.4)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total net operating revenues 2,567 2,627 (60) (2.3)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,489 1,322 167 12.6% Selling, general and administrative 751 775 (24) (3.1)% Depreciation and amortization 302 265 37 14.0% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,542 2,362 180 7.6% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income $ 25 $ 265 $ (240) (90.6)% -- ------------- -- -------------- -- ------------- Operating margin 1.0% 10.1% -- ------------- -- --------------
Net Operating Revenues Net operating revenues decreased 2% in the 2001 first quarter from the same period in 2000 due to a more competitive pricing environment, a change in the mix of products sold and a decline in professional legacy data services, which more than offset minute growth of 21% in the same period. The decrease was partly offset by growth in data and Internet communications services revenues. Revenue and operating income growth will likely continue to be impacted by pricing pressures and increased spending to support the growth of Internet Protocol services. Voice Revenues Voice revenues decreased 2% in the 2001 first quarter from the same 2000 period due to a decline in consumer and business voice revenues resulting from a more competitive pricing environment. Consumer voice revenues were impacted by lower calling card usage due to the increased use of wireless phones partly offset by increased prepaid and international services. The decline in business voice revenues mainly reflects decreased inbound and outbound toll-free calls. Data Revenues Data revenues reflect sales of current-generation data services including asynchronous transfer mode and frame relay services. These revenues increased 6% in the 2001 first quarter from the same 2000 period due to increased sales as a result of continued demand for data products. Internet Revenues Internet revenues increased 14% in the 2001 first quarter from the same 2000 period due to strong growth in dedicated service revenues and moderate growth in dial-up Internet service provider-related revenues. The growth in Internet revenues reflects continued demand and increased use of the Internet. Other Revenues Other revenues decreased 48% in the 2001 first quarter from the same 2000 period due to a decline in professional services and legacy data services. The decrease also reflects cable capacity sales in the 2000 first quarter with no corresponding cable capacity sales in the 2001 first quarter. Costs of Services and Products Costs of services and products include interconnection costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers, costs to operate and maintain the long distance network and the Internet protocol network, costs of equipment and transmission capacity sales, and costs related to the development and deployment of Sprint ION. These costs increased 13% in the 2001 first quarter from the same 2000 period. Interconnection costs increased 18% in the 2001 first quarter from the same 2000 period due to increased calling volumes. All other costs of services and products increased 4% in the 2001 first quarter from the same 2000 period due to increased network costs of the long distance operation and the continued expansion of Sprint ION business services nationwide and the continued launch of Sprint ION consumer services in select markets. Total costs of services and products for global markets were 58.0% of net operating revenues in the 2001 first quarter compared to 50.3% for the same period a year ago. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense decreased 3% in the 2001 first quarter from the same 2000 period due to a reduction in advertising and promotion costs in both the consumer and business markets and a strong emphasis on cost control, partly offset by an increase in bad debt expense and increased marketing and promotions of Internet services. SG&A expense was 29.3% of net operating revenues in the 2001 first quarter compared to 29.5% for the same period a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 14% in the 2001 first quarter from the same period a year ago due to an increased asset base to enhance network reliability, meet increased demand for voice and data-related services and upgrade capabilities for providing new products and services as well as an increasing asset base for Sprint ION. Depreciation and amortization expense was 11.8% of net operating revenues in the 2001 first quarter compared to 10.1% for the same period a year ago.
Local Division Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Local service $ 732 $ 696 $ 36 5.2% Network access 505 511 (6) (1.2)% Long distance 186 171 15 8.8% Other 130 151 (21) (13.9)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total net operating revenues 1,553 1,529 24 1.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 496 480 16 3.3% Selling, general and administrative 338 337 1 0.3% Depreciation and amortization 281 279 2 0.7% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 1,115 1,096 19 1.7% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 438 $ 433 $ 5 1.2% --- ------------- -- -------------- -- ------------- Operating margin 28.2% 28.3% --- ------------- -- --------------
Net Operating Revenues At the beginning of the 2000 third quarter, Sprint changed its transfer pricing for certain transactions between FON Group entities. The main effect of this change was a reduction in the local division's "Net Operating Revenues - Other Revenues." In addition, Sprint's local division transferred a customer service and telemarketing organization to the PCS Group at the beginning of the 2000 second quarter. For comparative purposes, the following discussion of local division results assumes the transfer pricing change and the transfer of the customer service and telemarketing organization occurred at the beginning of 2000. Adjusting for the transfer pricing change and this transfer, operating margin would have been 28.1% for the 2000 first quarter. Net operating revenues increased 4% in the 2001 first quarter from the same 2000 period. This increase mainly reflects increased sales of network-based services such as Caller ID and Call Waiting and steady customer access line growth. Sales of network-based services increased due to strong demand for bundled services which combine local service, network-based features and long distance calling. The local division ended the 2001 first quarter with more than 8.3 million switched access lines, a 2.2% increase during the past 12 months. Access line growth was impacted by increased disconnections of non-paying customers and the transition of some business customers from switched access to dedicated services. On a voice-grade equivalent basis, which includes both traditional switched services and high capacity lines, access lines grew 22% during the past 12 months. This growth reflects many business customers switching from individual lines to high capacity dedicated circuits. Local Service Revenues Local service revenues, derived from local exchange services, grew 5% in the 2001 first quarter from the same 2000 period because of continued demand for network-based services and steady customer access line growth. Revenue growth also reflects increased sales of data products. Network Access Revenues Network access revenues, derived from long distance phone companies using the local network to complete calls, decreased 1% in the 2001 first quarter from the same 2000 period. Strong growth in special access services were more than offset by a 3% decline in minutes of use and FCC-mandated access rate reductions. Access rate reductions took effect in July 2000. Long Distance Revenues Long distance revenues are mainly derived from providing consumer long distance services to customers within Sprint's local franchise territories and other long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues increased 9% in the 2001 first quarter from the same 2000 period, reflecting the success of bundled services, which include long distance calling. Other Revenues Other revenues increased 11% in the 2001 first quarter from the same 2000 period because of an increase in equipment sales. Costs of Services and Products Costs of services and products include costs to operate and maintain the local network and costs of equipment sales. These costs increased 6% in the 2001 first quarter compared to the same 2000 period due to increased equipment sales, higher access costs associated with long distance revenues and reciprocal compensation costs for additional terminating traffic from wireless and competitive local exchange carriers. Costs of services and products was 31.9% of net operating revenues in the 2001 first quarter compared to 31.2% for the same period a year ago. Selling, General and Administrative Expense SG&A expense increased 2% in the 2001 first quarter compared to the same 2000 period mainly due to an increase in the provision for uncollectible customer accounts. SG&A expense was 21.8% of net operating revenues in the 2001 first quarter compared to 22.1% for the same period a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 1% in the 2001 first quarter compared to the same 2000 period reflecting increased capital expenditures somewhat offset by an increase to the depreciable lives of certain assets. Depreciation and amortization expense was 18.1% of net operating revenues in the 2001 first quarter compared to 18.6% for the same period a year ago.
Product Distribution and Directory Publishing Businesses Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 494 $ 461 $ 33 7.2% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 364 351 13 3.7% Selling, general and administrative 48 39 9 23.1% Depreciation and amortization 4 4 - - - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 416 394 22 5.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 78 $ 67 $ 11 16.4% --- ------------- -- -------------- -- ------------- Operating margin 15.8% 14.5% --- ------------- -- --------------
Net operating revenues increased 7% in the 2001 first quarter compared to the same 2000 period. Nonaffiliated revenues accounted for approximately 60% of revenues in both the 2001 and 2000 first quarters. Nonaffiliated revenues increased 2% in the 2001 first quarter compared to the same 2000 period. The increase in nonaffiliated revenues was mainly due to the consolidation of a directory publishing partnership. Beginning in the 2000 third quarter, the directory publishing partnership, previously accounted for as an equity method investment, was fully consolidated due to a restructuring in the partnership, which resulted in transfer of control to Sprint. The increase in nonaffiliated revenues was partly offset by a decline in equipment sales due to a loss of a customer contract in the second half of 2000. Affiliated revenues increased 18% in the 2001 first quarter compared to the same 2000 period reflecting a change in the mix of the local division's capital program to more network equipment and components. In the 2000 first quarter, affiliate sales were lower because the local division generally purchased electronics and software directly from manufacturers. Operating expenses increased 6% in the 2001 first quarter compared to the same 2000 period reflecting increased SG&A expense and costs of services and products due to the consolidation of the directory publishing partnership.
PCS Group Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 2,051 $ 1,220 $ 831 68.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,134 894 240 26.8% Selling, general and administrative 664 507 157 31.0% Depreciation and amortization 535 421 114 27.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,333 1,822 511 28.0% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (282) $ (602) $ 320 53.2% -- ------------- -- -------------- -- ------------- Operating income (loss) before depreciation and amortization $ 253 $ (181) $ 434 NM -- ------------- -- -------------- -- ------------- NM = Not meaningful
The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 23% of net operating revenues in the 2001 first quarter. These revenues were 24% of net operating revenues in the 2000 first quarter. Net Operating Revenues Quarters Ended March 31, --------------------- 2001 2000 - ------------------------------------------------------- Customers (millions) 10.4 6.6 - ------------------------- --------------------- Average monthly service revenue per user (ARPU) $ 60 $ 57 - ----------------------- --------------------- Customer churn rate 2.5% 2.9% - ----------------------- --------------------- The PCS Group's net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges, usage charges and activation fees. Subscriber revenues increased 76% in the 2001 first quarter from the same 2000 period mainly reflecting an increase in the average number of customers and an increase in ARPU. The PCS Group added 826,000 customers in the 2001 first quarter before the sale of 14,000 customers to an affiliate, ending the quarter with nearly 10.4 million customers compared to 6.6 million customers at the end of the 2000 first quarter. ARPU was $60 for the 2001 first quarter compared to $57 in the 2000 first quarter period. The increase in ARPU was mainly due to the implementation of activation charges in the 2000 second quarter and customers subscribing to higher usage service plans. Subscriber revenues were also aided by the increase in resale customers. The companies that the PCS Group serves on a wholesale basis added 49,000 customers in the 2001 first quarter ending the quarter with approximately 359,000 customers compared to approximately 77,000 customers at the end of the 2000 first quarter. In the 2001 first quarter, the customer churn rate improved reflecting expanded network coverage, increased percentage of customers under contract and the success of several customer retention initiatives. Revenues from sales of handsets and accessories were approximately 10% of net operating revenues in the 2001 first quarter. These revenues as a percentage of net operating revenues were approximately 14% in the 2000 first quarter. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses Quarters Ended March 31, --------------------- 2001 2000 - ------------------------------------------------------- Acquisition costs per gross customer addition (CPGA) $ 360 $ 390 - ------------------------- --------------------- Monthly cash costs per user (CCPU) $ 34 $ 37 - ------------------------- --------------------- The PCS Group's costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 27% in the 2001 first quarter from the same 2000 period reflecting an increase in the average number of in customers and expanded market coverage. SG&A expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 31% in the 2001 first quarter from the same 2000 period reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. CPGA, including equipment subsidies and marketing costs, have improved approximately 8% in the 2001 first quarter from the same 2000 period. Lower equipment costs have contributed to the improvement. CCPU consists of costs of service revenues, service delivery and other general and administrative costs. CCPU decreased approximately 7% in the 2001 first quarter from the same 2000 period. The improvements reflect successful expense management and scale benefits resulting from the increased customer base. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 27% in the 2001 first quarter from the same 2000 period mainly reflecting depreciation of the network assets placed in service during 2001 and 2000. Additionally, depreciation of certain network assets was increased in the 2001 first quarter to reflect the accelerated replacement of the assets to accommodate network technology upgrades. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense Sprint's effective interest rate on long-term debt was 6.9% in the 2001 and 2000 first quarters. Interest costs on short-term borrowings classified as long-term debt, deferred compensation plans and customer deposits have been excluded so as not to distort the effective interest rate on long-term debt. Other Income (Expense), Net Other income (expense) consisted of the following: Quarters Ended March 31, ---------------------- 2001 2000 - ---------------------------------------------------- (millions) Dividend and interest income $ 9 $ 7 Equity in net losses of (45) (25) affiliates Net gains from investments - 26 Gain on sale of assets 10 28 Other, net 6 (8) - ---------------------------------------------------- Total $ (20) $ 28 ---------------------- Dividend and interest income for both the 2001 and 2000 first quarter reflects dividends earned on cost method investments and interest earned on temporary investments. In the 2001 first quarter, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance operation in Brazil, the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico, and other strategic investments. In the 2000 first quarter, investments accounted for using the equity method also included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long distance provider in Canada. Net gains from investments in the 2000 first quarter mainly include a gain associated with equity securities used to retire debt instruments offset by net losses on miscellaneous investment activities. Gain on sales of assets in the 2001 and 2000 first quarter mainly include the sales of certain wireless customers and associated network infrastructure. Income Taxes See Note 3 of Condensed Notes to Consolidated Financial Statements for information about the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Discontinued Operation, Net In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, Sprint's gain on sale has been reported as a discontinued operation. Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million in the first quarter of 2000. Extraordinary Items, Net In the 2001 first quarter, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss. In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- Total consolidated assets were as follows: March 31, December 31, 2001 2000 - ----------------------------------------------------- (millions) FON Group $ 24,029 $ 23,649 PCS Group 19,965 19,763 Intergroup eliminations (848) (811) - ----------------------------------------------------- Consolidated assets $ 43,146 $ 42,601 -------------------------------- Sprint's consolidated assets increased $545 million in the 2001 first quarter. Net property, plant and equipment increased $763 million reflecting capital expenditures to support the PCS network build-out and expansion, the build-out of the Internet protocol network, long distance and local network enhancements, and Sprint ION development and hardware deployment, partly offset by depreciation and network asset sales. Offsetting decreases in Sprint's consolidated assets primarily reflect a reduction in current assets and amortization of goodwill and other intangible assets. See "Liquidity and Capital Resources" for more information about changes in Sprint's Consolidated Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Sprint's Board of Directors has the power to make determinations that may impact the financial and liquidity position of each of the tracking stock groups. This power includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding the timing and amount of capital expenditures. The actions of the Board of Directors are subject to its fiduciary duties to all shareholders of Sprint, and not just to the holders of a particular class of common stock. Given the above, it may be difficult to assess each group's liquidity and capital resources and in turn the future prospects of each group based on past performance. Operating Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) FON Group $ 616 $ 1,023 PCS Group (175) (93) Intergroup eliminations - - - ------------------------------------------------------ Cash flows provided by operating activities $ 441 $ 930 ------------------------------- In the 2001 first quarter, operating cash flows decreased $489 million from the same 2000 period primarily reflecting increased working capital requirements. The decrease in operating cash flows also reflects a decline in the FON Group's operating results, partly offset by the PCS Group's improved operating results. Investing Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) FON Group $ (1,153) $ (413) PCS Group (632) (571) Intergroup eliminations - 928 - ------------------------------------------------------ Cash flows used by investing activities $ (1,785) $ (56) ------------------------------- The FON Group's capital expenditures totaled $1.1 billion in the 2001 first quarter and $758 million in the 2000 first quarter. Global markets division capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services, upgrade capabilities for providing new products and services and to continue development and hardware deployment of Sprint ION. The local division incurred capital expenditures to accommodate voice grade equivalent growth, expand capabilities for providing enhanced services and continue the build-out of high-speed DSL services. Other FON Group capital expenditures were incurred mainly for Sprint's World Headquarters Campus. PCS Group capital expenditures were $655 million in the 2001 first quarter and $693 million in the 2000 first quarter. Capital expenditures in both years were mainly for the continued buildout and expansion of the PCS network. In February 2000, Sprint received $1.4 billion from the sale of its interest in Global One. The proceeds were used to repay existing debt and fund the PCS Group's capital expenditures. "Investments in and loans to affiliates, net" consisted mainly of the Sprint's investments in EarthLink and Intelig. Financing Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) FON Group $ 475 $ (519) PCS Group 810 703 Intergroup eliminations - (928) - ------------------------------------------------------ Cash flows provided (used) by financing activities $ 1,285 $ (744) ------------------------------- Financing activities in the 2001 first quarter mainly reflect net borrowings of $1.4 billion. Financing activities in the 2000 first quarter primarily reflect payments on borrowings made with the proceeds from the sale of Global One. Sprint paid cash dividends of $109 million in both the 2001 and 2000 first quarter periods. Capital Requirements Sprint's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be $9.7 to $10.0 billion. FON Group capital expenditures are expected to be $5.9 billion, and PCS Group capital expenditures are expected to be between $3.3 and $3.5 billion. Investments in affiliates are expected to be between $450 and $550 million. Dividend payments are expected to approximate $455 million in 2001. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses. The tax sharing agreement applies to tax years ending on or before December 31,2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Liquidity In order to fund the capital requirements detailed in the previous section, about $5 billion of external funding is needed. In January 2001, Sprint issued $2.4 billion of debt securities. See Note 5 of Condensed Notes to Consolidated Financial Statements for more details on this issuance. Sprint has announced its intentions to sell $3 billion of PCS common stock in an underwritten public offering when market or other conditions indicate that such a course of action is advisable. However, since it is uncertain when these conditions will materialize, other alternatives are being evaluated. Any borrowings Sprint may incur are ultimately limited by certain debt covenants. Sprint could borrow up to an additional $8 billion at the end of March 2001 under the most restrictive of its debt covenants. - -------------------------------------------------------------------------------- Financial Strategies - -------------------------------------------------------------------------------- General Risk Management Policies Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint seeks to minimize counterparty credit risk through stringent credit approval and review processes, the selection of only the most creditworthy counterparties, continual review and monitoring of all counterparties, and thorough legal review of contracts. Sprint also controls exposure to market risk by regularly monitoring changes in foreign exchange and interest rate positions under normal and stress conditions to ensure they do not exceed established limits. Sprint's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Senior management receives frequent status updates of all outstanding derivative positions. Interest Rate Risk Management Fair Value Hedges Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed-rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed-rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Cash Flow Hedges Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating-rate debt to a fixed-rate. Other Derivatives In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transaction and are not designated as hedging instruments. Foreign Exchange Risk Management Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. These international operations were not material to the consolidated financial position at March 31, 2001 or results of operations or cash flows for the quarter ended March 31, 2001. Sprint has not entered into any significant foreign currency forward contracts or other derivative instruments to reduce the effects of adverse fluctuations in foreign exchange rates. As a result, Sprint was not subject to material foreign exchange risk. PART I. Item 3 Item 3. Quantitative and Qualitative Disclosures about Market Risk The risk inherent in Sprint's market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. Sprint is susceptible to certain risks related to changes in interest rates and foreign currency exchange rate fluctuations. Sprint does not purchase or hold any derivative financial instruments for trading purposes. Interest Rate Risk The communications industry is a capital intensive, technology driven business. Sprint is subject to interest rate risk primarily associated with its borrowings. Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Approximately 73% of Sprint's debt at March 31, 2001 is fixed rate debt. While changes in interest rates impact the fair value of this debt, there is no impact to earnings and cash flows because Sprint intends to hold these obligations to maturity unless refinancing conditions are favorable. Sprint performs interest rate sensitivity analyses on its variable rate debt. These analyses indicate that a 75 basis point change in interest rates would have a $39 million pre-tax impact on the income statement and cash flows at March 31, 2001. While Sprint's variable rate debt is subject to earnings and cash flows impacts as interest rates change, it is not subject to changes in fair values. Sprint also prepared a value-at-risk analysis to assess the worst-case impact of past market movements on Sprint's 2001 long-term debt portfolio. Based on that analysis, which used average interest rates from 1980 to present, Sprint is 95% confident that the fair value of outstanding debt would not increase above Sprint's book value over the next six months. Foreign Currency Risk Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint uses foreign currency derivatives to hedge its net foreign currency payable related to settlement of international telecommunications access charges. The dollar equivalent of Sprint's net foreign currency payables was $18 million at March 31, 2001. The potential immediate pre-tax loss to Sprint that would result from a hypothetical 10% change in foreign currency exchange rates based on these positions would be approximately $2 million. PART II. Other Information PART II. - Other Information Item 1. Legal Proceedings There were no reportable events during the quarter ended March 31, 2001. Item 2. Changes in Securities At the Annual Meeting of Shareholders of Sprint held on April 17, 2001, the shareholders approved an amendment to Sprint's Articles of Incorporation to -increase the authorized shares of Series 1 PCS common stock from 1,250,000,000 shares to 3,000,000,000 shares, -increase the authorized shares of Series 2 PCS common stock from 500,000,000 shares to 1,000,000,000 shares, and -increase the total number of shares of authorized capital stock from 6,770,000,000 shares to 9,020,000,000 shares. The increase in authorized shares allows the Sprint Board to issue additional shares of Series 1 PCS common stock for corporate purposes which the Board deems advisable, such as financings, acquisitions and employee benefit plans, without further action by the shareholders, except as may be required in a specific case by Kansas law or by the New York Stock Exchange. At the Annual Meeting of Shareholders, the shareholders also approved an amendment to Sprint's Articles of Incorporation reducing the minimum number of directors to constitute the Board of Directors from ten to eight. Item 3. Defaults Upon Senior Securities There were no reportable events during the quarter ended March 31, 2001. Item 4. Submission of Matters to a Vote of Security Holders On April 17, 2001, Sprint held its Annual Meeting of Shareholders. In addition to the election of three Class III Directors to serve a term of three years, the shareholders approved two amendments to Sprint's Articles of Incorporation, an amendment to the 1988 Employees Stock Purchase Plan, and the appointment of Ernst & Young LLP as independent auditors of Sprint for 2001. The shareholders did not approve two shareholder proposals. The following votes were cast for each of the following nominees for Director or were withheld with respect to such nominees:
For Withheld William T. Esrey 1,384,518,689 17,377,804 Linda Koch Lorimer 1,385,687,454 16,209,039 Stewart Turley 1,385,507,775 16,388,718
The following votes were cast with respect to the proposal to amend the Articles of Incorporation to reduce the minimum number of Directors required to eight: For 1,379,078,131 Against 15,289,452 Abstain 7,528,911 The following votes were cast with respect to the proposal to amend the Articles of Incorporation to increase the number of authorized shares of Series 1 PCS common stock, Series 2 PCS common stock and total authorized capital stock. Votes cast by all shareholders voting as a single class: For 1,187,065,754 Against 206,796,574 Abstain 8,034,165 Votes cast by the holders of Series 1 PCS common stock, Series 2 PCS common stock and Series 3 PCS common stock, voting as a class: For 764,523,462 Against 59,219,573 Abstain 3,570,807 Votes cast by the holders of Series 1 PCS common stock, Series 2 PCS common stock, Series 3 PCS common stock and Class A common stock, voting as a class: For 807,641,480 Against 59,219,573 Abstain 3,570,807 The following votes were cast with respect to the proposal to amend the 1988 Employees Stock Purchase Plan to increase the number of shares of Series 1 PCS common stock that may be issued under the plan: For 1,355,000,849 Against 38,445,527 Abstain 8,450,117 The following votes were cast with respect to the proposal to approve the appointment of Ernst & Young LLP as independent auditors of Sprint for 2001: For 1,382,717,756 Against 12,197,937 Abstain 6,980,800 The following votes were cast with respect to a shareholder proposal urging the Sprint Board to seek shareholder approval for future severance agreements with senior executives that provide benefits in an amount exceeding two times the sum of the executive's base salary and bonus: For 386,201,348 Against 738,593,077 Abstain 28,835,894 Broker non-votes 248,266,174 The following votes were cast with respect to a shareholder proposal urging the Sprint Board to adopt a policy that Sprint will not reprice, or terminate and regrant, to a lower exercise price any stock option granted to any employee or director of Sprint without the prior approval of the holders of a majority of Sprint's outstanding shares of common stock: For 528,791,583 Against 606,542,832 Abstain 18,295,904 Broker non-votes 248,266,173 Item 5. Other Information Ratio of Earnings to Fixed Charges Sprint's earnings, as adjusted, were inadequate to cover fixed charges by $62 million in the 2001 first quarter and $72 million in the 2000 first quarter. The ratio was computed by dividing fixed charges into the sum of earnings, after certain adjustments, and fixed charges. Earnings include loss from continuing operations before income taxes, plus equity in the net losses of less-than-50%-owned entities, less capitalized interest. Fixed charges include interest on all debt of continuing operations, including amortization of debt issuance costs and the interest component of operating rents. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: (3) Articles of Incorporation and Bylaws: (a) Articles of Incorporation, as amended (filed as Exhibit 3.1 to Amendment No. 3 to Sprint Corporation's Registration Statement on Form 8-A registering Sprint's PCS Common Stock, filed April 18, 2001, and incorporated herein by reference). (b) Bylaws, as amended (filed as Exhibit 3(b) to Sprint Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference). (4) Instruments defining the Rights of Sprint's Equity Security Holders: (a) The rights of Sprint's equity security holders are defined in the Fifth, Sixth, Seventh and Eighth Articles of Sprint's Articles of Incorporation. See Exhibit 3(a). (b) Rights Agreement dated as of November 23, 1998, between Sprint Corporation and UMB Bank, n.a. (filed as Exhibit 4.1 to Amendment No. 1 to Sprint Corporation's Registration Statement on Form 8-A relating to Sprint's PCS Group Rights, filed November 25, 1998, and incorporated herein by reference). (c) Amended and Restated Standstill Agreement dated November 23, 1998, by and among Sprint Corporation, France Telecom and Deutsche Telekom AG (filed as Exhibit 4E to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference), as amended by the Master Transfer Agreement dated January 21, 2000 between and among France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH, Atlas Telecommunications, S.A., Sprint Corporation, Sprint Global Venture, Inc. and the JV Entities set forth in Schedule II thereto (filed as Exhibit 2 to Sprint Corporation's Current Report on Form 8-K dated January 26, 2000 and incorporated herein by reference). (d) Tracking Stock Policies of Sprint Corporation (filed as Exhibit 4D to Post-Effective Amendment No. 2 to Sprint Corporation's Registration Statement on Form S-3 (No. 33-58488) and incorporated herein by reference). (10) Executive Compensation Plans and Arrangements: (a) 1990 Stock Option Plan, as amended (filed as Exhibit 10(g) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). (b) Management Incentive Stock Option Plan, as amended (filed as Exhibit 10(j) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). (c) Management Incentive Plan, as amended (filed as Exhibit 10(r) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). (d) Summary of Executive Officer Benefits and Board of Directors Benefits and Fees (filed as Exhibit 10(y) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). (e) Employment Agreements dated as of February 26, 2001 by and among Sprint Corporation, Sprint/United Management Company and William T. Esrey and Ronald T. LeMay (filed as Exhibit 10(bb) to Sprint Corporation Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). (12) Computation of Ratio of Earnings to Fixed Charges (99) Supplemental Information (a) Annex I - FON Group Combined Financial Information (b) Annex II - PCS Group Combined Financial Information (b) Reports on Form 8-K On February 20, 2001, Sprint filed a Current Report on Form 8-K dated December 13, 2000, in which it reported that it had announced fourth quarter 2000 and calendar year 2000 results. It also reported that, on December 13, 2000, a shareholder had filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors. The news release regarding fourth quarter 2000 and calendar year 2000 results, which was included in the Current Report, included the following financial information: FON Group Combined Statements of Operations FON Group Selected Operating Results FON Group Proforma Financial Information FON Group Supplemental Operating Information FON Group Condensed Combined Balance Sheets FON Group Condensed Combined Cash Flow Information PCS Group Combined Statements of Operations PCS Group Supplemental Operating Information PCS Group Net Customer Additions PCS Group Condensed Combined Balance Sheets PCS Group Condensed Combined Cash Flow Information Sprint Corporation Condensed Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information On April 23, 2001, Sprint filed a Current Report on Form 8-K dated April 17, 2001 in which it reported that it had announced first quarter 2001 results. The news release regarding first quarter 2001 results, which was included in the Current Report, included the following financial information: FON Group Combined Statements of Operations FON Group Selected Operating Results FON Group Condensed Combined Balance Sheets FON Group Condensed Combined Cash Flow Information PCS Group Combined Statements of Operations PCS Group Condensed Combined Balance Sheets PCS Group Condensed Combined Cash Flow Information PCS Group Net Customer Additions Sprint Corporation Consolidated Statements of Operations Sprint Corporation Condensed Consolidated Balance Sheets Sprint Corporation Condensed Consolidated Cash Flow Information SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPRINT CORPORATION -------------------------- (Registrant) By /s/ John P. Meyer ----------------------------------- John P. Meyer Senior Vice President -- Controller Principal Accounting Officer Dated: May 15, 2001 EX-12 2 spr1q01_exh12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT (12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited) Sprint Corporation Quarters Ended March 31, ------------------------------- ------------------------------- 2001 2000 - -------------------------------------------------------------------------------------------------------------------- (millions) Earnings Loss from continuing operations before income taxes $ (77) $ (70) Capitalized interest (44) (34) Equity in net losses of less than 50% owned entities 59 32 - -------------------------------------------------------------------------------------------------------------------- Subtotal (62) (72) - -------------------------------------------------------------------------------------------------------------------- Fixed charges Interest charges 351 288 Interest factor of operating rents 88 80 - -------------------------------------------------------------------------------------------------------------------- Total fixed charges 439 368 - -------------------------------------------------------------------------------------------------------------------- Earnings, as adjusted $ 377 $ 296 ------------------------------- Earnings, as adjusted, were inadequate to cover fixed charges by $62 million for the 2001 first quarter and $72 million for the 2000 first quarter. Note: Earnings include loss from continuing operations before taxes, plus equity in the net losses of less-than-50% owned entities, less capitalized interest. Fixed charges include interest on all debt of continuing operations, including amortization of debt issuance costs and the interest component of operating rents.
EX-99 3 spr1q01_exh99.txt ANNEX FINANCIAL STATEMENTS Supplemental Information -- Annex I Sprint FON Group Combined Financial Information The FON Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the FON Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation.
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint FON Group (millions) (an integrated business of Sprint Corporation) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended March 31, 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 4,358 $ 4,404 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 2,105 1,948 Selling, general and administrative 1,135 1,153 Depreciation 580 528 Amortization 6 17 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 3,826 3,646 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income 532 758 Interest expense (27) (39) Other income, net 5 7 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income from continuing operations before income taxes 510 726 Income tax expense (194) (281) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income from Continuing Operations 316 445 Discontinued operation, net - 675 Extraordinary items, net (1) - Cumulative effect of change in accounting principle, net - (2) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income $ 315 $ 1,118 -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Sprint FON Group (an integrated business of Sprint Corporation) (millions) - --------------------------------------------- ----------------- -------- ----------------- ------------------------ Quarters Ended March 31, 2001 2000 - --------------------------------------------- ----------------- -------- ----------------- ------------------------ Net Income $ 315 $ 1,118 - --------------------------------------------- --- ------------- -- ----- -- -------------- -- --------------------- Other Comprehensive Income (Loss) Unrealized holding losses on securities (1) (3) Income tax benefit - 1 - --------------------------------------------- --- ------------- -- ----- -- -------------- -- --------------------- Net unrealized holding losses on securities during the period (1) (2) Reclassification adjustment for gains included in net income - (32) - --------------------------------------------- --- ------------- -- ----- -- -------------- -- --------------------- Total net unrealized holding losses on securities (1) (34) Net unrealized losses on qualifying cash flow hedges (6) - Cumulative effect of change in accounting principle, net (9) - Foreign currency translation adjustment, net (4) - - --------------------------------------------- --- ------------- -- ----- -- -------------- -- --------------------- Total other comprehensive loss (20) (34) - --------------------------------------------- --- ------------- -- ----- -- -------------- -- --------------------- Comprehensive Income $ 295 $ 1,084 -- -------------- -- --------------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED BALANCE SHEETS Sprint FON Group (millions) (an integrated business of Sprint Corporation) - ----------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 60 $ 122 Accounts receivable, net of allowance for doubtful accounts of $258 and $293 3,059 3,126 Inventories 429 434 Prepaid expenses 315 276 Receivables from the PCS Group 324 361 Other 167 193 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 4,354 4,512 Property, plant and equipment Global markets division 13,143 12,512 Local division 17,136 16,835 Other 1,758 1,651 - ----------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 32,037 30,998 Accumulated depreciation (15,677) (15,165) - ----------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 16,360 15,833 Investments in and advances to affiliates 674 842 Intangible assets Goodwill 878 877 Other 385 384 - ----------------------------------------------------------------------------------------------------------------------------- Total intangible assets 1,263 1,261 Accumulated amortization (63) (57) - ----------------------------------------------------------------------------------------------------------------------------- Net intangible assets 1,200 1,204 Other assets 1,441 1,258 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 24,029 $ 23,649 --------------------------------------- Liabilities and Combined Attributed Net Assets Current liabilities Short-term borrowings including current maturities of long-term debt $ 1,113 $ 1,026 Accounts payable 1,066 1,598 Accrued interconnection costs 590 547 Accrued taxes 369 264 Advance billings 428 462 Payroll and employee benefits 359 377 Other 708 730 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 4,633 5,004 Long-term debt and capital lease obligations 4,013 3,482 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,310 1,276 Postretirement and other benefit obligations 1,082 1,077 Other 452 457 - ----------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 2,844 2,810 Redeemable preferred stock 10 10 Combined attributed net assets 12,529 12,343 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 24,029 $ 23,649 --------------------------------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint FON Group (millions) (an integrated business of Sprint Corporation) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Quarters Ended March 31, 2001 2000 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net income $ 315 $ 1,118 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operation, net - (675) Equity in net losses of affiliates 25 25 Depreciation and amortization 586 545 Deferred income taxes and investment tax credits 69 238 Changes in assets and liabilities: Accounts receivable, net 67 (31) Inventories and other current assets (32) (22) Accounts payable and other current liabilities (409) (49) Receivables from the PCS Group 42 (88) Noncurrent assets and liabilities, net (42) 5 Other, net (5) (43) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by operating activities 616 1,023 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (1,119) (758) Investments in and loans to affiliates, net (46) (130) Advances to the PCS Group - (928) Other, net 12 - - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by continuing operations (1,153) (1,816) Proceeds from sale of investment in Global One - 1,403 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (1,153) (413) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from debt 667 - Payments on debt (61) (381) Dividends paid (105) (105) Proceeds from common stock issued 3 36 Other, net (29) (69) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by financing activities 475 (519) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents (62) 91 Cash and Equivalents at Beginning of Period 122 104 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 60 $ 195 --- ------------- -- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS Sprint FON Group (Unaudited) (an integrated business of Sprint Corporation) The information in this supplement has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the combined interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present the FON Group's combined financial position, results of operations, cash flows and comprehensive income. This combined financial information is provided as additional disclosure to investors regarding the operations of the FON Group. Certain information and footnote disclosures normally included in combined financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 2000 Form 10-K/A. Operating results for the 2001 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- 1. Basis of Combination and Presentation - -------------------------------------------------------------------------------- FON common stock and PCS common stock are intended to reflect the performance of the FON and PCS groups. However, they are classes of common stock of Sprint, not of the group they are intended to track. Accordingly, the PCS stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON stock is intended to reflect the financial results and economic value of the global markets division, the local division, and the product distribution and directory publishing businesses. The combined FON Group financial statements, together with the combined PCS Group financial statements, include all the accounts in Sprint's consolidated financial statements prior to inter-group eliminations. The combined financial statements for each group are prepared in accordance with accounting principles generally accepted in the United States. Investments in entities in which the FON Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). Transactions between the PCS Group and the FON Group have not been eliminated in the combined financial statements of either group. The FON Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the FON Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation. Investors in FON stock are shareholders of Sprint and are subject to the risks related to an equity investment in Sprint and all of Sprint's businesses, assets and liabilities. The assets and liabilities allocated by Sprint's Board to the FON Group remain assets and liabilities of Sprint Corporation and are therefore subject to the claims of Sprint's creditors generally. In the event of the liquidation or winding up of Sprint Corporation, assets of Sprint remaining for distribution to Sprint's common shareholders will be distributed to holders of FON stock based on the liquidation value of such shares as provided in Sprint's articles of incorporation, which may differ from the Board's allocation of assets and liabilities among the groups. The Board of Directors of Sprint may, subject to the restrictions in Sprint's articles of incorporation, change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The FON Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or group equity as previously reported. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each group. Cost allocation methods other than time studies include factors (general, marketing or headcount) derived from the operating unit's relative share of the predefined category referenced (e.g. headcount). Sprint believes that the costs allocated are comparable to the costs that would be incurred if the groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's board of directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Allocation of Group Financing Financing activities for the groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the groups is specifically allocated to and reflected in the financial statements of the applicable group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. Under Sprint's centralized cash management program, one group may advance funds to the other group. These advances are accounted for as short-term borrowings between the groups and bear interest at a market rate that is substantially equal to the rate that group would be able to obtain from third parties on a short-term basis. The allocation of group financing activities may change at the discretion of Sprint and does not require shareholder approval. - -------------------------------------------------------------------------------- 2. Investments - -------------------------------------------------------------------------------- At the end of March 2001, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance provider in Brazil, and other strategic investments. In the 2000 first quarter, investments accounted for using the equity method also included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long distance operation in Canada. Combined, unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Results of operations: Net operating revenues $ 193 $ 481 ------------------------- Operating loss $ (108) $ (60) ------------------------- Net loss $ (111) $ (137) ------------------------- Equity in net losses of $ (11) $ (25) affiliates ------------------------- - -------------------------------------------------------------------------------- 3. Income Taxes - -------------------------------------------------------------------------------- The differences that caused the FON Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Income tax expense at the federal statutory rate $ 178 $ 254 Effect of: State income taxes, net of federal income tax 15 19 effect Equity in losses of foreign joint ventures - 10 Goodwill amortization 3 2 Other, net (2) (4) - ------------------------------------------------------- Income tax expense $ 194 $ 281 ------------------------- Effective income tax rate 38.0% 38.7% ------------------------- - -------------------------------------------------------------------------------- 4. Cumulative Effect of Change in Accounting Principle - -------------------------------------------------------------------------------- Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management Policies Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating rate debt to a fixed rate. In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transactions and are not designated as hedging instruments. Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Forward contracts, which function as natural hedges, are used to offset the impact of foreign currency fluctuations in these payments. Adoption of the Accounting Standard The derivative instruments held by the FON Group at the adoption of SFAS No. 133 are interest rate swaps and stock warrants. The interest rate swaps meet all the required criteria of SFAS No. 133 for the assumption of perfect effectiveness resulting in no recognition of changes in their fair values in earnings upon adoption or during the life of the swaps. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Forward contracts held during the period are not designated as hedges and accordingly, not affected by the adoption of SFAS No. 133. The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative reduction in other comprehensive income of $9 million. The total fair value of the stock warrants held by the FON Group on the date of adoption was not material requiring no transition adjustment to earnings. The reduction in other comprehensive income results from a decrease in fair value of cash flow hedges resulting from interest rate fluctuations. The decrease is recorded in net unrealized losses on qualifying cash flow hedges on the combined statements of comprehensive income. The net derivative losses included in other comprehensive income as of January 1, 2001 are not expected to be reclassified into earnings within the next 12-month period because the FON Group intends to hold the qualifying cash flow hedges until maturity in 2002. The FON Group recorded a net derivative gain in earnings of $0.2 million (net of tax of $0.1 million) for the 2001 first quarter due to changes in the fair value of the stock warrants that are not designated as hedging instruments. The net derivative gain is included in other income, net on the combined statements of operations. The FON Group recorded a $6 million reduction in other comprehensive income in the 2001 first quarter resulting from losses on cash flow hedges. - -------------------------------------------------------------------------------- 5. Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of March 2001, short-term borrowings exceeded the long-term portion of those unused credit facilities. Accordingly, $88 million of commercial paper borrowings allocated to the FON Group remained in current liabilities. In February 2001, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. - -------------------------------------------------------------------------------- 6. Combined Attributed Net Assets - -------------------------------------------------------------------------------- Quarter Ended March 31, 2001 - ------------------------------------------------------- (millions) Beginning balance $ 12,343 Net income 315 Dividends (109) Common stock issued 21 Tax benefit of stock compensation 4 Other comprehensive loss (20) Other, net (25) - ------------------------------------------------------- Ending balance $ 12,529 ------------------ - -------------------------------------------------------------------------------- 7. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- FON shareholders are subject to all of the risks related to an investment in Sprint and the FON Group, including the effects of any legal proceedings and claims against the PCS Group. In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the FON Group's combined financial statements. - -------------------------------------------------------------------------------- 8. Segment Information - -------------------------------------------------------------------------------- The FON Group operates in three business segments: the global markets division, the local division and the product distribution and directory publishing businesses. Sprint generally accounts for transactions between segments based on fully distributed costs, which Sprint believes approximates fair value. Beginning in the 2000 fourth quarter, Sprint changed its segment reporting to align financial reporting with changes in how Sprint manages operations and assesses its performance. Using several factors, Sprint combined its long distance operation, Sprint ION, broadband fixed wireless services and certain other ventures into one division, global markets. The global markets division now includes four major revenue streams: voice, data, Internet, and other. Additionally, Sprint shifted the recognition of consumer long distance revenues and expenses associated with customers in its local franchise territories from the global markets division to the local division. The product distribution and directory publishing businesses is managed based on products and services provided to the market. As a result, all previously reported financial information relating to these segments has been restated to reflect the current composition of each segment.
Segment financial information was as follows: - -------------------------------------------------------------------------------------------------------------------- Product Global Distribution Corporate Sprint Quarters Ended Markets Local & and FON March 31, Division Division Directory Eliminations(1) Group Publishing - -------------------------------------------------------------------------------------------------------------------- (millions) 2001 Net operating revenues $ 2,567 $ 1,553 $ 494 $ (256) $ 4,358 Affiliated revenues 130 56 188 (256) 118 Operating income (loss) 25 438 78 (9) 532 2000 Net operating revenues $ 2,627 $ 1,529 $ 461 $ (213) $ 4,404 Affiliated revenues 95 49 160 (213) 91 Operating income (loss) 265 433 67 (7) 758 - -------------------------------------------------------------------------------------------------------------------- (1) Significant intercompany eliminations consist of local access charged to the global markets division, equipment purchases from the product distribution business and interexchange services provided to the local division.
Net operating revenues by product and services were as follows: - -------------------------------------------------------------------------------------------------------------------- Product Global Distribution Sprint Quarters Ended Markets Local & FON March 31, Division Division Directory Eliminations(1) Group Publishing - -------------------------------------------------------------------------------------------------------------------- (millions) 2001 Voice $ 1,736 $ - $ - $ (27) $ 1,709 Data 502 - - - 502 Internet 249 - - - 249 Local service - 732 - - 732 Network access - 505 - (41) 464 Long distance - 186 - - 186 Product distribution - - 359 (185) 174 Directory publishing 135 - 135 Other 80 130 - (3) 207 ---------------------------------------------------------------------------- Total net operating revenues $ 2,567 $ 1,553 $ 494 $ (256) $ 4,358 ---------------------------------------------------------------------------- 2000 Voice $ 1,780 $ - $ - $ (26) $ 1,754 Data 474 - - - 474 Internet 218 - - - 218 Local service - 696 - - 696 Network access - 511 - (29) 482 Long distance - 171 - - 171 Product distribution - - 355 (158) 197 Directory publishing - - 106 - 106 Other 155 151 - - 306 ---------------------------------------------------------------------------- Total net operating revenues $ 2,627 $ 1,529 $ 461 $ (213) $ 4,404 ---------------------------------------------------------------------------- (1) Significant intercompany eliminations consist of local access charged to the global markets division, equipment purchases from the product distribution business and interexchange services provided to the local division.
- -------------------------------------------------------------------------------- 9. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- The FON Group's cash paid for interest and income taxes was as follows: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 18 $ 27 ------------------------- Income taxes $ 27 $ (149) ------------------------- The FON Group's noncash activities included the following: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 18 $ 32 ------------------------- Tax benefit from stock compensation $ 4 $ 51 ------------------------- ------------------------- Stock received for stock options exercised $ - $ 13 ------------------------- ------------------------- Debt redeemed with investments in equity securities $ - $ 275 ------------------------- - -------------------------------------------------------------------------------- 10. Discontinued Operation - -------------------------------------------------------------------------------- In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom (FT) and Deutsche Telekom AG (DT). Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, the FON Group's gain on the sale has been reported as a discontinued operation. The FON Group recorded an after-tax gain related to the sale of Sprint's interest in Global One of $675 million in the first quarter of 2000. - -------------------------------------------------------------------------------- 11. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. - -------------------------------------------------------------------------------- 12. Recently Issued Accounting Pronouncements - -------------------------------------------------------------------------------- In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and provides consistent standards for distinguishing transfers from sales and secured borrowings. This statement is effective for transactions occurring after March 31, 2001 and is not expected to have a material impact on the FON Group's combined financial statements. - -------------------------------------------------------------------------------- 13. Subsequent Events - -------------------------------------------------------------------------------- At the Annual Meeting of Shareholders of Sprint held on April 17, 2001, the shareholders approved an amendment to Sprint's Articles of Incorporation to o increase the authorized shares of Series 1 PCS Common Stock from 1.25 billion shares to 3 billion shares, o increase the authorized shares of Series 2 PCS Common Stock from 500 million shares to 1 billion shares, and o increase the total number of shares of authorized capital stock from 6.77 billion shares to 9.02 billion shares. In April 2001, Sprint's Board of Directors declared a dividend of 12.5 cents per share on the Sprint FON common stock and an equivalent dividend (12.5 cents per underlying share of Sprint FON common stock) on the Class A common stock. Dividends will be paid June 29, 2001. In February 2001, Sprint filed a registration statement with the SEC for a secondary offering of 174.8 million shares of FON stock (including 22.8 million shares to cover over-allotments) owned by FT and DT, including the FON stock underlying the Class A common stock. Sprint expects this offering to be completed during the 2001 second quarter with FT and DT receiving the related proceeds. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION Sprint FON Group AND RESULTS OF OPERATIONS (an integrated business of Sprint Corporation) - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: o the effects of vigorous competition in the markets in which Sprint operates; o the costs and business risks associated with providing new services and entering new markets necessary to provide nationwide or global services; o the ability of the PCS Group to continue to grow a significant market presence; o the effects of mergers and consolidations within the telecommunications industry; o the uncertainties related to Sprint's strategic investments; o the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; o unexpected results of litigation filed against Sprint; o the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes including the impact of the Telecommunications Act of 1996, or other external factors over which Sprint has no control; and o other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- Sprint FON Group - -------------------------------------------------------------------------------- Operating Segments Sprint's business is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses, and the PCS wireless telephony products and services business. The FON Group includes the global markets division, the local division and the product distribution and directory publishing businesses, and the PCS Group includes the PCS wireless telephony products and services business. The PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division and the product distribution and directory publishing businesses. During 2000, Sprint changed the segments comprising the FON Group to align financial reporting with changes in how Sprint manages the FON Group's operations and assesses its performance. The FON Group operates in three business segments: the global markets division, the local division and the product distribution and directory publishing businesses. Board Discretion Regarding Tracking Stocks Sprint's Board 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. Global Markets Division The global markets division provides a broad suite of communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. These services include domestic and international voice; Internet; data communications such as frame relay access and transport, web hosting, virtual private networks, and managed security services; and broadband services. Sprint is deploying integrated communications services, referred to as Sprint ION(R). Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide advanced services in the competitive local service market. Sprint uses various advanced services last-mile technologies, including dedicated access and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS). Digital Subscriber Line technology enables high-speed transmission of data over existing copper telephone lines between the customer and the service provider, and MMDS is a fixed wireless network that distributes signals through microwave from a single transmission point to multiple receiving points. 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 MMDS capabilities from cable TV services to high-speed data services. Global markets operating results reflect the development costs and the operating revenues and expenses of these broadband fixed wireless services. Sprint intends to provide broadband data and voice services to additional markets served by these capabilities. Included in the global markets division are the costs of establishing international operations beginning in 2000. Local Division The local division consists mainly of regulated local phone companies serving more than 8.3 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, consumer long distance services to customers within its franchise territories, sales of telecommunications equipment, and other long distance services within certain regional calling areas, or LATAs. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. - -------------------------------------------------------------------------------- Results of Operations - --------------------------------------------------------------------------------
Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 4,358 $ 4,404 $ (46) (1.0)% Operating expenses 3,826 3,646 180 4.9% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income $ 532 $ 758 $ (226) (29.8)% -- ------------- -- -------------- -- ------------- Income from continuing operations $ 316 $ 445 $ (129) (29.0)% -- ------------- -- -------------- -- -------------
In the 2001 first quarter, income from continuing operations includes net nonrecurring gains of $9 million from investment activities. In the 2000 first quarter, income from continuing operations includes net nonrecurring gains of $17 million from investment activities. Excluding nonrecurring items, income from continuing operations was $307 million in the 2001 quarter and $428 million in the 2000 first quarter. - -------------------------------------------------------------------------------- Segmental Results of Operations - --------------------------------------------------------------------------------
Global Markets Division Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Voice $ 1,736 $ 1,780 $ (44) (2.5)% Data 502 474 28 5.9% Internet 249 218 31 14.2% Other 80 155 (75) (48.4)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total net operating revenues 2,567 2,627 (60) (2.3)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,489 1,322 167 12.6% Selling, general and administrative 751 775 (24) (3.1)% Depreciation and amortization 302 265 37 14.0% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,542 2,362 180 7.6% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income $ 25 $ 265 $ (240) (90.6)% -- ------------- -- -------------- -- ------------- Operating margin 1.0% 10.1% -- ------------- -- --------------
Net Operating Revenues Net operating revenues decreased 2% in the 2001 first quarter from the same period in 2000 due to a more competitive pricing environment, a change in the mix of products sold and a decline in professional legacy data services, which more than offset minute growth of 21% in the same period. The decrease was partly offset by growth in data and Internet communications services revenues. Revenue and operating income growth will likely continue to be impacted by pricing pressures and increased spending to support the growth of Internet Protocol services. Voice Revenues Voice revenues decreased 2% in the 2001 first quarter from the same 2000 period due to a decline in consumer and business voice revenues resulting from a more competitive pricing environment. Consumer voice revenues were impacted by lower calling card usage due to the increased use of wireless phones partly offset by increased prepaid and international services. The decline in business voice revenues mainly reflects decreased inbound and outbound toll-free calls. Data Revenues Data revenues reflect sales of current-generation data services including asynchronous transfer mode and frame relay services. These revenues increased 6% in the 2001 first quarter from the same 2000 period due to increased sales as a result of continued demand for data products. Internet Revenues Internet revenues increased 14% in the 2001 first quarter from the same 2000 period due to strong growth in dedicated service revenues and moderate growth in dial-up Internet service provider-related revenues. The growth in Internet revenues reflects continued demand and increased use of the Internet. Other Revenues Other revenues decreased 48% in the 2001 first quarter from the same 2000 period due to a decline in professional services and legacy data services. The decrease also reflects cable capacity sales in the 2000 first quarter with no corresponding cable capacity sales in the 2001 first quarter. Costs of Services and Products Costs of services and products include interconnection costs paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers, costs to operate and maintain the long distance network and the Internet protocol network, costs of equipment and transmission capacity sales, and costs related to the development and deployment of Sprint ION. These costs increased 13% in the 2001 first quarter from the same 2000 period. Interconnection costs increased 18% in the 2001 first quarter from the same 2000 period due to increased calling volumes. All other costs of services and products increased 4% in the 2001 first quarter from the same 2000 period due to increased network costs of the long distance operation and the continued expansion of Sprint ION business services nationwide and the continued launch of Sprint ION consumer services in select markets. Total costs of services and products for global markets were 58.0% of net operating revenues in the 2001 first quarter compared to 50.3% for the same period a year ago. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense decreased 3% in the 2001 first quarter from the same 2000 period due to a reduction in advertising and promotion costs in both the consumer and business markets and a strong emphasis on cost control, partly offset by an increase in bad debt expense and increased marketing and promotions of Internet services. SG&A expense was 29.3% of net operating revenues in the 2001 first quarter compared to 29.5% for the same period a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 14% in the 2001 first quarter from the same period a year ago due to an increased asset base to enhance network reliability, meet increased demand for voice and data-related services and upgrade capabilities for providing new products and services as well as an increasing asset base for Sprint ION. Depreciation and amortization expense was 11.8% of net operating revenues in the 2001 first quarter compared to 10.1% for the same period a year ago.
Local Division Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues Local service $ 732 $ 696 $ 36 5.2% Network access 505 511 (6) (1.2)% Long distance 186 171 15 8.8% Other 130 151 (21) (13.9)% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total net operating revenues 1,553 1,529 24 1.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 496 480 16 3.3% Selling, general and administrative 338 337 1 0.3% Depreciation and amortization 281 279 2 0.7% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 1,115 1,096 19 1.7% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 438 $ 433 $ 5 1.2% --- ------------- -- -------------- -- ------------- Operating margin 28.2% 28.3% --- ------------- -- --------------
Net Operating Revenues At the beginning of the 2000 third quarter, Sprint changed its transfer pricing for certain transactions between FON Group entities. The main effect of this change was a reduction in the local division's "Net Operating Revenues - Other Revenues." In addition, Sprint's local division transferred a customer service and telemarketing organization to the PCS Group at the beginning of the 2000 second quarter. For comparative purposes, the following discussion of local division results assumes the transfer pricing change and the transfer of the customer service and telemarketing organization occurred at the beginning of 2000. Adjusting for the transfer pricing change and this transfer, operating margin would have been 28.1% for the 2000 first quarter. Net operating revenues increased 4% in the 2001 first quarter from the same 2000 period. This increase mainly reflects increased sales of network-based services such as Caller ID and Call Waiting and steady customer access line growth. Sales of network-based services increased due to strong demand for bundled services which combine local service, network-based features and long distance calling. The local division ended the 2001 first quarter with more than 8.3 million switched access lines, a 2.2% increase during the past 12 months. Access line growth was impacted by increased disconnections of non-paying customers and the transition of some business customers from switched access to dedicated services. On a voice-grade equivalent basis, which includes both traditional switched services and high capacity lines, access lines grew 22% during the past 12 months. This growth reflects many business customers switching from individual lines to high capacity dedicated circuits. Local Service Revenues Local service revenues, derived from local exchange services, grew 5% in the 2001 first quarter from the same 2000 period because of continued demand for network-based services and steady customer access line growth. Revenue growth also reflects increased sales of data products. Network Access Revenues Network access revenues, derived from long distance phone companies using the local network to complete calls, decreased 1% in the 2001 first quarter from the same 2000 period. Strong growth in special access services were more than offset by a 3% decline in minutes of use and FCC-mandated access rate reductions. Access rate reductions took effect in July 2000. Long Distance Revenues Long distance revenues are mainly derived from providing consumer long distance services to customers within Sprint's local franchise territories and other long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues increased 9% in the 2001 first quarter from the same 2000 period, reflecting the success of bundled services, which include long distance calling. Other Revenues Other revenues increased 11% in the 2001 first quarter from the same 2000 period because of an increase in equipment sales. Costs of Services and Products Costs of services and products include costs to operate and maintain the local network and costs of equipment sales. These costs increased 6% in the 2001 first quarter compared to the same 2000 period due to increased equipment sales, higher access costs associated with long distance revenues and reciprocal compensation costs for additional terminating traffic from wireless and competitive local exchange carriers. Costs of services and products was 31.9% of net operating revenues in the 2001 first quarter compared to 31.2% for the same period a year ago. Selling, General and Administrative Expense SG&A expense increased 2% in the 2001 first quarter compared to the same 2000 period mainly due to an increase in the provision for uncollectible customer accounts. SG&A expense was 21.8% of net operating revenues in the 2001 first quarter compared to 22.1% for the same period a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 1% in the 2001 first quarter compared to the same 2000 period reflecting increased capital expenditures somewhat offset by an increase to the depreciable lives for certain assets. Depreciation and amortization expense was 18.1% of net operating revenues in the 2001 first quarter compared to 18.6% for the same period a year ago.
Product Distribution and Directory Publishing Businesses Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ----------------------------------- ------------------------------- 2001 2000 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 494 $ 461 $ 33 7.2% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 364 351 13 3.7% Selling, general and administrative 48 39 9 23.1% Depreciation and amortization 4 4 - - - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 416 394 22 5.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 78 $ 67 $ 11 16.4% --- ------------- -- -------------- -- ------------- Operating margin 15.8% 14.5% --- ------------- -- --------------
Net operating revenues increased 7% in the 2001 first quarter compared to the same 2000 period. Nonaffiliated revenues accounted for approximately 60% of revenues in both the 2001 and 2000 first quarters. Nonaffiliated revenues increased 2% in the 2001 first quarter compared to the same 2000 period. The increase in nonaffiliated revenues was mainly due to the consolidation of a directory publishing partnership. Beginning in the 2000 third quarter, the directory publishing partnership, previously accounted for as an equity method investment, was fully consolidated due to a restructuring in the partnership, which resulted in transfer of control to Sprint. The increase in nonaffiliated revenues was partly offset by a decline in equipment sales due to a loss of a customer contract in the second half of 2000. Affiliated revenues increased 18% in the 2001 first quarter compared to the same 2000 period reflecting a change in the mix of the local division's capital program to more network equipment and components. In the 2000 first quarter, affiliate sales were lower because the local division generally purchased electronics and software directly from manufacturers. Operating expenses increased 6% in the 2001 first quarter compared to the same 2000 period reflecting increased SG&A expense and costs of services and products due to the consolidation of the directory publishing partnership. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense Interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The difference between Sprint's actual interest rates and the rates charged to the PCS Group is reflected as a reduction in the FON Group's interest expense as follows: Quarters Ended March 31, ------------------------ 2001 2000 - --------------------------------------------------------- (millions) FON Group interest costs $ 91 $ 97 Credit from the PCS Group (64) (58) ------------------------ Interest expense $ 27 $ 39 ------------------------ The FON Group's effective interest rate on long-term debt was 7.4% in the 2001 first quarter and 7.6% in the 2000 first quarter. The decrease mainly reflects the retirement of debt with higher interest rates. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings, deferred compensation plans, customer deposits, and the credit from the PCS Group detailed above have been excluded so as not to distort the effective interest rate on long-term debt. Other Income, Net Other income (expense) consisted of the following: Quarters Ended March 31, ----------------------- 2001 2000 - ------------------------------------------------------ (millions) Dividend and interest income $ 13 $ 11 Equity in net losses of (11) (25) affiliates Net gains from investments - 26 Other, net 3 (5) - ------------------------------------------------------ Total $ 5 $ 7 ----------------------- Dividend and interest income for both the 2001 and 2000 first quarter reflects dividends earned on cost method investments and interest earned on temporary investments. In the 2001 first quarter, investments accounted for using the equity method consisted primarily of the FON Group's investments in Intelig, a long distance provider in Brazil, and other strategic investments. In the 2000 first quarter, investments accounted for using the equity method also included the FON Group's investments in EarthLink, Inc., an Internet service provider, and Call-Net, a long distance operation in Canada. Net gains from investments in the 2000 first quarter mainly include a gain associated with equity securities used to retire debt instruments offset by net losses on miscellaneous investment activities. Income Taxes See Note 3 of Condensed Notes to Combined Financial Statements for information about the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Discontinued Operation, Net In the 2000 first quarter, Sprint sold its interest in Global One to France Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. As a result of Sprint's sale of its interest in Global One, the FON Group's gain on sale has been reported as a discontinued operation. The FON Group recorded an after-tax gain related to the sale of Sprint's interest in Global One of $675 million in the first quarter of 2000. Extraordinary Item, Net In the 2001 first quarter, Sprint repaid, prior to scheduled maturities, $18 million of first mortgage bonds. These bonds had an interest rate of 9.9%. This resulted in a $1 million after-tax extraordinary loss for the FON Group. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - ------------------------------------------------------ (millions) Combined assets $ 24,029 $ 23,649 -------------------------------- The FON Group's combined assets increased $380 million in the 2001 first quarter. Net property, plant and equipment increased $527 million reflecting capital expenditures to support the build-out of the Internet protocol network, long distance and local network enhancements, and Sprint ION development and hardware deployment, partly offset by depreciation. Offsetting decreases in the FON Group's combined assets primarily reflect a reduction in current assets. See "Liquidity and Capital Resources" for more information about changes in the FON Group's Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Sprint's Board of Directors has the power to make determinations that may impact the financial and liquidity position of each of the tracking stock groups. This power includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding the timing and amount of capital expenditures. The actions of the Board of Directors are subject to its fiduciary duties to all shareholders of Sprint, and not just to the holders of a particular class of common stock. Given the above, it may be difficult for investors to assess each group's liquidity and capital resources and in turn the future prospects of each group based on past performance. Operating Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided by operating $ 616 $ 1,023 activities ------------------------------- Operating cash flows decreased $407 million in the 2001 first quarter mainly reflecting increases in working capital requirements and a decline in the FON Group's operating results. Investing Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows used by investing $ (1,153) $ (413) activities ------------------------------- Capital expenditures totaled $1.1 billion in the 2001 first quarter and $758 million in the same 2000 period. Global markets division capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services and upgrade capabilities for providing new products and services and to continue development and hardware deployment for Sprint ION. The local division incurred capital expenditures to accommodate voice grade equivalent growth, expand capabilities for providing enhanced services and continue the build-out of high-speed DSL services. Other FON Group capital expenditures were incurred for Sprint's World Headquarters Campus. In February 2000, the FON Group received $1.4 billion from the sale of its investment in Global One. "Investments in and loans to affiliates, net" consisted mainly of the FON Group's investments in EarthLink and Intelig. Financing Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided (used) by financing $ 475 $ (519) activities ------------------------------- Financing activities in the 2001 first quarter mainly reflect net borrowings of $606 million compared to net payments on borrowings of $381 million in the same 2000 period. The FON Group paid cash dividends of $105 million in both the 2001 and 2000 first quarter periods. Capital Requirements The FON Group's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be $6.0 billion. FON Group capital expenditures are expected to be $5.9 billion in 2001. The global markets division and local division will require the majority of this total. Investments in affiliates are expected to require cash of approximately $100 million. Dividend payments are expected to approximate $440 million. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's board of directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Supplemental Information -- Annex II Sprint PCS Group Combined Financial Information The PCS Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the PCS Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation.
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended March 31, 2001 2000 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 2,051 $ 1,220 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 1,134 894 Selling, general and administrative 664 507 Depreciation 401 289 Amortization 134 132 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 2,333 1,822 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Loss (282) (602) Interest expense (285) (220) Other income (expense), net (20) 26 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss from continuing operations before income taxes (587) (796) Income tax benefit 194 286 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss from continuing operations (393) (510) Extraordinary items, net - (3) Cumulative effect of change in accounting principle, net 2 - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Loss $ (391) $ (513) -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF COMPREHENSIVE LOSS Sprint PCS Group (Unaudited) (an integrated business of Sprint Corporation) (millions) - --------------------------------------------- ----------------- ----------------- ---------------- --- ------------- Quarters Ended March 31, 2001 2000 - --------------------------------------------- ----------------- ----------------- ---------------- --- ------------- Net Loss $ (391) $ (513) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income (Loss) Unrealized holding gains on securities - 3 Income tax expense - (1) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income - 2 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Loss $ (391) $ (511) -- ------------- --- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED BALANCE SHEETS Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - ------------------------------------------------------------------------------------------------------------------------ March 31, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ (Unaudited) Assets Current assets Cash and equivalents $ 120 $ 117 Accounts receivable, net of allowance for doubtful accounts of $120 and $96 920 902 Inventories 570 515 Prepaid expenses 126 90 Current tax benefit receivable from the FON Group 103 26 Other 97 200 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 1,936 1,850 Property, plant and equipment Network equipment 8,057 7,540 Construction work in progress 1,664 1,713 Buildings and leasehold improvements 2,215 2,108 Other 811 756 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 12,747 12,117 Accumulated depreciation (2,985) (2,595) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 9,762 9,522 Investments in affiliates 162 148 Intangible assets Goodwill 4,548 4,548 PCS licenses 3,059 3,059 Customer base 745 747 Microwave relocation costs 405 411 Other 46 46 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 8,803 8,811 Accumulated amortization (1,209) (1,077) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 7,594 7,734 Other 511 509 - ------------------------------------------------------------------------------------------------------------------------- Total $ 19,965 $ 19,763 - ------------------------------------------------------------------------------------------------------------------------- Liabilities and Combined Attributed Net Assets Current liabilities Short-term borrowings including current maturities of long-term debt $ 678 $ 244 Accounts payable 458 687 Construction obligations 896 997 Accrued taxes 212 203 Accrued interest 288 119 Payables to the FON Group 257 296 Other 854 846 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,643 3,392 Long-term debt and capital lease obligations 14,463 14,136 Deferred credits and other liabilities Deferred income taxes 24 90 Other 271 253 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 295 343 Redeemable preferred stock 526 526 Combined attributed net assets 1,038 1,366 - ------------------------------------------------------------------------------------------------------------------------- Total $ 19,965 $ 19,763 - ------------------------------------------------------------------------------------------------------------------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint PCS Group (millions) (an integrated business of Sprint Corporation) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Quarters Ended March 31, 2001 2000 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net loss $ (391) $ (513) Adjustments to reconcile net loss to net cash used by operating activities: Equity in net losses of affiliates 34 - Depreciation and amortization 535 421 Deferred income taxes (79) 60 Changes in assets and liabilities: Accounts receivable, net (18) (1) Inventories and other current assets (36) (18) Accounts payable and other current liabilities (129) 20 Current tax benefit receivable from the FON Group (77) (154) Receivables from and payables to the FON Group, net (42) 88 Noncurrent assets and liabilities, net 21 17 Other, net 7 (13) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by operating activities (175) (93) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (655) (693) Other, net 23 122 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (632) (571) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from debt 2,400 - Payments on debt (1,641) (370) Dividends paid (4) (4) Proceeds from common stock issued 6 30 Advances from the FON Group - 928 Other, net 49 119 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by financing activities 810 703 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase in Cash and Equivalents 3 39 Cash and Equivalents at Beginning of Period 117 16 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 120 $ 55 --- ------------- -- ------------- See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS Sprint PCS Group (Unaudited) (an integrated business of Sprint Corporation The information in this supplement has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the combined interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present the PCS Group's combined financial position, results of operations, cash flows and comprehensive loss. The combined financial information is provided as additional disclosure to investors regarding the operations of the PCS Group. Certain information and footnote disclosures normally included in combined financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 2000 Form 10-KA. Operating results for the 2001 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- 1. Basis of Combination and Presentation - -------------------------------------------------------------------------------- FON common stock and PCS common stock are intended to reflect the performance of the FON and PCS groups. However, they are classes of common stock of Sprint, not of the group they are intended to track. Accordingly, the PCS stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON stock is intended to reflect the financial results and economic value of the global markets division, the local division, and the product distribution and directory publishing businesses. The combined FON Group financial statements, together with the combined PCS Group financial statements, include all the accounts in Sprint's consolidated financial statements prior to inter-group eliminations. The combined financial statements for each group are prepared in accordance with accounting principles generally accepted in the United States. Investments in entities in which the PCS Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 2). Transactions between the PCS Group and the FON Group have not been eliminated in the combined financial statements of either group. The PCS Group is an integrated business of Sprint Corporation and does not constitute a stand-alone entity. The purpose of this combined financial information is to provide investors additional information to use in analyzing the results of operations and financial condition of the PCS Group, and this combined financial information should be read in conjunction with the consolidated financial statements of Sprint Corporation. Investors in PCS stock are shareholders of Sprint and are subject to the risks related to an equity investment in Sprint and all of Sprint's businesses, assets and liabilities. The assets and liabilities allocated by Sprint's Board to the PCS Group remain assets and liabilities of Sprint Corporation and are therefore subject to the claims of Sprint's creditors generally. In the event of the liquidation or winding up of Sprint Corporation, assets of Sprint remaining for distribution to Sprint's common shareholders will be distributed to holders of PCS stock based on the liquidation value of such shares as provided in Sprint's articles of incorporation, which may differ from the Board's allocation of assets and liabilities among the groups. The Board of Directors of Sprint may, subject to the restrictions in Sprint's articles of incorporation, change the allocation of the assets and liabilities that comprise each of the FON Group and the PCS Group without shareholder approval. Given the Board's discretion in these matters, it may be difficult to assess the future prospects of each group based on past performance. The PCS Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or group equity as previously reported. Allocation of Shared Services Sprint directly assigns, where possible, certain general and administrative costs to the FON Group and the PCS Group based on their actual use of those services. Where direct assignment of costs is not possible, or practical, Sprint uses other indirect methods, including time studies, to estimate the assignment of costs to each group. Cost allocation methods other than time studies include factors (general, marketing or headcount) derived from the operating unit's relative share of the predefined category referenced (e.g. headcount). Sprint believes that the costs allocated are comparable to the costs that would be incurred if the groups would have been operating on a stand-alone basis. The allocation of shared services may change at the discretion of Sprint and does not require shareholder approval. Allocation of Federal and State Income Taxes Sprint files a consolidated federal income tax return and certain state income tax returns which include FON Group and PCS Group results. In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for the allocation of income taxes between the two groups. The FON Group's income taxes are calculated as if it files returns which exclude the PCS Group. The PCS Group's income taxes reflect the PCS Group's incremental cumulative impact on Sprint's consolidated income taxes. Intergroup tax payments are satisfied on the date Sprint's related tax payment is due to or the refund is received from the applicable tax authority. The tax sharing agreement applies to tax years ending on or before December 31, 2001. For periods after December 31, 2001, Sprint's Board of Directors will adopt a tax sharing arrangement that will be designed to allocate tax benefits and burdens fairly between the FON Group and the PCS Group. Allocation of Group Financing Financing activities for the groups are managed by Sprint on a centralized basis. Debt incurred by Sprint on behalf of the groups is specifically allocated to and reflected in the financial statements of the applicable group. Interest expense is allocated to the PCS Group based on an interest rate that is substantially equal to the rate it would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. That interest rate is higher than the rate Sprint obtains on borrowings. The difference between Sprint's actual interest rate and the rate charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. Under Sprint's centralized cash management program, one group may advance funds to the other group. These advances are accounted for as short-term borrowings between the groups and bear interest at a market rate that is substantially equal to the rate that group would be able to obtain from third parties on a short-term basis. The allocation of group financing activities may change at the discretion of Sprint and does not require shareholder approval. - -------------------------------------------------------------------------------- 2. Investment - -------------------------------------------------------------------------------- At the end of March 2001, investments accounted for using the equity method consisted of the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico, and another strategic investment. In the 2000 first quarter, the PCS group did not have any equity investments. Unaudited, summarized financial information (100% basis) of these entities was as follows: Quarter Ended March 31, 2001 - ------------------------------------------------------- (millions) Results of operations Net operating revenues $ 35 ------------------ Operating loss $ (60) ------------------ Net loss $ (98) ------------------ Equity in net loss of affiliate $ (34) ------------------ - -------------------------------------------------------------------------------- 3. Income Taxes - -------------------------------------------------------------------------------- The differences that caused the PCS Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Income tax benefit at the federal statutory rate $ (205) $ (279) Effect of: State income taxes, net of federal income tax (11) (17) effect Equity in loss of foreign affiliate 13 - Goodwill amortization 10 10 Other, net (1) - - ------------------------------------------------------- Income tax benefit $ (194) $ (286) ------------------------- Effective income tax rate 33.0% 35.9% ------------------------- - -------------------------------------------------------------------------------- 4. Cumulative Effect of Change in Accounting Principle - -------------------------------------------------------------------------------- Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management Policies Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint's derivative transactions are used principally for hedging purposes and comply with Board-approved policies. Sprint enters into interest rate swap agreements to minimize exposure to interest rate movements and achieve an optimal mixture of floating and fixed rate debt while minimizing liquidity risk. The interest rate swap agreements designated as fair value hedges effectively convert Sprint's fixed rate debt to a floating rate by receiving fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. Sprint enters into interest rate swap agreements designated as cash flow hedges to reduce the impact of interest rate movements on future interest expense by effectively converting a portion of its floating rate debt to a fixed rate. In certain business transactions, Sprint is granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the terms of the business transactions and are not designated as hedging instruments. Sprint's foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. Sprint's primary transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. Forward contracts, which function as natural hedges, are used to offset the impact of foreign currency fluctuations in these payments. Adoption of the Accounting Standard The derivative instruments held by the PCS Group at the adoption of SFAS No. 133 are stock warrants. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Forward contracts held during the period are not designated as hedges and, accordingly, not affected by the adoption of SFAS No. 133. The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative reduction in the net loss of $2 million (net of tax of $1 million). The reduction of the net loss was due to changes in the fair value of warrants that are not designated as hedging instruments and is recorded as a cumulative effect of change in accounting principle, net on the combined statements of operations. The PCS Group recorded a net derivative gain in earnings of $0.3 million (net of tax of $0.2 million) for the 2001 first quarter due to changes in the fair value of the stock warrants that are not designated as hedging instruments. The net derivative gain is included in other income (expense), net on the combined statements of operations. - -------------------------------------------------------------------------------- 5. Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of March 2001, short-term borrowings exceeded the long-term portion of those unused credit facilities. Accordingly, $430 million of commercial paper borrowings allocated to the PCS Group remained in current liabilities. In January 2001, Sprint allocated to the PCS Group $2.4 billion of debt consisting of notes with 5 year and 10 year maturities. These notes have interest rates ranging from 8.2% to 9.0%, which are based on rates the PCS Group would have been able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guarantee by Sprint or any member of the FON Group. - -------------------------------------------------------------------------------- 6. Combined Attributed Net Assets - -------------------------------------------------------------------------------- Quarter Ended March 31, 2001 - ------------------------------------------------------- (millions) Beginning balance $ 1,366 Net loss (391) Dividends (4) Common stock issued 39 Tax benefit of stock compensation 3 Other, net 25 - ------------------------------------------------------- Ending balance $ 1,038 ------------------ - -------------------------------------------------------------------------------- 7. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- PCS shareholders are subject to all of the risks related to an investment in Sprint and the PCS Group, including the effects of any legal proceedings and claims against the FON Group. In December 2000, Amalgamated Bank, an institutional shareholder, filed a derivative action purportedly on behalf of Sprint against certain of its current and former officers and directors in the Jackson County, Missouri, Circuit Court. The complaint alleges that the individual defendants breached their fiduciary duties to Sprint and were unjustly enriched by making undisclosed amendments to Sprint's stock option plans, by failing to disclose certain information concerning regulatory approval of the proposed merger of Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two additional, substantially identical, derivative actions by other shareholders have been filed. Various other suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the PCS Group's combined financial statements. - -------------------------------------------------------------------------------- 8. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- The PCS Group's cash paid (received) for interest and income taxes was as follows: Quarters Ended March 31 ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 104 $ 87 ------------------------- Income taxes $ (44) $ (265) ------------------------- The PCS Group's noncash activities included the following: Quarters Ended March 31, ------------------------- 2001 2000 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 34 $ 40 ------------------------- Tax benefit from stock compensation $ 3 $ 30 ------------------------- Stock received for stock options exercised $ 1 $ 6 ------------------------- - -------------------------------------------------------------------------------- 9. Merger Termination - -------------------------------------------------------------------------------- On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of directors of both companies terminated their merger agreement, previously announced in October 1999, as a result of regulatory opposition to the merger. - -------------------------------------------------------------------------------- 10. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and provides consistent standards for distinguishing transfers from sales and secured borrowings. This statement is effective for transactions occurring after March 31, 2001 and is not expected to have a material impact on the PCS Group's combined financial statements. - -------------------------------------------------------------------------------- 11. Subsequent Event - -------------------------------------------------------------------------------- At the Annual Meeting of Shareholders of Sprint held on April 17, 2001, the shareholders approved an amendment to Sprint's Articles of Incorporation to o increase the authorized shares of Series 1 PCS Common Stock from 1.25 billion shares to 3 billion shares, o increase the authorized shares of Series 2 PCS Common Stock from 500 million shares to 1 billion shares, and o increase the total number of shares of authorized capital stock from 6.77 billion shares to 9.02 billion shares. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION Sprint PCS Group AND RESULTS OF OPERATIONS (an integrated business of Sprint Corporation) - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: o the effects of vigorous competition in the markets in which Sprint operates; o the costs and business risks associated with providing new services and entering new markets necessary to provide nationwide or global services; o the ability of the PCS Group to continue to grow a significant market presence; o the effects of mergers and consolidations within the telecommunications industry; o the uncertainties related to Sprint's strategic investments; o the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; o unexpected results of litigation filed against Sprint; o the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes including the impact of the Telecommunications Act of 1996, or other external factors over which Sprint has no control; and o other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. - -------------------------------------------------------------------------------- Sprint PCS Group - -------------------------------------------------------------------------------- Operating Segments Sprint's business is divided into four lines of business: the global markets division, the local division, the product distribution and directory publishing businesses, and the PCS wireless telephony products and services business. The FON Group includes the global markets division, the local division and the product distribution and directory publishing businesses, and the PCS Group includes the PCS wireless telephony products and services business. The PCS common stock is intended to reflect the financial results and economic value of the PCS wireless telephony products and services business. The FON common stock is intended to reflect the financial results and economic value of the global markets division, the local division and the product distribution and directory publishing businesses. Board Discretion Regarding Tracking Stocks Sprint's Board 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 it 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. PCS Group The PCS Group includes Sprint's wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. The PCS Group operates PCS systems in over 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to provide service to the entire United States population including Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches more than 225 million people. The PCS Group provides nationwide service through: o operating its own digital network in major U.S. metropolitan areas, o affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, o roaming on other providers' analog cellular networks using dual-band/dual-mode handsets, and o roaming on other providers' digital PCS networks that use code division multiple access (CDMA). The PCS Group also provides wholesale PCS services to companies that resell the services to their customers on a retail basis. These companies pay the PCS Group a discounted price for their customers' usage, but bear the costs of acquisition and customer service. The wireless industry, including the PCS Group, typically generates a higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions.
- ------------------------------------------------------------------------------------------------------------------- Results of Operations - ------------------------------------------------------------------------------------------------------------------- Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2001 2000 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 2,051 $ 1,220 $ 831 68.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 1,134 894 240 26.8% Selling, general and administrative 664 507 157 31.0% Depreciation and amortization 535 421 114 27.1% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,333 1,822 511 28.0% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (282) $ (602) $ 320 53.2% -- ------------- -- -------------- -- ------------- Operating income (loss) before depreciation and amortization $ 253 $ (181) $ 434 NM -- ------------- -- -------------- -- ------------- NM = Not meaningful
The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 23% of net operating revenues in the 2001 first quarter. These revenues were 24% of net operating revenues in the 2000 first quarter. Net Operating Revenues Quarters Ended March 31, --------------------- 2001 2000 - ------------------------------------------------------- Customers (millions) 10.4 6.6 --------------------- Average monthly service revenue per user (ARPU) $ 60 $ 57 --------------------- Customer churn rate 2.5% 2.9% --------------------- The PCS Group's net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges, usage charges and activation fees. Subscriber revenues increased 76% in the 2001 first quarter from the same 2000 period mainly reflecting an increase in the average number of customers and an increase in ARPU. The PCS Group added 826,000 customers in the 2001 first quarter before the sale of 14,000 customers to an affiliate, ending the quarter with nearly 10.4 million customers compared to 6.6 million customers at the end of the 2000 first quarter. ARPU was $60 for the 2001 first quarter compared to $57 in the 2000 first quarter. The increase in ARPU was mainly due to the implementation of activation charges in the 2000 second quarter and customers subscribing to higher usage service plans. Subscriber revenues were also aided by the increase in resale customers. The companies that the PCS Group serves on a wholesale basis added 49,000 customers in the 2001 first quarter ending the quarter with approximately 359,000 customers compared to approximately 77,000 customers at the end of the 2000 first quarter. In the 2001 first quarter, the customer churn rate improved reflecting expanded network coverage, increased percentage of customers under contract and the success of several customer retention initiatives. Revenues from sales of handsets and accessories were approximately 10% of net operating revenues in the 2001 first quarter. These revenues as a percentage of net operating revenues were approximately 14% in the 2000 first quarter. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses Quarters Ended March 31, --------------------- 2001 2000 - ------------------------------------------------------- Acquisition costs per gross customer addition (CPGA) $ 360 $ 390 --------------------- Monthly cash costs per user (CCPU) $ 34 $ 37 --------------------- The PCS Group's costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 27% in the 2001 first quarter from the same 2000 period reflecting an increase in the average number of customers and expanded market coverage. SG&A expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 31% in the 2001 first quarter from the same 2000 period reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. CPGA, including equipment subsidies and marketing costs, have improved approximately 8% in the 2001 first quarter from the same 2000 period. Lower equipment costs contributed to the improvement. CCPU consists of costs of service revenues, service delivery and other general and administrative costs. CCPU decreased approximately 7% in the 2001 first quarter from the same 2000 period. The improvements reflect successful expense management and scale benefits resulting from the increased customer base. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 27% in the 2001 first quarter from the same 2000 period mainly reflecting depreciation of the network assets placed in service during 2001 and 2000. Additionally, depreciation of certain network assets was increased in the 2001 first quarter to reflect the accelerated replacement of the assets to accommodate network technology upgrades. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense The PCS Group's effective interest rate on long-term debt was 8.7% in the 2001 first quarter and 8.6% in the 2000 first quarter. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings and deferred compensation plans have been excluded so as not to distort the PCS Group's effective interest rate on long-term debt. Interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The PCS Group's interest expense includes $64 million in the 2001 first quarter and $58 million in the 2000 first quarter resulting from the difference between Sprint's actual interest rates and the rates charged to the PCS Group. These costs are derived from both long-term and short-term borrowings. Only the long-term portion of these costs are in the effective interest rates above. Other Income (Expense), Net Other income (expense) consisted of the following: Quarters Ended March 31, ---------------------- 2001 2000 - ---------------------------------------------------- (millions) Dividend and interest income $ 1 $ - Equity in net losses of affiliates (34) - Gains on sales of assets 10 28 Other, net 3 (2) - ---------------------------------------------------- Total $ (20) $ 26 ---------------------- In the 2001 first quarter, investments accounted for using the equity method consisted of the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico, and another strategic investment. In the 2000 first quarter, the PCS group did not have any equity investments. Gains on sales of assets in both the 2001 and 2000 first quarter reflect the sales of certain wireless customers and associated network infrastructure. Income Taxes See Note 3 of Condensed Notes to Combined Financial Statements for the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Extraordinary Items, Net In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- March 31, December 31, 2001 2000 - ------------------------------------------------------ (millions) Combined assets $ 19,965 $ 19,763 -------------------------------- The PCS Group's combined assets increased $202 million in the 2001 first quarter. Net property, plant and equipment increased $240 million mainly reflecting capital expenditures to support the PCS network buildout and expansion, partly offset by depreciation and network asset sales. The current tax benefit receivable from the FON Group increased $77 million reflecting the PCS Group's 2001 year-to-date current income tax benefit recognized, offset by payments from the FON Group during the period. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Offsetting decreases in the PCS Group's combined assets primarily reflect amortization of goodwill and other intangible assets. See "Liquidity and Capital Resources" for more information about changes in the PCS Group's Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Sprint's Board of Directors has the power to make determinations that may impact the financial and liquidity position of each of the tracking stock groups. This power includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding the timing and amount of capital expenditures. The actions of the Board of Directors are subject to its fiduciary duties to all shareholders of Sprint, and not just to the holders of a particular class of common stock. Given the above, it may be difficult for investors to assess each group's liquidity and capital resources and in turn the future prospects of each group based on past performance. Operating Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows used by operating activities $ (175) $ (93) ------------------------------- Operating cash flows decreased $82 million in the 2001 first quarter primarily reflecting an increase in working capital requirements partly offset by improved operating results. Investing Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows used by investing $ (632) $ (571) activities ------------------------------- Capital expenditures, which are the PCS Group's largest investing activity, totaled $655 million in the 2001 first quarter, compared to $693 million in the 2000 first quarter. Capital expenditures in both years were mainly for the continued buildout and expansion of the PCS network. Financing Activities Quarters Ended March 31, ------------------------------- 2001 2000 - ------------------------------------------------------ (millions) Cash flows provided by financing activities $ 810 $ 703 ------------------------------- In the 2001 first quarter, financing activities mainly reflect net borrowings of $759 million used mainly to fund capital requirements. In the 2000 first quarter, financing activities mainly reflect advances from the FON Group of $928 million used primarily to fund capital requirements and repay existing debt. Capital Requirements The PCS Group's 2001 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be between $3.7 and $4.0 billion. Capital expenditures are expected to range between $3.3 and $3.5 billion, and investments in affiliates are expected to be between $350 and $450 million. PCS preferred stock dividend payments are expected to total $15 million in 2001, including payments to the FON Group, in the amount of $8 million, for its preferred intergroup interest. -----END PRIVACY-ENHANCED MESSAGE-----