10-Q 1 sslp2q01.txt SPRINT SPECTRUM LP FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ------------------------ 333-06609-01 Commission file number 333-06609-02 --------------------------------------------------------- SPRINT SPECTRUM L.P. SPRINT SPECTRUM FINANCE CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 48-1165245 DELAWARE 43-1746537 ------------------------------------- ---------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Nos.) 6160 Sprint Parkway, Overland Park, Kansas 66251 --------------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (800) 829-0965 ---------------------------- Securities registered pursuant to Section 12(b) and 12(g) of the Act: None The registrants meet the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and are therefore filing this Form with the reduced disclosure format. 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______ -------- At August 1, 2001 Sprint Spectrum Finance Corporation had 100 common shares outstanding.

Part I. Item 1.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL Sprint Spectrum L.P. STATEMENTS (Unaudited) -------------------------------------------------------------------------------- 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 Spectrum L.P.'s consolidated financial position, results of operations and cash flows. 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 Spectrum L.P.'s 2000 Form 10-K. 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. General -------------------------------------------------------------------------------- Sprint Spectrum L.P., with its wholly owned subsidiaries (Sprint Spectrum), began commercial code division multiple access operations late in the 1996 fourth quarter. Sprint Spectrum is wholly owned by Sprint Corporation (Sprint). 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. -------------------------------------------------------------------------------- 2. Basis of Consolidation and Presentation -------------------------------------------------------------------------------- The consolidated financial statements include the accounts of Sprint Spectrum and its subsidiaries. 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 partners' capital as previously reported. -------------------------------------------------------------------------------- 3. 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 became effective for Sprint Spectrum on January 1, 2001 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for the changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of the relationships designated based on the exposures hedged. Changes in fair value of derivatives designated as fair value hedges are recognized in earnings along with fair value changes of the hedged item. Changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Changes in fair value of derivative instruments that do not qualify for hedge relationship designation are recognized in earnings. Risk Management Policies Financial strategies are determined by Sprint on a centralized basis. Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Sprint's derivative transactions are used for hedging purposes only 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. Derivative Accounting Under the Standard The derivative instruments Sprint Spectrum holds are stock warrants. The stock warrants are not designated as hedging instruments and changes in the fair values of these derivative instruments are recognized in earnings during the period of change. Upon adoption of SFAS No. 133, Sprint Spectrum recorded a $2 million cumulative reduction to net loss. 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 in "Cumulative effect of change in accounting principle" in Sprint Spectrum's Consolidated Statements of Operations. Sprint Spectrum recorded a net derivative loss in earnings of $0.2 million for the 2001 second quarter and a net derivative gain in earnings of $0.3 million for the year-to-date period due to changes in the fair value of the stock warrants that are not designated as hedging instruments. The net derivative gain and loss are included in Other income, net in the Consolidated Statements of Operations. -------------------------------------------------------------------------------- 4. Debt -------------------------------------------------------------------------------- Sprint reclassifies short-term borrowings to long-term debt because of Sprint's intent and ability to refinance these borrowings on a long-term basis. The amount reclassified is limited to the long-term portion of Sprint's unused credit facilities. At the end of June 2001, short-term borrowings exceeded the long-term portion of those credit facilities. Accordingly, the amount of commercial paper borrowings allocated to Sprint Spectrum and reclassified to long-term debt was limited to $1.1 billion. Conversely, $984 million of commercial paper borrowings remained in current liabilities. During the 2001 year-to-date period, Sprint allocated $750 million of its debt securities maturing in 2006 to Sprint Spectrum at an interest rate of 8.2%. The allocated debt was used mainly to repay existing debt. -------------------------------------------------------------------------------- 5. Litigation, Claims and Assessments -------------------------------------------------------------------------------- Various suits arising in the ordinary course of business are pending against Sprint Spectrum. Management cannot predict the final outcome of these actions but believes they will not be material to the consolidated financial statements. -------------------------------------------------------------------------------- 6. Supplemental Cash Flows Information -------------------------------------------------------------------------------- Sprint Spectrum's cash paid for interest, net of capitalized interest, totaled $296 million in the first six months of 2001 and $262 million in the same 2000 period. -------------------------------------------------------------------------------- 7. Recently Issued Accounting Pronouncements -------------------------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 supercedes the Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and Statement No. 38, "Accounting for Pre-acquisition Contingencies of Purchased Enterprises." This statement requires accounting for all business combinations using the purchase method and changes the criteria for recognizing intangible assets apart from goodwill. This statement is effective for all business combinations initiated after June 30, 2001. Statement No. 142 supercedes APB Opinion No. 17, "Intangible Assets," and addresses how purchased intangibles should be accounted for upon acquisition. The statement proscribes the necessary accounting for both identifiable intangibles and goodwill after initial recognition. Amortization of goodwill will cease upon adoption of this statement and periodic impairment testing of all intangibles will be required. Sprint Spectrum is currently assessing the impact of this standard and expects to complete that assessment by year-end 2001. This statement is effective for fiscal years beginning after December 15, 2001. -------------------------------------------------------------------------------- 8. Subsequent Event -------------------------------------------------------------------------------- In August 2001, Sprint issued 20.4 million shares of PCS common stock and received net proceeds of $488 million. Sprint also issued $1.7 billion of equity units yielding 7.125%, which consist of a 3-year forward purchase agreement to purchase PCS common stock and a 5-year senior note. It is expected that Sprint will allocate a portion of the proceeds to Sprint Spectrum. Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Spectrum L.P. FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- General -------------------------------------------------------------------------------- In November 1998, Sprint purchased the remaining ownership interests in Sprint Spectrum Holding Company, L.P.--Sprint Spectrum's general partner--and MinorCo, L.P.--Sprint Spectrum's limited partner--from Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. At that time, Sprint allocated its wireless personal communication services (PCS) operations, including Sprint Spectrum, to the Sprint PCS Group. 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. The wireless industry, including Sprint Spectrum, 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 --------------------------------------------------------------------------------

Sprint Spectrum 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 approximately 23% of net operating revenues in the 2001 second quarter and year-to-date periods. These revenues were approximately 24% of net operating revenues in the 2000 second quarter and year-to-date periods. Net Operating Revenues 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 53% in the 2001 second quarter and 61% in the 2001 year-to-date period from the same 2000 periods reflecting an increase in the average number of customers and an increase in the monthly average revenue per user. Revenues from sales of handsets and accessories were approximately 10% of net operating revenues in the 2001 second quarter and year-to-date periods. These revenues as a percentage of net operating revenues were approximately 15% in the 2000 second quarter and year-to-date periods. As part of Sprint Spectrum's marketing plans, handsets are normally sold at prices below Sprint Spectrum's cost. Operating Expenses Costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 14% in the 2001 second quarter and 16% in the 2001 year-to-date period from the same 2000 periods reflecting the growth in customers and expanded market coverage. Selling, general and administrative (SG&A) expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 42% in the 2001 second quarter and 37% in the 2001 year-to-date period from the same 2000 periods reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include PCS licenses, customer base and microwave relocation costs, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 40% in the 2001 second quarter and 38% in the 2001 year-to-date period from the same 2000 periods mainly reflecting depreciation of the network assets placed in service during 2001 and 2000. Additionally, depreciation of certain network assets was increased in the 2001 first quarter to reflect the accelerated replacement of the assets to accommodate network technology upgrades. -------------------------------------------------------------------------------- Nonoperating Items -------------------------------------------------------------------------------- Interest Expense Sprint Spectrum's effective interest rate on long-term debt was 8.6% in the 2001 second quarter and 8.7% in the 2001 year-to-date period compared to 8.8% in the same 2000 periods reflecting interest on debt allocated by Sprint and the decrease in interest rates on variable-rate debt. Other Income, Net Other income consisted of the following:

-------------------------------------------------------------------------------- Liquidity and Capital Resources -------------------------------------------------------------------------------- Sprint Spectrum's liquidity and capital resources are managed by Sprint. Sprint funds the Sprint PCS Group's, including Sprint Spectrum's, capital expenditures, working capital and debt service requirements. -------------------------------------------------------------------------------- Financial Strategies -------------------------------------------------------------------------------- Financial strategies are determined by Sprint on a centralized basis. In certain business transactions, Sprint Spectrum 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. -------------------------------------------------------------------------------- Forward-Looking Information -------------------------------------------------------------------------------- Sprint Spectrum 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 Spectrum operates; o the costs and business risks related to entering and expanding new markets necessary to provide seamless service and new services; o the ability of Sprint Spectrum to continue to grow a significant market presence; o the impact of any unusual items resulting from ongoing evaluations of Sprint Spectrum's business strategies; o unexpected results of litigation filed against Sprint Spectrum; o the possibility of one or more of the markets in which Sprint Spectrum competes being affected by changes in political, economic or other factors such as monetary policy, legal and regulatory changes or other external factors over which Sprint Spectrum has no control; and o other risks referenced from time to time in Sprint's or Sprint Spectrum'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 Spectrum is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. Part I. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES Sprint Spectrum L.P. ABOUT MARKET RISK Omitted under the provisions of General Instruction H. Part II. Other Information Item 1. Legal Proceedings There were no reportable events during the quarter ended June 30, 2001. Item 2. Changes in Securities Omitted under the provisions of General Instruction H. Item 3. Defaults Upon Senior Securities Omitted under the provisions of General Instruction H. Item 4. Submission of Matters to a Vote of Security Holders Omitted under the provisions of General Instruction H. Item 5. Other Information There were no reportable events during the quarter ended June 30, 2001. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: (3.1)Certificate of Limited Partnership of Sprint Spectrum L.P. (incorporated by reference to Exhibit 3.2 to Sprint Spectrum's Form S-1 Registration Statement, Registration No. 333-06609, filed on June 21, 1996). (3.2)Agreement of Limited Partnership of MajorCo Sub, L.P. (renamed Sprint Spectrum L.P.), dated as of March 28, 1995, among MajorCo, L.P. (renamed Sprint Spectrum Holding Company, L.P.) and MinorCo, L.P. (incorporated by reference to Exhibit 3.6 to Sprint Spectrum's Form S-1 Registration Statement, Registration No. 333-06609, filed on June 21, 1996). (3.3)First Amendment to Agreement of Limited Partnership of Sprint Spectrum L.P., effective as of February 29, 2000 (incorporated by reference to Exhibit 3.3 to Sprint Spectrum's Annual Report on Form 10-K for the year ended December 31, 1999). (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2001. 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 SPECTRUM L.P. -------------------------- (Registrant) /s/ William J. Gunter -------------------------------------------------------------- William J. Gunter Senior Vice President and Chief Financial Officer - Sprint PCS Principal Financial Officer Date: August 14, 2001 Part I. Item 1.

-------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- Sprint Spectrum Finance Corporation (FinCo), a wholly owned subsidiary of Sprint Spectrum L.P., was formed to be a co-obligor of certain securities issued by Sprint Spectrum. FinCo has nominal assets and did not conduct any operations during 2001 and 2000. As a result, the Statements of Operations and Statements of Cash Flows have been omitted. Part I. Item 2. -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FinCo had no operations during 2001 and 2000. Part I. Item 3. -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted under the provisions of General Instruction H. Part II. Other Information Item 1. Legal Proceedings There were no reportable events during the quarter ended June 30, 2001. Item 2. Changes in Securities Omitted under the provisions of General Instruction H. Item 3. Defaults Upon Senior Securities Omitted under the provisions of General Instruction H. Item 4. Submission of Matters to a Vote of Security Holders Omitted under the provisions of General Instruction H. Item 5. Other Information There were no reportable events during the quarter ended June 30, 2001. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: (3.1)Certificate of Incorporation of Sprint Spectrum Finance Corporation (incorporated by reference to Exhibit 3.3 to Sprint Spectrum's Form S-1 Registration Statement, Registration No. 333-06609, filed on June 21, 1996). (3.2)Bylaws of Sprint Spectrum Finance Corporation (incorporated by reference to Exhibit 3.4 to Sprint Spectrum's Form S-1 Registration Statement, Registration No. 333-06609, filed on June 21, 1996). (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2001. 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 SPECTRUM FINANCE CORPORATION -------------------------------------------------------------- (Registrant) /s/ William J. Gunter -------------------------------------------------------------- William J. Gunter Senior Vice President and Chief Financial Officer - Sprint PCS Principal Financial Officer Date: August 14, 2001

SPRINT SPECTRUM L P 10-Q