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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
--------------------------
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 7997, Shawnee Mission, Kansas 66207-0997
- --------------------------------------------------------------------------------
(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
----------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----------- -------
COMMON SHARES OUTSTANDING AT October 31, 2003:
FON COMMON STOCK 903,949,604
PCS COMMON STOCK:
Series 1 847,630,317
Series 2 187,445,330
CLASS A COMMON STOCK 43,118,018
1
TABLE OF CONTENTS
Page
Reference
Part I - Financial Information
Item 1. Financial Statements
Consolidated Financial Statements (including Consolidating Information)
Consolidated Statements of Operations 1
Consolidated Statements of Comprehensive Income (Loss) 5
Consolidated Balance Sheets 9
Consolidated Statements of Cash Flows 13
Consolidated Statement of Shareholders' Equity 15
Condensed Notes to Consolidated Financial Statements 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
Item 4. Controls and Procedures 56
Part II - Other Information
Item 1. Legal Proceedings 57
Item 2. Changes in Securities 57
Item 3. Defaults Upon Senior Securities 58
Item 4. Submission of Matters to a Vote of Security Holders 58
Item 5. Other Information 58
Item 6. Exhibits and Reports on Form 8-K 58
Signature 60
Exhibits
(12) Computation of Ratios of Earnings to Fixed Charges
(31) (a) Certification of Chief Executive Officer Pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a)
(b) Certification of Chief Financial Officer Pursuant to Securities
Exchange Act of 1934 Rule 13a-14(a)
(32) (a) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Part I.
Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Quarters Ended September 30, 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,714 $ 6,798
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 3,034 2,995
Selling, general and administrative 1,644 1,900
Depreciation and amortization 1,251 1,258
Restructuring and asset impairments 1,223 121
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 7,152 6,274
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) (438) 524
Interest expense (335) (345)
Intergroup interest charge - -
Premium on early retirement of debt (2) -
Other income (expense), net 4 74
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes (771) 253
Income tax benefit 274 224
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations (497) 477
Discontinued operation, net (1) 42
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) (498) 519
Preferred stock dividends (paid) received (2) (1)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ (500) $ 518
-- ------------- --- -------------
Diluted Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Diluted weighted average common shares
Basic Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Basic weighted average common shares
DIVIDENDS PER COMMON SHARE
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ---------------------------------- ----------------------------------
2003 2002 2003 2002 2003 2002
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (164) $ (175) $ 3,538 $ 3,816 $ 3,340 $ 3,157
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(164) (175) 1,570 1,692 1,628 1,478
(11) (8) 855 953 800 955
- - 623 670 628 588
- - 1,223 126 - (5)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(175) (183) 4,271 3,441 3,056 3,016
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
11 8 (733) 375 284 141
- - (55) (75) (280) (270)
- - 98 82 (98) (82)
- - (2) - - -
(11) (8) 25 17 (10) 65
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (667) 399 (104) (146)
- - 235 85 39 139
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (432) 484 (65) (7)
- - (1) 42 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (433) 526 (65) (7)
- - 2 2 (4) (3)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ (431) $ 528 $ (69) $ (10)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (0.48) $ 0.54 $ (0.07) $ (0.01)
- 0.05 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (0.48) $ 0.59 $ (0.07) $ (0.01)
--- ------------- -- ------------- -- ------------- --- -------------
903.0 894.6 1,033.1 1,018.6
--- ------------- -- ------------- -- ------------- --- -------------
$ (0.48) $ 0.54 $ (0.07) $ (0.01)
- 0.05 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (0.48) $ 0.59 $ (0.07) $ (0.01)
--- ------------- -- ------------- -- ------------- --- -------------
903.0 892.9 1,033.1 1,018.6
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Year-to-Date September 30, 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 19,516 $ 20,138
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 8,766 9,246
Selling, general and administrative 4,894 5,407
Depreciation and amortization 3,739 3,629
Restructuring and asset impairments 1,581 144
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 18,980 18,426
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 536 1,712
Interest expense (1,052) (1,044)
Intergroup interest charge - -
Premium on early retirement of debt (21) -
Other income (expense), net (78) (234)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes (615) 434
Income tax benefit (expense) 213 37
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations (402) 471
Discontinued operation, net 1,321 120
Cumulative effect of change in
accounting principles, net 258 -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 1,177 591
Preferred stock dividends (paid) received (5) (5)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 1,172 $ 586
-- ------------- --- -------------
Diluted Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
Cumulative effect of change in accounting principle, net
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Diluted weighted average common shares
Basic Earnings (Loss) per Common Share
Continuing operations
Discontinued operation
Cumulative effect of change in accounting principle, net
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total
Basic weighted average common shares
DIVIDENDS PER COMMON SHARE
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ---------------------------------- ----------------------------------
2003 2002 2003 2002 2003 2002
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (516) $ (444) $ 10,649 $ 11,559 $ 9,383 $ 9,023
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(516) (444) 4,685 5,374 4,597 4,316
(31) (24) 2,677 2,875 2,248 2,556
- - 1,886 1,971 1,853 1,658
- - 1,571 126 10 18
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(547) (468) 10,819 10,346 8,708 8,548
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
31 24 (170) 1,213 675 475
- - (185) (232) (867) (812)
- - 278 255 (278) (255)
- - (21) - - -
(31) (24) 25 (181) (72) (29)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (73) 1,055 (542) (621)
- - 10 (261) 203 298
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (63) 794 (339) (323)
- - 1,321 120 - -
- - 258 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,516 914 (339) (323)
- - 6 5 (11) (10)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,522 $ 919 $ (350) $ (333)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (0.07) $ 0.89 $ (0.34) $ (0.33)
1.47 0.14 - -
0.29 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 1.69 $ 1.03 $ (0.34) $ (0.33)
--- ------------- -- ------------- -- ------------- --- -------------
899.9 893.2 1,026.6 1,014.2
--- ------------- -- ------------- -- ------------- --- -------------
$ (0.07) $ 0.90 $ (0.34) $ (0.33)
1.47 0.13 - -
0.29 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 1.69 $ 1.03 $ (0.34) $ (0.33)
--- ------------- -- ------------- -- ------------- --- -------------
899.9 891.2 1,026.6 1,014.2
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.375 $ 0.375 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Quarters Ended September 30, 2003 2002
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ (498) $ 519
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities 4 (18)
Income tax benefit (expense) (2) 7
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period 2 (11)
Reclassification adjustment for gains on securities
included in net income (loss) (3) (1)
Income tax expense 1 -
- ------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Net reclassification adjustment for gains
included in net income (loss) (2) (1)
Reclassifications adjustment for foreign currency translation
losses included in net income (loss), net - (7)
Unrealized gains (losses) on qualifying cash flow hedges (4) 6
Income tax benefit (expense) 1 (2)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on qualifying
cash flow hedges during the period (3) 4
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (3) (15)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (501) $ 504
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ------------------------------- -- ----------------------------------
2003 2002 2003 2002 2003 2002
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ (433) $ 526 $ (65) $ (7)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 4 (18) - -
- - (2) 7 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2 (11) - -
- - (3) (1) - -
- - 1 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (2) (1) - -
- - - - - (7)
- - (4) 6 - -
- - 1 (2) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (3) 4 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (3) (8) - (7)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ (436) $ 518 $ (65) $ (14)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Year-to-Date September 30, 2003 2002
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 1,177 $ 591
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities 44 (48)
Income tax benefit (expense) (17) 19
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period 27 (29)
Reclassification adjustment for gains on securities
included in net income (loss) (6) (2)
Income tax expense 3 -
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Reclassifications adjustment for gains included in
net income (loss) (3) (2)
Foreign currency translation adjustments (1) 3
Reclassifications adjustment for foreign currency translation
losses included in net income (loss), net - (7)
Unrealized gains (losses) on qualifying cash flow hedges (34) 34
Income tax benefit (expense) 13 (8)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized gains (losses) on qualifying
cash flow hedges (21) 26
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) 2 (9)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 1,179 $ 582
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ---------------------------------- ----------------------------------
2003 2002 2003 2002 2003 2002
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,516 $ 914 $ (339) $ (323)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 44 (48) - -
- - (17) 19 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 27 (29) - -
- - (6) (2) - -
- - 3 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (3) (2) - -
- - (1) (2) - 5
- - - - - (7)
- - (34) 34 - -
- - 13 (8) - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (21) 26 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2 (7) - (2)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,518 $ 907 $ (339) $ (325)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 2,601 $ 1,035
Accounts receivable, net of consolidated allowance for doubtful accounts of
$284 and $414 2,907 2,951
Inventories 582 682
Deferred tax asset 16 806
Current tax benefit receivable from the FON Group - -
Prepaid expenses 327 360
Intergroup receivable - -
Other 210 244
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 6,643 6,078
Assets of discontinued operation - 391
Property, plant and equipment
FON Group 35,220 35,055
PCS Group 18,306 16,978
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 53,526 52,033
Accumulated depreciation (26,139) (23,288)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 27,387 28,745
Investments in and advances to affiliates 30 73
Intangibles
Goodwill 4,401 4,401
Spectrum licenses 3,393 4,620
Other intangibles 29 26
- -------------------------------------------------------------------------------------------------------------------------
Total intangibles 7,823 9,047
Accumulated amortization (3) (2)
- -------------------------------------------------------------------------------------------------------------------------
Net intangibles 7,820 9,045
Other assets 1,016 961
- -------------------------------------------------------------------------------------------------------------------------
Total $ 42,896 $ 45,293
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ----------------------------------- -----------------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2003 2002 2003 2002 2003 2002
- ------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 1,145 $ 641 $ 1,456 $ 394
- - 1,525 1,650 1,382 1,301
- - 215 219 367 463
- - 16 42 - 764
(186) - - - 186 -
- - 166 215 161 145
(561) (536) 561 536 - -
- - 130 114 80 130
- ------------------------------------- ----------------------------------- -----------------------------------
(747) (536) 3,758 3,417 3,632 3,197
- - - 391 - -
- - 35,220 35,055 - -
- - - - 18,306 16,978
- ------------------------------------- ----------------------------------- -----------------------------------
- - 35,220 35,055 18,306 16,978
(48) (46) (19,061) (18,161) (7,030) (5,081)
- ------------------------------------- ----------------------------------- -----------------------------------
(48) (46) 16,159 16,894 11,276 11,897
(279) (280) 252 252 57 101
- - 27 27 4,374 4,374
- - 300 1,520 3,093 3,100
- - 26 24 3 2
- ------------------------------------- ----------------------------------- -----------------------------------
- - 353 1,571 7,470 7,476
- - (3) (2) - -
- ------------------------------------- ----------------------------------- -----------------------------------
- - 350 1,569 7,470 7,476
- - 682 610 334 351
- ------------------------------------- ----------------------------------- -----------------------------------
$ (1,074) $ (862) $ 21,201 $ 23,133 $ 22,769 $ 23,022
- ------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 979 $ 1,887
Current maturities of intergroup debt - -
Accounts payable 1,996 2,151
Accrued interconnection costs 585 626
Accrued taxes 364 358
Advance billings 555 510
Accrued restructuring costs 155 277
Payroll and employee benefits 471 579
Accrued interest 337 416
Intergroup payable - -
Other 994 1,004
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,436 7,808
Liabilities of discontinued operation
Current tax benefit payable to the PCS Group - -
Other - 299
Noncurrent liabilities
Long-term debt and capital lease obligations 17,025 18,405
Intergroup debt - -
Equity unit notes 1,725 1,725
Deferred income taxes 1,839 2,025
Postretirement and other benefit obligations 1,385 1,712
Other 945 769
- -------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 22,919 24,636
Redeemable preferred stock 247 256
Shareholders' equity
Common stock
Class A FT, par value $0.00 per share and $0.50 per share, 100.0 shares
authorized, 43.1 shares issued and outstanding - 22
FON, par value $2.00 per share, 4,200.0 shares authorized, 903.6 and 895.1
shares issued and outstanding 1,807 1,790
PCS, par value $1.00 per share, 4,600.0 shares authorized, 1,034.9 and
999.8 shares issued and outstanding 1,035 1,000
Capital in excess of par or stated value 10,060 9,931
Retained earnings 1,091 252
Accumulated other comprehensive loss (699) (701)
Combined attributed net assets - -
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,294 12,294
- -------------------------------------------------------------------------------------------------------------------------
Total $ 42,896 $ 45,293
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------ ----------------------------------- -----------------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2003 2002 2003 2002 2003 2002
- ------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 42 $ 1,234 $ 937 $ 653
- - (1,110) - 1,110 -
- - 734 808 1,262 1,343
- - 575 614 10 12
(11) - 222 122 153 236
- - 225 232 330 278
- - 152 251 3 26
- - 471 488 - 91
- - 68 116 269 300
(561) (536) - - 561 536
(48) (46) 530 545 512 505
- ------------------------------------ ----------------------------------- -----------------------------------
(620) (582) 1,909 4,410 5,147 3,980
(175) - 175 - - -
- - - 299 - -
- - 2,789 3,142 14,236 15,263
- - - (406) - 406
- - - - 1,725 1,725
- - 1,535 1,825 304 200
- - 1,298 1,677 87 35
- - 392 362 553 407
- ------------------------------------ ----------------------------------- -----------------------------------
- - 6,014 6,600 16,905 18,036
(279) (280) - 10 526 526
- 22 - - - -
1,807 1,790 - - - -
1,035 1,000 - - - -
10,060 9,931 - - - -
1,091 252 - - - -
(699) (701) - - - -
(13,294) (12,294) 13,103 11,814 191 480
- ------------------------------------ ----------------------------------- -----------------------------------
- - - - - -
- ------------------------------------ ----------------------------------- -----------------------------------
$ (1,074) $ (862) $ 21,201 $ 23,133 $ 22,769 $ 23,022
- ------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date September 30, 2003 2002
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ 1,177 $ 591
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Discontinued operation, net (1,321) (120)
Cumulative effect of change in accounting principle, net (258) -
Equity in net (gains) losses of affiliates 45 105
Depreciation and amortization 3,739 3,629
Deferred income taxes 440 526
Net losses on write-down of assets 1,568 396
Changes in assets and liabilities:
Accounts receivable, net 44 325
Inventories and other current assets 174 (159)
Accounts payable and other current liabilities (1,226) (665)
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net (148) (57)
Other, net 145 (145)
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided by operating activities 4,379 4,426
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (2,352) (3,628)
Investments in and loans to other affiliates, net (16) (14)
Investments in debt securities (91) -
Net proceeds from sales of assets 81 97
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (2,378) (3,545)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt 44 6,023
Payments on debt (2,386) (6,286)
Dividends paid (343) (341)
Other, net 20 44
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided (used) by financing activities of continuing operations (2,665) (560)
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash from discontinued operations 2,230 104
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 1,566 425
Cash and Equivalents at Beginning of Period 1,035 313
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 2,601 $ 738
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2003 2002 2003 2002 2003 2002
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,516 $ 914 $ (339) $ (323)
- - (1,321) (120) - -
- (258) - - -
- - (2) 12 47 93
- - 1,886 1,971 1,853 1,658
- - (428) 376 868 150
- - 1,558 395 10 1
- - 125 335 (81) (10)
711 16 44 (66) (581) (109)
(711) (16) (286) (891) (229) 242
- - 14 (28) (14) 28
- - (351) (37) 203 (20)
- - 97 (122) 48 (23)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2,594 2,739 1,785 1,687
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,141) (1,550) (1,211) (2,078)
- - - (26) (16) 12
(91) - - -
- - 80 66 1 31
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,152) (1,510) (1,226) (2,035)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 44 1,287 - 4,736
- - (2,335) (2,270) (51) (4,016)
- - (332) (330) (11) (11)
- - (20) (53) 40 97
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (2,643) (1,366) (22) 806
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,705 104 525 -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 504 (33) 1,062 458
- - 641 134 394 179
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,145 $ 101 $ 1,456 $ 637
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
Year-to-date September 30, 2003
- ----------------------------------------------------------------------------------------------------------------
Capital in
FON PCS Excess of
Class A FT Common Common Par or Stated
Common Stock Stock Stock Value
- ----------------------------------------------------------------------------------------------------------------
Beginning 2003 balance $ 22 $ 1,790 $ 1,000 $ 9,931
Net income (loss) - - - -
FON common stock dividends - - - -
PCS preferred stock dividends - - - (5)
Conversion of PCS common stock
underlying Class A common stock (22) - 22 -
FON Series 1 common stock issued - 17 - 97
PCS Series 1 common stock issued - - 13 37
Other, net - - - -
- ----------------------------------------------------------------------------------------------------------------
September 2003 balance $ - $ 1,807 $ 1,035 $ 10,060
------------------------------------------------------------------
Shares Outstanding
- ------------------------------------------------------------------------------------------------
Beginning 2003 balance 43.1 895.1 999.8
FON Series 1 common stock issued - 8.5 -
PCS Series 1 common stock issued - - 13.5
Conversion of Class A FT - - 21.6
- ------------------------------------------------------------------------------------------------
September 2003 balance 43.1 903.6 1,034.9
--------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
- ------------------------------------------------------------------------------------
Accumulated
Other
Retained Comprehensive Consolidated Combined Attributed Net Assets
Earnings Loss Total Sprint FON Group Sprint PCS Group
- ------------------------------------------------------------------------------------
$ 252 $ (701) $ 12,294 $ 11,814 $ 480
1,177 - 1,177 1,516 (339)
(338) - (338) (338) -
- - (5) 6 (11)
- - - - -
- - 114 114 -
- - 50 - 50
- 2 2 (9) 11
- ------------------------------------------------------------------------------------
$ 1,091 $ (699) $ 13,294 $ 13,103 $ 191
- ------------------------------------------------------------------------------------
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 2002 Form
10-K. Operating results for the 2003 year-to-date period do not necessarily
represent the results that may be expected for the year ending December 31,
2003.
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1. Basis of Consolidation and Presentation
- --------------------------------------------------------------------------------
Tracking Stock
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
but rather represent a direct equity interest in our assets and liabilities as a
whole.
Board Discretion Regarding Tracking Stocks
Sprint's Board has the discretion to, among other things, make operating and
financial decisions that could favor one group over the other and, subject to
the restrictions in Sprint's articles of incorporation, to change the allocation
of the assets and liabilities that comprise each of the FON Group and the PCS
Group without shareholder approval. Under the applicable corporate law, Sprint's
Board owes its fiduciary duties to all of Sprint's shareholders and there is no
Board of Directors that owes separate duties to the holders of either the FON
common stock or the PCS common stock. The Tracking Stock Policies provide that
the Board, in resolving material matters in which the holders of FON common
stock and PCS common stock have potentially divergent interests, will act in the
best interests of Sprint and all of its common shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. These policies may be changed by the
Board without shareholder approval. Given the Board's discretion in these
matters, it may be difficult to assess the future prospects of each group based
on past performance.
Consolidation and Comparative Presentation
The consolidated financial statements include the accounts of Sprint, its wholly
owned subsidiaries and subsidiaries it controls. Investments in entities in
which Sprint exercises significant influence, but does not control, are
accounted for using the equity method (see Note 2).
The consolidated financial statements are prepared using accounting principles
generally accepted in the United States. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
Intergroup Transactions
The PCS Group uses the long distance operation of the FON Group as its
interexchange carrier and purchases wholesale long distance for resale to its
customers. Additionally, the FON Group provides the PCS Group with Caller ID
services and various other goods and services. Also included in these amounts
are goods capitalized by the PCS Group. Charges to the PCS Group for these items
totaled $163 million and $175 million in the 2003 and 2002 third quarters and
$513 million and $500 million in the 2003 and 2002 year-to-date periods,
respectively. The intercompany profit on capitalized charges totaled $1 million
and $4 million in the 2003 and 2002 third quarters and $4 million and $8 million
in the 2003 and 2002 year-to-date periods, respectively. The service charges
less capitalized charges are included in the FON Group's net operating revenues
and in the PCS Group's costs of services and products.
The PCS Group provides the FON Group with access to its network and
telemarketing and various other services. Charges to the FON Group for these
items totaled $2 million in the 2003 third quarter, $7 million in the 2003
year-to-date period and $4 million in the 2002 third quarter. In the 2002
year-to-date period, the PCS Group credited the FON Group for $48 million. This
credit was primarily related to proceedings initiated by the Federal
Communications Commission (FCC) in 2001 to consider a number of issues regarding
compensation arrangements between carriers that exchange local and long distance
traffic, including the issue of whether wireless carriers should be allowed to
charge long distance carriers for terminating long distance calls to their
wireless customers.
The FON Group charges the PCS Group a return on investment or capital carrying
charge for the use of FON Group owned capital assets. Charges to the PCS Group
for this item totaled $11 million and $8 million in the 2003 and 2002 third
quarters and $31 million and $24 million in the 2003 and 2002 year-to-date
periods, respectively. These amounts are included in the FON Group's other
income and the PCS Group's operating expenses.
Allocation of Shared Services
Sprint directly assigns, where possible and practical, certain general and
administrative costs to the FON Group and the PCS Group based on their actual
use of those services. Where direct assignment of costs is not possible, or
practical, Sprint uses other indirect methods, including time studies, to
estimate the allocation of costs to each group. Cost allocation methods other
than time studies include factors (general, marketing or headcount) derived from
the operating unit's relative share of the predefined category referenced (e.g.
headcount). Sprint believes that the costs allocated are comparable to the costs
that would be incurred if the groups had been operating on a stand-alone basis.
The FON Group provides facilities, information services and certain other
services to the PCS Group. Charges to the PCS Group for these services totaled
$140 million and $100 million in the 2003 and 2002 third quarters and $399
million and $235 million in the 2003 and 2002 year-to-date periods,
respectively. This increase primarily reflects the transition of the PCS Group
to shared facilities managed by the FON Group. Previously the PCS Group had
separate facilities, and thus a direct cost. Group direct costs for these
facilities have dropped proportionately for these allocated shared services.
Also included in these amounts are charges that were capitalized by the PCS
Group. These capitalized charges totaled $8 million and $6 million in the 2003
and 2002 third quarters and $17 million and $11 million in the 2003 and 2002
year-to-date periods, respectively. The service charges less capitalized charges
are included in the PCS Group's operating expenses.
Costs for shared services totaled approximately $348 million and $131 million in
the 2003 and 2002 third quarters and $890 million and $383 million in the 2003
and 2002 year-to-date periods, respectively. The percentage of these costs
allocated to the PCS Group were approximately 47% and 31% in the 2003 and 2002
third quarters and 47% and 29% in the 2003 and 2002 year-to-date periods,
respectively, with the balance allocated to the FON Group. The increase in total
costs for shared services is driven by the consolidation of Sprint's Network,
Information Technology, and Billing and Accounts Receivable organizations
announced in the 2002 fourth quarter. As a result of synergies from these
consolidations, group direct costs for these services have dropped more than
proportionately for these allocated shared services. The allocation of shared
services may change at the discretion of Sprint's Board and does not require
shareholder approval.
Allocation of Group Financing
Financing activities for the groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the groups is specifically allocated
to and reflected in the financial statements of the applicable group. If the
group to which the debt has been allocated does not provide the funds when
Sprint subsequently repays all or a part of the
debt, the allocated debt is reported as intergroup debt. With certain external
borrowings in 1998, the FON Group extended the PCS Group longer repayment terms
than the external borrowings.
Interest expense is allocated to the PCS Group based on an interest rate that is
substantially equal to the rate it would be able to obtain from third parties as
a wholly owned Sprint subsidiary, but without the benefit of any guarantee by
Sprint or any member of the FON Group. That interest rate is higher than the
rate Sprint obtains on borrowings. The difference between Sprint's actual
interest rate and the rate charged to the PCS Group is reflected as a reduction
in the FON Group's interest expense and totaled $98 million and $82 million in
the 2003 and 2002 third quarters and $278 million and $255 million in the 2003
and 2002 year-to-date periods, respectively. These amounts are reflected in the
"Intergroup interest charge" on the Consolidated Statements of Operations.
Under Sprint's centralized cash management program, one group may advance funds
to the other group. These advances are accounted for as short-term borrowings
between the groups and bear interest at a market rate that is substantially
equal to the rate that group would be able to obtain from third parties on a
short-term basis.
The allocation of group financing activities may change at the discretion of
Sprint's Board and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. Sprint adopted a tax
sharing agreement which 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 allocation of federal and state income taxes between the groups may change
at the discretion of Sprint's Board and does not require shareholder approval.
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2. Investments
- --------------------------------------------------------------------------------
Investments in Securities
The cost of investments in marketable equity securities, which is included in
"Other assets" in the Consolidated Balance Sheets, was $136 million at the end
of September 2003 and $95 million at December 31, 2002. Accumulated unrealized
holding gains were $27 million, gross and $17 million, net of income taxes, at
the end of September 2003. Comparatively, as of December 31, 2002, the
accumulated unrealized holding losses were $20 million, gross and $12 million,
net of income taxes, and accumulated unrealized holding gains were $10 million,
gross and $6 million, net of income taxes. Both gains and losses are included in
"Accumulated other comprehensive loss" in the Consolidated Balance Sheets.
During the 2003 third quarter, Sprint invested in marketable debt securities in
the amount of $250 million. At September 30, 2003, $91 million of this amount
was included in "Current assets--Other" and "Other assets" in the Consolidated
Balance Sheet. The remaining $159 million have maturities of less than 90 days
and was included in "Cash and equivalents." Accumulated unrealized holding gains
were immaterial as of September 30, 2003.
During the 2003 second quarter, Sprint converted its remaining EarthLink
preferred shares into 18 million common shares and sold 10.8 million shares to
EarthLink, Inc. and in the open market for $66 million. Sprint recognized a $3
million loss on the sales. At the end of September 2003, Sprint held 18.9
million EarthLink common shares. These shares are hedged with variable prepaid
forward contracts, maturing from November 2004 to November 2005.
Sprint's cost method investment in EarthLink preferred shares, which is also
included in "Other assets" on the Consolidated Balance Sheet, was $116 million
at the end of December 2002.
Investments in and Advances to Affiliates
At the end of September 2003, investments accounted for using the equity method
consisted primarily of the PCS Group's $57 million investment in Virgin Mobile,
U.S.A. (Virgin). At the end of September 2002, investments accounted for using
the equity method consisted primarily of the PCS Group's investment in SVC BidCo
L.P. (BidCo), and Virgin. During the 2002 fourth quarter, the PCS Group's
investment in BidCo was dissolved.
In the 2003 third quarter, a Sprint subsidiary agreed to guarantee a $20 million
term-loan facility entered into by Virgin to fund working capital needs. The
facility expires on December 31, 2004. If required to perform, Sprint would
acquire Virgin's subscriber base. The fair value of this liability is recorded
in `Noncurrent liabilities - Other' in the Consolidated Balance Sheet in the
amount of $5 million. Additionally, in the 2003 third quarter, Sprint's board
authorized additional cash funding for the joint venture in the amount of $30
million.
In the 2003 third quarter, Sprint evaluated its investment in Virgin and
determined this interest does not meet the qualifications of a variable interest
entity.
Combined, unaudited, summarized financial information (100% basis) of entities
accounted for using the equity method was as follows:
Quarters Ended Year-to-Date
September 30, September 30,
--- ------------------------------- -- -------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
Net operating revenues $ 221 $ 145 $ 568 $ 529
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (34) $ (21) $ (88) $ (143)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (77) $ (15) $ (162) $ (396)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (17) $ (3) $ (45) $ (105)
--- ------------- -- -------------- -- ------------- --- -------------
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3. Asset Retirement Obligations
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Sprint adopted Statement of Financial Accounting Standard (SFAS) No. 143,
Accounting for Asset Retirement Obligations, on January 1, 2003. This standard
provides accounting guidance for legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction
or development and (or) normal operation of that asset. According to the
standard, the fair value of an asset retirement obligation (ARO liability)
should be recognized in the period in which (1) a legal obligation to retire a
long-lived asset exists and (2) the fair value of the obligation based on
retirement cost and settlement date is reasonably estimable. Upon initial
recognition of the ARO liability, the related asset retirement cost should be
capitalized by increasing the carrying amount of the related long-lived asset.
Sprint's network is primarily located on leased property. In the FON Group, a
majority of the leased property has no requirement for remediation at
retirement. The remainder of the FON Group's leased property and predominately
all of the PCS Group's leased property do have remediation requirements. Sprint
expects to maintain the property as a necessary component of infrastructure
required to maintain FCC licensing. The history and patterns of Sprint's use, as
well as that of our industry, support a low probability associated with lessor
enforcement of their remediation rights. Based on these trends and our limited
experience in performing remediation of sites, Sprint estimates the liability
associated with the ultimate disposition of those requirements to be immaterial.
Adoption of SFAS No. 143 affected the cost of removal historically recorded by
the FON Group's local division. Consistent with regulatory requirements and
industry practice, the local division historically accrued costs of removal in
its depreciation reserves. These costs of removal do not meet the SFAS No. 143
definition of an ARO liability. Upon adoption of SFAS No. 143, the FON Group
recorded a reduction in its historical depreciation reserves of approximately
$420 million to remove the accumulated excess cost of removal, resulting in a
cumulative effect of change in accounting principle credit, net of tax, in the
Consolidated Statements of Operations of $258 million. The annual impact of this
accounting change on income from continuing operations is an expected decrease
to the FON Group's 2003 depreciation expense of approximately $40 million and an
increase to 2003 expenses incurred for removal costs of approximately $20
million recognized ratably over the year.
The following table illustrates the effect on net income (loss) had Sprint
applied SFAS No. 143 in the 2002 comparative periods:
Sprint FON Group
-----------------------------------------------------------------------------
Quarters Ended September 30, Year-to-Date September 30,
--- --------------- -- --------------- --- -------------- --- ---------------
2003 2002 2003 2002
- -------------------------------------- --- --------------- -- --------------- --- -------------- --- ---------------
(millions)
Net income (loss), as reported $ (433) $ 526 $ 1,516 $ 914
Deduct: Cumulative effect of change
in accounting principle, net of
related tax effects - - (258) -
Add: Historically accrued cost of
removal included in depreciation
reserves, less cash removal
expenses, net of related tax
effects - 1 - 7
- -------------------------------------- --- --------------- -- --------------- --- -------------- --- ---------------
Pro forma net income (loss) $ (433) $ 527 $ 1,258 $ 921
--- --------------- -- --------------- --- -------------- --- ---------------
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4. Income Taxes
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The differences that caused Sprint's effective income tax rates to vary from the
35% federal statutory rate for income taxes related to continuing operations
were as follows:
Sprint Sprint Sprint
Corporation FON PCS
Year-to-date September 30, 2003 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ (216) $ (26) $ (190)
Effect of:
State income taxes, net of federal income tax effect 2 14 (12)
Other, net 1 2 (1)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ (213) $ (10) $ (203)
--- ------------- --- -------------- -- --------------
Effective income tax rate 34.6% 13.7% 37.5%
--- ------------- --- -------------- -- --------------
Sprint Sprint Sprint
Corporation FON PCS
Year-to-date September 30, 2002 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 152 $ 369 $ (217)
Effect of:
State income taxes, net of federal income tax effect 5 25 (20)
Equity in losses of foreign joint ventures (56) 1 (57)
Decrease in valuation allowance for previous investment
write-downs (130) (130) -
Other, net (8) (4) (4)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ (37) $ 261 $ (298)
--- ------------- --- -------------- -- --------------
Effective income tax rate NM 24.7% 48.0%
--- ------------- --- -------------- -- --------------
NM=Not meaningful
In the 2002 third quarter, Sprint reached a definitive agreement to sell its
directory publishing business to R.H. Donnelley. Due to the anticipated gain on
this sale, Sprint recognized $292 million of tax benefits in the 2002 third
quarter on previously recorded investment losses. The difference between the
benefit recognized in the 2002 third quarter and the 2002 year-to-date impact
reflected in the above reconciliation consists primarily of the tax benefits on
equity losses and the write down of EarthLink, Inc. stock that occurred in the
2002 first and second quarters.
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5. Accounting for Derivative Instruments
- --------------------------------------------------------------------------------
Risk Management Policies
Sprint's derivative instruments include interest rate swaps, stock warrants,
variable prepaid forward contracts, credit forward contracts, and foreign
currency forward contracts. Sprint's derivative transactions are used
principally for hedging purposes and comply with Board-approved policies. Senior
finance management receives frequent status updates of all outstanding
derivative positions.
Sprint enters into interest rate swap agreements to manage 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 through the receipt of 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 enters into variable prepaid forward contracts which reduce the
variability in expected cash flows related to a forecasted sale of the
underlying equity securities held as available for sale.
Sprint enters into fair value hedges through credit forward contracts which
hedge changes in fair value of certain debt issues.
Sprint's foreign exchange risk management program focuses on reducing
transaction exposure to optimize consolidated cash flow. Sprint enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. 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 are
used to offset the impact of foreign currency fluctuations of these payments.
Interest Rate Swaps
The interest rate swaps met all the required criteria under derivative
accounting rules for the assumption of perfect effectiveness resulting in no
recognition of changes in their fair value in earnings during the life of the
swap. During the period ending September 30, 2003, Sprint held fair-value
interest rate swaps. The cash flow hedges held by Sprint matured in the 2002
second quarter.
Sprint recorded a $39 million increase in the 2003 third quarter and
year-to-date periods resulting from changes in the fair value of the interest
rate swaps. The increase in value for these swaps has been recorded in "Other
non-current assets" in the Consolidated Balance Sheet. As the swaps have been
deemed perfectly effective, an offset was recorded to the underlying "Long-term
debt."
Sprint recorded a $12 million pre-tax increase in the 2002 year-to-date period
resulting from gains on cash flow hedges. The changes in other comprehensive
income are included in "Net unrealized gains (losses) on qualifying cash flow
hedges" in the Consolidated Statements of Comprehensive Income (Loss).
Stock Warrants
The stock warrants are not designated as hedging instruments and changes in the
fair value of these derivative instruments are recognized in earnings during the
period of change.
Sprint's net derivative losses on stock warrants were immaterial in the 2003
third quarter and 2003 year-to-date period.
Sprint's net derivative losses on stock warrants were immaterial in the 2002
third quarter. Sprint recorded net derivative losses in earnings of $3 million
after tax for the 2002 year-to-date period due to changes in the fair value of
the stock warrants.
Net Purchased Equity Options
The net purchased equity options embedded in variable prepaid forward contracts
are designated as cash flow hedges.
Sprint recorded a $3 million after-tax decrease to other comprehensive income in
the 2003 third quarter and a $21 million after tax decrease for the 2003
year-to-date period resulting from losses on these cash flow hedges. Sprint
recorded a $4 million after-tax increase to other comprehensive income in the
2002 third quarter and a $14 million after tax increase for the 2002
year-to-date period. The changes in other comprehensive income are included in
"Net unrealized gains (losses) on qualifying cash flow hedges" in the
Consolidated Statements of Comprehensive Income (Loss).
Credit Forward Contracts
As there is high correlation between the credit forward contracts and the debt
issues being hedged, fluctuations in the value of the credit forward contracts
are generally offset by changes in the fair value of the debt issues. A nominal
amount was recorded in Sprint's Consolidated Statements of Operations in the
2003 third quarter and year-to-date periods on this investment. The contracts
matured in the 2003 third quarter.
Foreign Currency Forward Contracts
Foreign currency forward contracts held during the period were not designated as
hedges as defined in SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and changes in the fair value of these derivative
instruments are recognized in earnings during the period of change. The activity
associated with these contracts was immaterial in all periods presented.
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6. Restructuring and Asset Impairment
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Restructuring Activity
In the 2003 second quarter, Sprint announced the wind-down of its web hosting
business. Restructurings of other global markets division operations also
occurred in the continuing effort to create a more efficient cost structure
(Global Markets Web Hosting Wind-down). These decisions resulted in pre-tax
charges of $348 million in the 2003 second quarter and $2 million in the 2003
third quarter consisting of asset write-offs and severance costs associated with
work force reductions. The charge for asset impairments was $337 million and the
remaining $13 million was accrued for employee terminations. The severance
charges are associated with the involuntary employee separation of approximately
750 employees. In connection with the wind-down of the web hosting business,
Sprint will record additional charges for facility lease terminations, customer
migration, employee termination, and other wind-down costs in subsequent
periods. As of September 30, 2003, approximately 350 of the employee separations
had been completed. Sprint expects the aggregate pre-tax charge to be
approximately $400 million to $475 million. Sprint expects to pay the majority
of severance and other exit costs in the next nine months.
In the 2002 fourth quarter, Sprint announced a consolidation in its Network,
Information Technology, and Billing and Accounts Receivable organizations, as
well as in other areas of the Company, in the ongoing effort to streamline
operations and maintain a competitive cost structure (One Sprint Consolidation).
These decisions resulted in a $146 million pre-tax charge consisting of
severance costs associated with work force reductions totaling $58 million, and
the remaining $88 million accrued for other exit costs primarily associated with
the termination of real estate leases. The severance charge is associated with
the involuntary employee separation of approximately 2,100 employees. As of
September 30, 2003, substantially all of the employee separations had been
completed. Sprint expects to pay the majority of severance and other exit costs
by March 31, 2004.
In the 2002 fourth quarter, the PCS group announced it would reduce operating
expenses through a work force reduction (PCS Consolidation). This action, which
was undertaken to create a more competitive cost structure for the business,
resulted in a $43 million pre-tax charge. The charge for severance costs totaled
$25 million, and the remaining $18 million was accrued for other exit costs
primarily associated with the termination of real estate leases. The severance
charge was associated with the involuntary employee separation of approximately
1,600 employees. As of December 31, 2002, substantially all of the employee
separations had been completed. Sprint expects to pay the majority of the
remaining severance and other exit costs by March 31, 2004.
In the 2002 third quarter, Sprint announced a restructuring integrating its
E|Solutions' web hosting sales, mobile computing consulting, marketing, and
product sales support capabilities into Sprint Business while integrating
E/solutions' customer service operations into Network Services. Additionally,
Sprint announced that its global markets division would discontinue offering and
internally supporting facilities-based Digital Subscriber Line (DSL) services to
customers (collectively, the Global Markets Consolidation). These decisions
resulted in a $202 million pre-tax charge. The charge for asset impairments was
$142 million, severance costs totaled $22 million, and the remaining $38 million
was accrued for other exit costs associated with the termination of real estate
leases and other contractual obligations. The severance charge was associated
with the involuntary employee separation of approximately 1,100 employees. As of
September 30, 2002, substantially all of the employee separations had been
completed. As of September 30, 2003, the remaining liability primarily
represents lease termination costs.
In the 2002 first quarter, the PCS Group announced plans to close five PCS
customer solution centers, as well as additional steps to reduce operating costs
in its network, sales and distribution, and customer solutions business
units (PCS Customer Service Center Closures). These decisions resulted in a $23
million pre-tax charge. The charge for severance costs was $13 million with the
remaining $10 million being for other exit costs, primarily for the termination
of real estate leases. The severance charge was associated with the involuntary
employee separation of approximately 2,600 employees. As of September 30, 2002,
substantially all of the employee separations had been completed. In the 2002
third quarter, Sprint performed an analysis to finalize the restructuring
estimates recorded in the 2002 first quarter. This analysis resulted in a
reserve reduction of $6 million primarily associated with real estate lease
terminations.
In the 2001 fourth quarter, Sprint terminated its efforts to provide its Sprint
ION consumer and business offerings and announced plans to reduce operating
costs in the business units that comprise its FON Group. These efforts included
consolidation and streamlining of marketing and network operations, as well as
streamlining corporate support functions (Sprint ION Termination). These
decisions resulted in a $1,813 million pre-tax charge. The charge for asset
impairments was $1,327 million, severance costs totaled $231 million, and the
remaining $256 million was accrued for other exit costs including termination of
supplier agreements, real estate leases, and other contractual obligations. The
severance charge was associated with the involuntary employee separation of
approximately 6,000 employees. As of September 30, 2002, substantially all of
the employee separations had been completed. In the 2002 third quarter, Sprint
performed an analysis to finalize the restructuring estimates recorded in the
2001 fourth quarter. This analysis resulted in a reserve reduction in the third
quarter of 2002 of $42 million primarily associated with exit costs and a $34
million reduction associated with the asset impairment charge. Sprint expects to
pay the majority of the remaining severance costs by December 31, 2003.
In several of these restructuring events, the remaining other exit costs are
primarily lease commitments which will be paid according to their terms.
This activity is summarized as follows:
- ----------------------------------------------------------------------------------------------------------------------
2003 Activity
-----------------------------------------
December 31, Total September 30,
2002 Liability Restructuring Cash Non-cash/ 2003 Liability
Balance Charge Payments Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------
(millions)
Restructuring Events - 2003
Global Markets Web Hosting
Wind-down
Severance $ - $ 13 $ 7 $ - $ 6
Restructuring Events - 2002
One Sprint Consolidation
Severance 58 - 40 - 18
Other exit costs 51 - 4 - 47
PCS Consolidation
Severance 22 - 17 - 5
Other exit costs 16 - 3 (3) 10
Global Markets Consolidation
Severance 8 - 8 - -
Other exit costs 30 - 9 - 21
PCS Customer Service Center
Closures
Other exit costs 2 - 1 - 1
Restructuring Events - 2001
Sprint ION Termination
Severance 43 - 19 - 24
Other exit costs 47 - 15 (9) 23
- ----------------------------------------------------------------------------------------------------------------------
Total $ 277 $ 13 $ 123 $ (12) $ 155
----------------------------------------------------------------------------------
Other Asset Impairments
In the 2003 third quarter, the FON Group's global markets division recorded a
pre-tax, non-cash charge of $1.2 billion related to the write-down in the fair
value of its MMDS spectrum. Sprint's ongoing evaluation of business use for this
asset resulted in a decision to end pursuit of a residential fixed wireless
strategy. This decision required a revaluation of the fair value of the asset.
Sprint is now focusing its efforts on a broad range of alternative strategies.
Sprint is continuing to invest in the spectrum, is monitoring technology and
industry developments, and is involved in efforts to achieve favorable
regulatory rulings with respect to this spectrum.
In the 2003 first quarter, the PCS Group recorded a charge for asset impairment
of $10 million. This charge was associated with the termination of a software
development project.
- --------------------------------------------------------------------------------
7. Discontinued Operation
- --------------------------------------------------------------------------------
In the 2002 third quarter, Sprint reached a definitive agreement to sell its
directory publishing business to R.H. Donnelley for $2.23 billion in cash. The
sale closed on January 3, 2003. In the 2003 third quarter, Sprint recognized a
loss of $1 million primarily related to a state tax rate true-up. The pretax
gain recognized in the year-to-date period was $2.14 billion, $1.32 billion
after-tax. In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, Sprint has presented the directory publishing
business as a discontinued operation in the consolidated financial statements.
Summary financial information is as follows:
September 30, December 31,
2003 2002
--------------------------------------------------- -----------------------------------
(millions)
Assets of discontinued operation
Accounts receivable, net $ - $ 277
Prepaids - 99
Other assets - 15
--------------------------------------------------- -- -------------- -- --------------
Total assets of discontinued operation $ - $ 391
-- -------------- -- --------------
Liabilities of discontinued operation
Advance billings and other $ - $ 299
-- -------------- -- --------------
Quarters Ended
September 30,
-- -------------- -- --------------
2003 2002
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ - $ 133
-- -------------- -- --------------
Income before income taxes $ - $ 66
-- -------------- -- --------------
Year-to-Date
September 30,
-- -------------- -- --------------
2003 2002
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ 5 $ 409
-- -------------- -- --------------
Income before income taxes $ 5 $ 193
-- -------------- -- --------------
At September 30, 2003, the FON Group had a current tax payable to the PCS Group
related to the gain on the sale of the directory publishing business in the
amount of $175 million for the tax allocation between the PCS Group and the FON
Group under the tax sharing agreement.
- --------------------------------------------------------------------------------
8. Short-term Borrowings and Current Maturities of Long-term Debt
- --------------------------------------------------------------------------------
In the 2003 third quarter, Sprint repaid, before scheduled maturities, $334
million of its current maturities of long-term debt. The debt consisted of $34
million of senior notes with interest rates ranging from 5.7% to 5.9% and the
$300 million Export Development Canada loan with an interest rate of 2.8%.
Sprint recorded a discount of $3 million associated with the repayment of the
senior notes.
In March 2003, Sprint completed a tender offer to purchase $442 million
principal amount of current senior notes before their scheduled maturity. The
notes had an interest rate of 5.7% and a maturity date of November 15, 2003. A
premium of $6 million was paid as part of the tender offer. The notes were
allocated to the PCS Group and reflected as long-term debt. The PCS Group is
scheduled to pay $36 million of the total to the FON Group in the 2003 fourth
quarter and the remaining $406 million in the 2004 second quarter.
In March 2003, Sprint completed a tender offer to purchase $635 million
principal amount of its long-term senior notes before their scheduled maturity.
See further discussion in Note 9.
At the end of the 2003 third quarter, there was $1.1 billion of current
maturities of intergroup debt on the PCS Group balance sheet. This is comprised
of the senior notes purchased in the first and third quarters of 2003. As a
result of the FON Group's prepayment of the notes the allocated debt is
reflected as intergroup debt in the PCS Group balance sheet. The intergroup debt
is eliminated in the Consolidated Balance Sheet.
In February 2003, Sprint prepaid the $455 million balance outstanding relating
to the global markets division accounts receivable asset securitization
facility.
- --------------------------------------------------------------------------------
9. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
In the 2003 third quarter, Sprint repaid, before scheduled maturities, $84
million of its local division's first mortgage bonds. These bonds had interest
rates ranging from 9.1% to 9.3% and maturity dates ranging from 2019 to 2021.
Sprint recorded a premium of $5 million associated with this repayment.
In March 2003, Sprint completed a tender offer to purchase $635 million
principal amount of its long-term senior notes before their scheduled maturity.
The notes had an interest rate of 5.9% and a maturity date of May 1, 2004. A
premium of $13 million was paid as part of the tender offer. The notes were
allocated to the PCS Group and reflected as long-term debt at the time of the
tender offer. As a result of the FON Group's repayment of the notes, the
allocated debt was reflected as intergroup debt on the PCS Group balance sheet.
The notes are scheduled to be paid to the FON Group in the 2004 second quarter.
At the end of the 2003 third quarter, the allocated debt is reflected as current
maturities of intergroup debt on the PCS balance sheet. The intergroup debt is
eliminated in the Consolidated Balance Sheet.
In March 2002, Sprint issued $5 billion of debt securities which replaced its
commercial paper program.
- --------------------------------------------------------------------------------
10. Common Stock Issuances
- --------------------------------------------------------------------------------
In March 2003, France Telecom (FT) converted 34.4 million shares of Series 3 PCS
common stock into shares of Series 1 PCS common stock. At the same time, FT
converted 21.6 million shares of PCS common stock underlying Class A common
stock into Series 1 PCS common stock.
Upon the issuance of the PCS shares underlying the Class A common stock, there
were no more underlying shares of PCS or FON stock. The par value of the Class A
common stock was automatically reduced to $0.00 per share from $0.50 per share.
According to an amended Schedule 13D filed by FT with the SEC, it sold its
shares of Series 1 PCS common stock in June 2003. As a result, neither France
Telecom nor Deutsche Telekom own any shares of PCS common stock or FON common
stock or any shares convertible into PCS common stock or FON common stock.
- --------------------------------------------------------------------------------
11. Stock-based Compensation
- --------------------------------------------------------------------------------
Effective January 1, 2003, Sprint adopted SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, using the prospective method. Upon
adoption Sprint began expensing the fair value of stock-based compensation for
all grants, modifications or settlements made on or after January 1, 2003. The
following table illustrates the effect on net income and earnings per share of
stock-based compensation included in net income and the effect on net income and
earnings per share for grants issued on or before December 31, 2002, had Sprint
applied the fair value recognition provisions of SFAS 123.
Sprint FON Group
----------------------------------------------------------------------
Quarters Ended Year-to-Date
September 30, September 30,
--- ------------------------------- -- -------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions, except per share data)
Net income (loss), as reported $ (433) $ 526 $ 1,516 $ 914
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects
6 1 14 2
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (14) (23) (53) (70)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Pro forma net income (loss) $ (441) $ 504 $ 1,477 $ 846
--- ------------- -- -------------- -- ------------- --- -------------
Earnings (loss) per common share:
Basic - as reported $ (0.48) $ 0.59 $ 1.69 $ 1.03
--- ------------- -- -------------- -- ------------- --- -------------
Basic - pro forma $ (0.49) $ 0.57 $ 1.65 $ 0.95
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - as reported $ (0.48) $ 0.59 $ 1.69 $ 1.03
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - pro forma $ (0.49) $ 0.57 $ 1.65 $ 0.95
--- ------------- -- -------------- -- ------------- --- -------------
Sprint PCS Group
----------------------------------------------------------------------
Quarters Ended Year-to-Date
September 30, September 30,
--- ------------------------------- -- -------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions, except per share data)
Net loss, as reported $ (65) $ (7) $ (339) $ (323)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects
4 1 11 2
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (19) (34) (73) (97)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Pro forma net loss $ (80) $ (40) $ (401) $ (418)
--- ------------- -- -------------- -- ------------- --- -------------
Loss per common share:
Basic - as reported $ (0.07) $ (0.01) $ (0.34) $ (0.33)
--- ------------- -- -------------- -- ------------- --- -------------
Basic - pro forma $ (0.08) $ (0.04) $ (0.40) $ (0.42)
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - as reported $ (0.07) $ (0.01) $ (0.34) $ (0.33)
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - pro forma $ (0.08) $ (0.04) $ (0.40) $ (0.42)
--- ------------- -- -------------- -- ------------- --- -------------
Sprint recognized pre-tax charges of $14 million in the 2003 third quarter and
$23 million in the year-to-date period related to stock-based grants issued in
2003. In 2002, pre-tax charges of $2 million in the third quarter and $5 million
in the year-to-date period were recognized for grants of restricted stock made
in 2002 and previous years.
In the 2003 second quarter, Sprint recognized pre-tax charges of $15 million of
non-cash expense in connection with separation agreements agreed to by Sprint
and William T. Esrey, former chairman and chief executive officer; Ronald T.
LeMay, former president and chief operating officer; and J. Richard Devlin,
former executive vice president - general counsel, external affairs and
corporate secretary. The charges were associated with accounting for
modifications which accelerated vesting and extended exercise periods of stock
options granted in prior periods, as required by SFAS No. 123 "Accounting for
Stock-Based Compensation." Most of the FON options had exercise prices that were
approximately two times the market price at the modification date, while most of
the PCS options had exercise prices that were approximately five times the
market price at the modification date. The charge to earnings in the second
quarter was approximately one cent per share each for the FON Group and the PCS
Group.
- --------------------------------------------------------------------------------
12. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
In March 2003, settlements subject to court approval were announced in both a
derivative action and a securities class action filed by institutional
stockholders. The derivative settlement includes the adoption of certain
corporate governance enhancements, certain restrictions on stock and options by
individual defendants, and the payment of plaintiff's attorneys' fees in Sprint
stock, for which Sprint reserved $5 million in the 2003 first quarter in other
income (expense), net. The securities class action settlement provides for the
payment of a total of $50 million to the plaintiff class. Sprint reserved $45
million, representing the settlement amount net of undisputed insurance
coverage, in the 2003 first quarter in other income (expense), net. In the 2003
third quarter, Sprint recorded $17 million in an additional insurance recovery
related to this action. Sprint remains in negotiations with its insurance
carriers regarding remaining coverage.
A number of putative class action cases that allege Sprint failed to obtain
easements from property owners during the installation of its fiber optic
network have been filed in various courts. Several of these cases sought
certification of nationwide classes, and in one case, a nationwide class was
certified. However, a nationwide settlement of these claims was recently
approved by the U.S. District Court for the Northern District of Illinois, which
has enjoined all other similar cases. Objectors have appealed the preliminary
approval order and injunction to the Seventh Circuit Court of Appeals. Sprint
has previously accrued for the estimated settlement costs of these suits.
In July 2002, the Federal Communications Commission released a declaratory
ruling in a matter referred to it by the federal district court for the Western
District of Missouri in Sprint's suit against AT&T Corp for the collection of
terminating access charges. The FCC ruled that although nothing prohibited
wireless carriers from charging for access to their networks, interexchange
carriers were not required to pay such charges absent a contractual obligation
to do so. This decision has been appealed to the D.C. Circuit Court of Appeals.
Management believes adequate provisions have been recorded in the PCS Group's
results of operations.
In July 2003, the Inspector General of the General Services Administration (GSA)
recommended that the GSA Debarment Official consider whether to initiate
debarment proceedings against Sprint. The recommendation was based on a billing
error related to Sprint's FTS2001 contract with the GSA. In June 2003, Sprint
reached agreement with the Justice Department to pay the government $5.2
million, an amount twice the estimate of the amount over billed and an amount
that both agreed compensated the government. In October 2003, the GSA's
Debarment Official decided, based on a review of the record, not to initiate
debarment proceedings against Sprint.
In April and May 2003, three putative class action lawsuits were filed in the
U.S. District Court for the District of Kansas by individual participants in the
Sprint Retirement Savings Plan and the Centel Retirement Savings Plan for
Bargaining Unit Employees against Sprint Corporation, the committees that
administer the two plans, and various current and former officers of Sprint. The
lawsuits allege that defendants breached their fiduciary duties to the plans and
violated the ERISA statutes by including FON and PCS stock among the thirty
investment options offered to plan participants. The lawsuits seek to recover
any decline in the value of FON and PCS stock during the class period. These
lawsuits have been consolidated before a single judge.
Various other suits, proceedings and claims, including purported class actions,
typical for a business enterprise, are pending against Sprint.
While it is not possible to determine the ultimate disposition of each of these
proceedings and whether they will be resolved consistent with Sprint's beliefs,
Sprint expects that the outcome of such proceedings, individually or in the
aggregate, will not have a material adverse effect on the financial condition or
results of operations of Sprint, the FON Group or the PCS Group.
- --------------------------------------------------------------------------------
13. Other Financial Information
- --------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Sprint's allowance for doubtful accounts was as follows:
----------------- ----------------
September 30, December 31,
2003 2002
--------------------------------------------------- -----------------------------------
(millions)
FON Group $ 189 $ 279
PCS Group 95 135
--------------------------------------------------- -- -------------- -- --------------
Consolidated $ 284 $ 414
-- -------------- -- --------------
Supplemental Cash Flows Information
Sprint's net cash paid (received) for interest and income taxes was as follows:
Year-to-Date
September 30,
-- ------------- -- -------------
2003 2002
--------------------------------------------------- -- ------------- -- -------------
(millions)
Interest (net of capitalized interest) $ 1,118 $ 963
-- ------------- -- -------------
Income taxes $ 70 $ (453)
-- ------------- -- -------------
Sprint's non-cash activities included the following:
Year-to-Date
September 30,
-- ------------- -- -------------
2003 2002
--------------------------------------------------- -- ------------- -- -------------
(millions)
Common stock issued under Sprint's employee
benefit stock plans $ 152 $ 147
-- ------------- -- -------------
Tax benefit from stock options exercised $ 3 $ -
-- ------------- -- -------------
Contribution to equity investment $ 4 $ 35
-- ------------- -- -------------
- --------------------------------------------------------------------------------
14. Segment Information
- --------------------------------------------------------------------------------
Sprint is divided into three main lines of business: the global markets
division, the local division, and the PCS wireless telephony products and
services business, also known as the PCS Group. Other consists primarily of
wholesale distribution of telecommunications products.
Sprint manages its segments to the operating income (loss) level of reporting.
Items below operating income (loss) are held at a corporate level and only
attributed to the group level. The reconciliation from operating income to net
income is shown on the face of the Consolidated Statements of Operations in the
consolidating information.
Segment financial information was as follows:
- ----------------------------------------------------------------------------------------------------------------
Global Corporate
Quarters Ended Markets Local PCS and
September 30, Division Division Other(1) Group(2) Eliminations(3) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2003
Net operating revenues $ 1,974 $ 1,530 $ 220 $ 3,340 $ (350) $ 6,714
Affiliated revenues 167 40 141 2 (350) -
Operating income (loss) (1,181) 459 (7) 284 7 (438)
2002
Net operating revenues $ 2,231 $ 1,580 $ 229 $ 3,157 $ (399) $ 6,798
Affiliated revenues 171 68 155 5 (399) -
Operating income (loss) (63) 450 (6) 141 2 524
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Global Corporate
Year-to-Date Markets Local PCS and
September 30, Division Division Other(1) Group(2) Eliminations(3) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2003
Net operating revenues $ 6,018 $ 4,595 $ 617 $ 9,383 $ (1,097) $ 19,516
Affiliated revenues 530 158 402 7 (1,097) -
Operating income (loss) (1,504) 1,368 (23) 675 20 536
2002
Net operating revenues $ 6,848 $ 4,693 $ 649 $ 9,023 $ (1,075) $ 20,138
Affiliated revenues 495 218 409 (47) (1,075) -
Operating income (loss) (168) 1,412 (16) 475 9 1,712
- ----------------------------------------------------------------------------------------------------------------
(1) In the 2003 first quarter, Sprint closed the sale of its directory
publishing business to R.H. Donnelley for $2.23 billion in cash. Operations
of the directory publishing business are reported as a discontinued
operation for all periods presented. See Note 7 for additional information.
(2) Affiliate revenues in the 2002 third quarter and year-to-date periods
reflect the adjustment of previously recorded inter-segment wireless access
revenue between the global markets division and the PCS Group.
(3) Revenues eliminated in consolidation consist principally of local access
charged to the global markets division by the local division, equipment
purchases from the wholesale distribution business, interexchange services
provided to the local division, long-distance services provided to the PCS
Group for resale to PCS customers and for internal business use, Caller ID
services provided by the local division to the PCS Group and handset
purchases from the PCS Group.
Net operating revenues by product and services were as follows:
- ----------------------------------------------------------------------------------------------------------------------
Global
Quarters Ended Markets Local PCS
September 30, Division Division Other(1) Group Eliminations(2)Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2003
Voice $ 1,240 $ - $ - $ - $ (149) $ 1,091
Data 462 - - - (16) 446
Internet 233 - - - (2) 231
Local service - 757 - - (1) 756
Network access - 525 - - (32) 493
Long distance - 135 - - - 135
Wireless services - - - 3,340 (2) 3,338
Other 39 113 220 - (148) 224
----------------------------------------------------------------------------------
Total net operating revenues $ 1,974 $ 1,530 $ 220 $ 3,340 $ (350) $ 6,714
----------------------------------------------------------------------------------
2002
Voice $ 1,433 $ - $ - $ - $ (171) $ 1,262
Data 445 - - - - 445
Internet 258 - - - - 258
Local service - 765 - - - 765
Network access - 526 - - (52) 474
Long distance - 155 - - - 155
Wireless services - - - 3,157 (5) 3,152
Other 95 134 229 - (171) 287
----------------------------------------------------------------------------------
Total net operating revenues $ 2,231 $ 1,580 $ 229 $ 3,157 $ (399) $ 6,798
----------------------------------------------------------------------------------
(1) In the 2003 first quarter, Sprint closed the sale of its directory
publishing business to R.H. Donnelley for $2.23 billion in cash. Operations
of the directory publishing business are reported as a discontinued
operation for all periods presented. See Note 7 for additional information.
(2) Revenues eliminated in consolidation consist principally of local access
charged to the global markets division by the local division, equipment
purchases from the wholesale distribution business, interexchange services
provided to the local division, long-distance services provided to the PCS
Group for resale to PCS customers and for internal business use, Caller ID
services provided by the local division to the PCS Group and handset
purchases from the PCS Group.
(3) Prior to the 2003 second quarter, elimination information for the global
markets division was not tracked at a specific products and services level.
All eliminations were considered voice revenues.
- ----------------------------------------------------------------------------------------------------------------------
Global
Year-to-Date Markets Local PCS
September 30, Division(1) Division Other(1) Group Eliminations(2)Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2003
Voice $ 3,775 $ - $ - $ - $ (445) $ 3,330
Data 1,386 - - - (58) 1,328
Internet 721 - - - (25) 696
Local service - 2,284 - - (2) 2,282
Network access - 1,567 - - (132) 1,435
Long distance - 412 - - - 412
Wireless services - - - 9,383 (7) 9,376
Other 136 332 617 - (428) 657
----------------------------------------------------------------------------------
Total net operating revenues $ 6,018 $ 4,595 $ 617 $ 9,383 $ (1,097) $ 19,516
----------------------------------------------------------------------------------
2002
Voice $ 4,437 $ - $ - $ - $ (495) $ 3,942
Data 1,396 - - - - 1,396
Internet 750 - - - - 750
Local service - 2,289 - - - 2,289
Network access - 1,562 - - (164) 1,398
Long distance - 479 - - - 479
Wireless services - - - 9,023 47 9,070
Other 265 363 649 - (463) 814
----------------------------------------------------------------------------------
Total net operating revenues $ 6,848 $ 4,693 $ 649 $ 9,023 $ (1,075) $ 20,138
----------------------------------------------------------------------------------
(1) In the 2003 first quarter, Sprint closed the sale of its directory
publishing business to R.H. Donnelley for $2.23 billion in cash. Operations
of the directory publishing business are reported as a discontinued
operation for all periods presented. See Note 7 for additional information.
(2) Revenues eliminated in consolidation consist principally of local access
charged to the global markets division by the local division, equipment
purchases from the wholesale distribution business, interexchange services
provided to the local division, long-distance services provided to the PCS
Group for resale to PCS customers and for internal business use, Caller ID
services provided by the local division to the PCS Group and handset
purchases from the PCS Group.
(3) Prior to the 2003 second quarter, elimination information for the global
markets division was not tracked at a specific products and services level.
All eliminations were considered voice revenues.
- --------------------------------------------------------------------------------
15. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In November 2002, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on EITF No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21). The
issue addresses how to account for arrangements that may involve multiple
revenue-generating activities, i.e., the delivery or performance of multiple
products, services, and/or rights to use assets. In applying this guidance,
separate contracts with the same party, entered into at or near the same time,
will be presumed to be a bundled transaction, and the consideration will be
measured and allocated to the separate units based on their relative fair
values. This consensus guidance applies to agreements entered into in quarters
beginning after June 15, 2003. Sprint adopted this new accounting effective July
1, 2003.
The PCS Group currently sells wireless phones and service contracts
simultaneously in its company-owned stores. Under previous accounting guidance
in Staff Accounting Bulletin 101, these direct sales channel activation fees and
associated costs were deferred and recognized over the average life of service.
These were considered to be service revenues and expenses. EITF 00-21 results in
this activation fee revenue being recognized at the time the related wireless
phone is sold, and classifies it as equipment sales. The associated costs are no
longer deferred.
While this change accelerates the recognition of revenue and associated expense
over the next twenty-four months, which is the previous deferral period, the
impact to results of operations and cash flows is not material.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This standard
requires the classification of certain freestanding financial instruments as
liabilities measured at their fair value. Financial instruments within the scope
of this standard include mandatorily redeemable shares, instruments that
constitute an obligation to repurchase equity shares, or certain instruments
that constitute an obligation that may be settled by issuing a variable number
of equity shares. SFAS 150 is effective for financial instruments entered into
or modified after May 31, 2003, or otherwise at the beginning of the first
interim period beginning after June 15, 2003. Sprint adopted this standard
effective July 1, 2003. There was no financial statement impact to Sprint in
applying this standard.
In January 2003, the FASB issued Financial Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities. This interpretation addresses the
consolidation of certain business entities to which the usual condition of
consolidation does not apply. The interpretation focuses on financial interests
that indicate control and concludes that in the absence of control through
voting interests, a company's exposure to the economic risk and potential
rewards from an entity's assets and activities are the best evidence of control.
Variable interests are the rights and obligations that convey economic gains or
losses from changes in the value of the entity's assets and liabilities. If an
enterprise holds a majority of the variable interests of an entity, it is
considered the primary beneficiary and as such would be required to include the
assets, liabilities and the results of operations of the variable interest
entity in its financial statements.
The provisions of this interpretation were applied by Sprint beginning in the
2003 third quarter. There was no financial statement impact to Sprint in
applying this interpretation.
- --------------------------------------------------------------------------------
16. Subsequent Events
- --------------------------------------------------------------------------------
Dividend Declaration
On October 14, 2003, Sprint's Board of Directors declared a dividend of 12.5
cents per share on the FON common stock. The dividend will be paid December 30,
2003.
Change in Independent Auditor
On October 14, 2003, the audit committee of the board of directors selected KPMG
LLP as Sprint's independent auditor for the fiscal year 2004. Ernst & Young LLP
will continue as Sprint's independent auditor for the fiscal year 2003 audit.
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 and in other publicly available material. Statements
regarding expectations, including performance assumptions and estimates relating
to capital requirements, as well as other statements that are not historical
facts, are forward-looking statements.
These statements reflect management's judgments based on currently available
information and involve a number of risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. With respect to these forward-looking statements, management has
made assumptions regarding, among other things, customer and network usage,
customer growth, pricing, costs to acquire customers and provide service, the
timing of various events and the economic environment.
Future performance cannot be ensured. Actual results may differ materially from
those in the forward-looking statements. Some factors that could cause actual
results to differ include:
o extent and duration of the current economic downturn;
o the effects of vigorous competition in the markets in which Sprint
operates;
o the costs and business risks associated with providing new services
and entering new markets necessary to provide nationwide or global
services;
o adverse change in the ratings afforded our debt securities by ratings
agencies;
o the ability of the PCS Group and the global markets division to
continue to grow a significant market presence;
o the ability of the PCS Group and the global markets division to
improve profitability and reduce cash requirements;
o the effects of mergers and consolidations within the
telecommunications industry and unexpected announcements or
developments from others in the telecommunications industry;
o the uncertainties related to the outcome of bankruptcies affecting the
telecommunications industry;
o the impact to the PCS Group's network coverage due to financial
difficulties of third-party affiliates;
o the uncertainties related to Sprint's investments in networks,
systems, and other businesses;
o the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
o the impact of new, emerging and competing technologies on Sprint's
business;
o unexpected results of litigation filed against Sprint;
o the impact of wireless local number portability on the PCS Group's
growth and churn rates, revenues, and expenses;
o the possibility of one or more of the markets in which Sprint competes
being impacted by changes in political or other factors such as
monetary policy, legal and regulatory changes, including the impact of
the Telecommunications Act of 1996 (Telecom Act), or other external
factors over which Sprint has no control; and
o other risks referenced from time to time in Sprint's filings with the
Securities and Exchange Commission (SEC).
The words "estimate," "project," "intend," "expect," "believe," "target" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are found throughout Management's Discussion and
Analysis. The reader should not place undue reliance on forward-looking
statements, which speak only as of the date of this report. Sprint is not
obligated to publicly release any revisions to forward-looking statements to
reflect events after the date of this report or unforeseen events. Sprint
provides a detailed discussion of risk factors in various SEC filings, including
its 2002 Form 10-K, and you are encouraged to review these filings.
- --------------------------------------------------------------------------------
Definitions of Financial Measures
- --------------------------------------------------------------------------------
Sprint provides readers financial measures generated using generally accepted
accounting principles (GAAP).
ARPU (Average monthly service revenue per user) is calculated by dividing
wireless service revenues by weighted average monthly wireless subscribers. ARPU
is used to measure revenue on a per user basis. This is a measure which uses
GAAP as the basis for the calculation.
CCPU (Cash cost per user) is calculated by dividing the costs of wireless
service revenues, service delivery and other general and administrative costs by
weighted average monthly wireless subscribers. CCPU is a measure analysts use to
evaluate the cash costs to operate the business on a per user basis. This is a
measure which uses GAAP as the basis for the calculation.
CPGA (Cost per gross addition) is calculated by dividing the costs of acquiring
a new wireless subscriber, including equipment subsidies, marketing costs and
selling expenses, by gross additional subscribers. Analysts use this measure in
conjunction with the other measures to evaluate the profitability of the
operation. This is a measure which uses GAAP as the basis for the calculation.
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
Sprint is a global communications company and a leader in integrating
long-distance, local service, and wireless communications. Sprint is also one of
the largest carriers of Internet traffic using its tier one Internet protocol
network, which provides connectivity to any point on the Internet either through
its own network or via direct connections with other backbone providers. Sprint
is the nation's third-largest provider of long distance services, based on
revenues, and operates nationwide, all-digital long distance and tier one
Internet protocol networks. In addition, the local division currently serves
approximately 7.9 million access lines in 18 states. Sprint also operates a 100%
digital PCS wireless network with licenses to provide service to the entire
United States population using a single frequency band and a single technology.
Sprint operates in industries that have been and continue to be subject to
consolidation and dynamic change. Therefore, Sprint routinely reassesses its
business strategies. Due to changes in the telecommunications industry,
including bankruptcies, over-capacity and the economic downturn, Sprint
continues to assess the implications on its operations. Any such assessment may
impact the valuation of its long-lived assets.
As part of its overall business strategy, Sprint regularly evaluates
opportunities to expand and complement its business and may at any time be
discussing or negotiating a transaction that, if consummated, could have a
material effect on its business, financial condition, liquidity or results of
operations.
In the 2003 first quarter, Sprint sold its directory publishing business to R.H.
Donnelley for $2.23 billion in cash.
Business Transformation
Currently, Sprint's operations are divided into three lines of business: the
global markets division, the local division and the PCS wireless telephony
products and services business.
Sprint has commenced an initiative to realign internal resources. This effort is
being implemented to enhance the customer-facing focus on the needs and
preferences of two distinct consumer types - businesses and individuals. This
effort is expected to enable Sprint to more effectively and efficiently use its
portfolio of assets to create customer-focused communications solutions. During
2004, Sprint intends to continue to measure its activities using its current
business segments, and begin to measure certain activities under this
customer-focused approach.
Throughout 2004, management anticipates continuing to make decisions using the
current segmentation.
In conjunction with the realignment initiative, Sprint commenced efforts to
improve Sprint's productivity through:
o Consolidating systems and eliminating redundancies
o Automation
o Process re-engineering
o E-enablement
o Organizational redesign and streamlining
These efforts could result in restructuring charges and asset impairments in
subsequent quarters.
Board Discretion Regarding Tracking Stocks
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
but rather represent a direct equity interest in our assets and liabilities as a
whole.
Sprint's board of directors has the discretion to, among other things, make
operating and financial decisions that could favor one group over the other and,
subject to the restrictions in Sprint's articles of incorporation, to change the
allocation of the assets and liabilities that comprise each of the FON Group and
the PCS Group without shareholder approval. Under the applicable corporate law,
Sprint's Board owes its fiduciary duties to all of Sprint's shareholders and
there is no board of directors that owes separate duties to the holders of
either the FON common stock or the PCS common stock. The Tracking Stock Policies
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.
Sprint's board of directors may convert the PCS common stock into FON common
stock at any time. The conversion ratio would be at the discretion of the board
of directors, subject to the requirement that it must make independent
determinations as to the fairness of the conversion ratio to the holders of the
PCS common stock, taken as a separate class, and to the holders of the FON
common stock, taken as a separate class. The board of directors continues to
evaluate the advisability of converting the PCS common stock into FON common
stock.
- --------------------------------------------------------------------------------
General Overview of the Sprint FON Group
- --------------------------------------------------------------------------------
The FON Group is comprised of the global markets division, the local division
and other businesses consisting primarily of wholesale distribution of
telecommunications products. The global markets division is the nation's
third-largest provider of long distance services based on revenues. The
activities of the local division include local exchange communications and
consumer long distance services used by customers within Sprint's local
franchise territories. The FON Group also includes its investments in EarthLink,
Inc., an Internet service provider, and Call-Net, a long distance provider in
Canada.
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include domestic
and international voice; data communications using various protocols such as
Internet protocol (IP) and frame relay (a data service that transfers packets of
data over Sprint's network); and managed network services. In addition, the
global markets division provides consulting services and international data
communications.
The global markets division also includes the operating results of the wireless
high speed data and cable TV service operations of the broadband fixed wireless
companies. In 2001, Sprint announced it would halt further deployment of
Multichannel Multipoint Distribution Services (MMDS) using current line of sight
technology. In the third quarter of 2003, Sprint's ongoing evaluation of
business use for the MMDS spectrum resulted in a decision to end pursuit of a
residential fixed wireless strategy. This decision required a revaluation of the
fair value of this asset, resulting in a pre-tax, non-cash charge of $1.2
billion. Sprint is now focusing its efforts on a broad range of alternative
strategies.
Sprint is continuing to invest in the spectrum, is monitoring technology and
industry developments, and is involved in efforts to achieve favorable
regulatory rulings with respect to this spectrum.
In July 2003, the Inspector General of the General Services Administration (GSA)
recommended that the GSA Debarment Official consider whether to initiate
debarment proceedings against Sprint. The recommendation was based on a billing
error related to Sprint's FTS2001 contract with the GSA. In June 2003, Sprint
reached agreement with the Justice Department to pay the government $5.2
million, an amount twice the estimate of the amount over billed and an amount
that both agreed compensated the government. In October 2003, the GSA's
Debarment Official decided, based on a review of the record, not to initiate
debarment proceedings against Sprint.
In the 2003 second quarter, Sprint announced the wind-down of its web hosting
business.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 7.9 million access lines in 18 states. The local division provides
local voice and data services, including digital subscriber line (DSL), for
customers within its franchise territories, access by phone customers and other
carriers to the local division's local network, nationwide long distance
services to residential customers within its franchise territories, sales of
telecommunications equipment, and other services within specified calling areas
to residential and business customers. DSL enables high speed transmission of
data over existing copper telephone lines.
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates a 100%
digital PCS wireless network with licenses to provide service to the entire
United States population using a single frequency band and a single technology.
The PCS Group, together with third party affiliates, operates PCS systems in
over 300 metropolitan markets, including the 100 largest U.S. metropolitan
areas. The PCS Group's service, including third party affiliates, reaches a
quarter billion people. The PCS Group provides nationwide service through a
combination of:
o operating its own digital network in major U.S. metropolitan areas
using code division multiple access (CDMA), which is a digital
spread-spectrum wireless technology that allows a large number of
users to access a single frequency band by assigning a code to all
speech bits, sending a scrambled transmission of the encoded speech
over the air and reassembling the speech into its original format,
o affiliating with other companies that use CDMA, mainly in and around
smaller U.S. metropolitan areas,
o roaming on other providers' analog cellular networks using multi-mode
and multi-band handsets, and
o roaming on other providers' digital networks that use CDMA.
Sprint PCS customers can use their phones through roaming agreements in
countries other than the United States, including areas of:
o Asia Pacific, including China, Guam, Hong Kong and New Zealand,
o Canada and Mexico,
o Central and South America, including Argentina, Bolivia, Chile,
Colombia, Ecuador, Guatemala, Paraguay and Uruguay, and
o Most major Caribbean Islands.
Sprint launched nationwide third generation (3G) capability in the 2002 third
quarter. This capability allows more efficient utilization of the network when
voice calls are made using 3G-enabled handsets. It also provides enhanced data
services. The service, marketed as "PCS Vision," allows consumer and business
customers to use their Vision-enabled PCS devices to exchange personal and
corporate e-mail, take, send and receive pictures, play games with full-color
graphics and polyphonic sounds and browse the Internet wirelessly with speeds up
to 144 kbps (with average speeds of 50 to 70 kbps).
The PCS Group supplements its own network through affiliation arrangements with
other companies that use CDMA. Under these arrangements, these companies offer
PCS services under the Sprint brand name on CDMA networks built and operated at
their own expense.
Several of these affiliates are experiencing financial difficulties and are
evaluating restructuring activities. Two affiliates have filed for bankruptcy
protection and made claims against Sprint in the bankruptcy courts. One other
affiliate has filed suit against Sprint. Several of the affiliates are disputing
and refusing to pay amounts owed to the PCS Group. Reserves have been
established that are expected to provide for the ultimate resolution of these
disputes, and Sprint is in negotiations with some of the affiliates regarding
restructuring its relationship with them. The PCS Group may incur additional
expenses to ensure that service is available to its customers in the areas
served by its affiliates. If any of the PCS Group affiliates cease operations,
the PCS Group may incur roaming charges in areas where service was previously
provided by the affiliates and costs to meet FCC buildout requirements, as well
as experience lower revenues.
Sprint has reached agreements with two of its largest affiliates, Alamosa
Holdings, Inc. (Alamosa), and UbiquiTel Operating Company. The agreements
provide simplified and predictable long-term pricing for service bureau fees and
stability to the rates charged for inter-area service fees. In addition, Sprint
and the companies settled all outstanding disputes. The agreement with Alamosa
is conditioned upon Alamosa's successful completion of an exchange offer to
restructure its capital structure. The revised terms under the agreements are
expected to have an immaterial impact on future PCS Group results.
The PCS Group also includes its investment in Virgin Mobile, USA (Virgin
Mobile), a joint venture to market wireless services. This investment is
accounted for using the equity method.
The PCS Group also provides PCS services to companies that resell PCS services
to their customers on a retail basis under their own brand. These companies bear
the costs of acquisition, billing and customer service. In the 2003 third
quarter, Sprint executed a five year wholesale agreement with Qwest
Communications whereby Qwest wireless subscribers will use Sprint's national PCS
network and have access to Sprint branded Vision data services. Qwest will
continue to provide sales and service support to its wireless customers,
including the promotion and sale of handsets, price plans and customer service,
including billing and account information. Sprint will serve as the exclusive
provider to Qwest of wireless services for resale in the markets served by the
PCS Group. The transition of customers to the PCS network will begin in early
2004.
By November 24, 2003, all covered commercial mobile radio service (CMRS)
providers, including the PCS Group, must offer a database solution for local
number portability (LNP) that must be able to support roaming. LNP allows
customers to retain, subject to certain geographical limitations, existing
telephone numbers when switching from one telecommunications carrier to another.
The LNP requirement will impose increased operating costs on all CMRS carriers
and may result in higher subscriber churn rates.
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 other quarters. This is due to the use of retail
distribution, which is dependent on the holiday shopping season; the timing of
new products and service introductions; and aggressive marketing and sales
promotions.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 3,538 $ 3,816 $ 10,649 $ 11,559
PCS Group 3,340 3,157 9,383 9,023
Intergroup eliminations (164) (175) (516) (444)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 6,714 $ 6,798 $ 19,516 $ 20,138
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues decreased 1% in the 2003 third quarter and decreased 3%
in the 2003 year-to-date period compared to the same 2002 periods reflecting
declining FON Group long distance voice revenues substantially offset by growth
in the PCS Group revenues.
Income (loss) from continuing operations was as follows:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ (432) $ 484 $ (63) $ 794
PCS Group (65) (7) (339) (323)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations $ (497) $ 477 $ (402) $ 471
--- ------------- -- -------------- -- ------------- --- -------------
In the 2003 third quarter, loss from continuing operations includes a $777
million charge related to the impairment of the FON Group's MMDS spectrum
licenses resulting from a decision to no longer pursue a residential fixed
wireless strategy. Additionally, Sprint recorded an $11 million insurance
recovery, a $1 million charge related to web hosting wind-down activities, and a
$1 million net premium primarily related to the early retirement of local
division debt.
The 2003 year-to-date loss from continuing operations also includes a $22
million charge in connection with the separation agreements agreed to by Sprint
and three former executive officers and a $218 million charge related to winding
down the global markets division's web hosting business. Additionally, the
year-to-date period includes a $32 million charge to settle derivative action
and securities class action litigation, a $12 million charge reflecting the
premiums paid on debt tender offers, and a $6 million charge associated with the
termination of a software development project.
In the 2002 third quarter, income from continuing operations includes a charge
of $23 million to reflect loss on receivables due to the WorldCom bankruptcy, a
$76 million net charge for restructuring and asset impairments, and a gain on
the sale of an equity method investment of $67 million. Income from continuing
operations also includes a previously unrecognizable tax benefit of $292 million
related to previously recorded investment losses.
The 2002 year-to-date income from continuing operations also includes a gain of
$25 million related to the sale of customer contracts and a $241 million charge
related to a write-down of an investment due to declining market value. In
addition, the 2002 year-to-date period includes a $15 million restructuring
charge representing the closing of five PCS customer solution centers, as well
as additional steps to reduce operating costs in the PCS business units. This
charge was offset by favorable true-ups of unrelated items. In total, the PCS
Group charge and true-ups had no effect on income from continuing operations.
- --------------------------------------------------------------------------------
Segmental Results of Operations
- --------------------------------------------------------------------------------
Global Markets Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 1,240 $ 1,433 $ (193) (13.5)%
Data 462 445 17 3.8%
Internet 233 258 (25) (9.7)%
Other 39 95 (56) (58.9)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 1,974 2,231 (257) (11.5)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,059 1,189 130 10.9%
Selling, general and administrative 522 604 82 13.6%
Depreciation and amortization 351 378 27 7.1%
Restructuring and asset impairments 1,223 123 (1,100) NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 3,155 2,294 (861) (37.5)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (1,181) $ (63) $ (1,118) NM
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 3,775 $ 4,437 $ (662) (14.9)%
Data 1,386 1,396 (10) (0.7)%
Internet 721 750 (29) (3.9)%
Other 136 265 (129) (48.7)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 6,018 6,848 (830) (12.1)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 3,225 3,939 714 18.1%
Selling, general and administrative 1,653 1,855 202 10.9%
Depreciation and amortization 1,073 1,099 26 2.4%
Restructuring and asset impairments 1,571 123 (1,448) NM
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 7,522 7,016 (506) (7.2)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (1,504) $ (168) $ (1,336) NM
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
NM = Not meaningful
Net Operating Revenues
Net operating revenues decreased 12% in the 2003 third quarter and in the 2003
year-to-date period from the same 2002 periods. The overall revenue decrease is
in large part due to the decline in voice revenues including the loss of
revenues from a major wholesale customer.
Voice Revenues
Voice revenues decreased 13% in the 2003 third quarter and 15% in the 2003
year-to-date period from the same 2002 periods due to a decline in consumer
voice revenues resulting from wireless, e-mail and instant messaging
substitution, aggressive competition from RBOCs for consumer and small business
customers and lower business voice pricing. Minute volume decreased 4% in the
2003 third quarter compared to the 2002 third quarter. The minute decline was
primarily driven by the loss of a major wholesale customer and a large prepaid
customer.
Data Revenues
Data revenues increased 4% in the 2003 third quarter and decreased 1% in the
2003 year-to-date period from the same 2002 periods. The quarter-over-quarter
increase is driven by an increase in frame relay partially offset by declines in
private line services and ATM.
Internet Revenues
Internet revenues decreased 10% in the 2003 third quarter and 4% in the 2003
year-to-date period from the same 2002 periods. The quarter-over-quarter decline
was mainly driven by a decrease in dial IP, dedicated IP and web hosting
services. The year-to-date decrease in dial IP was primarily due to the final
contractually-scheduled repricing of the AOL dial IP agreement. While Sprint has
made the decision to exit the web hosting business, the year-to-date period
still reflects the increased web-hosting revenue in the 2003 first and second
quarters.
Other Revenues
Other revenues decreased 59% in the 2003 third quarter and 49% in the 2003
year-to-date period from the same 2002 periods. The decrease was primarily due
to the sale of a consulting business in the third quarter of 2002 and lower
equipment sales.
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 our long distance networks, and costs of equipment sales. These costs
decreased 11% in the 2003 third quarter and 18% in the 2003 year-to-date period
from the same 2002 periods. The decrease was due to volume declines, an
improving product mix, and initiatives to reduce access unit costs. Costs of
services and products for the global markets division were 53.6% of net
operating revenues in the 2003 third quarter and year-to-date periods compared
to 53.3% and 57.5% for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses decreased 14% in the 2003
third quarter and 11% in the 2003 year-to-date period from the same 2002
periods. The decline was due to reduced bad debt provisions, restructuring
efforts, and general cost controls partially offset by the cost of the executive
separation agreements reached during the second quarter. SG&A expense was 26.4%
of net operating revenues in the 2003 third quarter and 27.5% in the 2003
year-to-date period compared to 27.1% for the same periods a year ago.
SG&A includes charges for estimated bad debt expense. The reserve for bad debts
requires management's judgment and is based on customer specific indicators, as
well as historical trending, industry norms, regulatory decisions and
recognition of current market indicators about general economic conditions. Bad
debt expense as a percentage of net revenues was 0.8% in the 2003 third quarter
and 1.7% in the 2003 year-to-date period compared to 3.9% and 3.6% for the same
2002 periods. This reduction reflects an improvement in collections, aging and
recoveries of previously written-off accounts. Reserve for bad debt as a percent
of outstanding accounts receivable was 11.8% at the end of the 2003 third
quarter and 14.9% at year-end 2002.
Depreciation and Amortization Expense
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense decreased 7% in the
2003 third quarter and 2% in the 2003 year-to-date period from the same periods
a year ago primarily driven by a decrease in capital spending. Depreciation and
amortization expense was 17.8% of net operating revenues in both the 2003 third
quarter and the 2003 year-to-date period compared to 16.9% and 16.0% for the
same 2002 periods.
Restructuring and Asset Impairment
In the 2003 third quarter, the FON Group recorded a pre-tax, non-cash charge of
$1.2 billion related to the write-down in the fair value of its MMDS spectrum.
Sprint's ongoing evaluation of business use for this asset resulted in a
decision to end pursuit of a residential fixed wireless strategy. This decision
required a revaluation of the fair value of the asset. Sprint is now focusing
its efforts on a broad range of alternative strategies.. Sprint is continuing to
invest in the spectrum, is monitoring technology and industry developments, and
is involved in efforts to achieve favorable regulatory rulings with respect to
this spectrum.
In the 2003 second quarter, a $348 million charge was recorded in connection
with Sprint's announcement of the wind-down of its web hosting business. The
charge for asset impairments was $337 million. The remaining $11 million was
accrued for employee terminations in connection with the wind-down of the web
hosting business, as well as restructurings of other global markets division
operations in the continuing effort to create a more efficient cost structure.
In the 2003 third quarter, an additional $2 million charge was recorded related
to employee terminations. Sprint will record additional wind-down related
charges for facility lease terminations, customer migration, employee
termination, and other wind-down costs in subsequent periods. Sprint expects the
aggregate pre-tax charge to be approximately $400 to $475 million.
Local Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
----------------------------------- -------------------------------
2003 2002 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 757 $ 765 $ (8) (1.0)%
Network access 525 526 (1) (0.2)%
Long distance 135 155 (20) (12.9)%
Other 113 134 (21) (15.7)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,530 1,580 (50) (3.2)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 493 513 20 3.9%
Selling, general and administrative 308 323 15 4.6%
Depreciation and amortization 270 291 21 7.2%
Restructuring - 3 3 100.0%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,071 1,130 59 5.2%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 459 $ 450 $ 9 2.0%
--- ------------- -- -------------- -- -------------
Operating margin 30.0% 28.5%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
----------------------------------- -------------------------------
2003 2002 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 2,284 $ 2,289 $ (5) (0.2)%
Network access 1,567 1,562 5 0.3%
Long distance 412 479 (67) (14.0)%
Other 332 363 (31) (8.5)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 4,595 4,693 (98) (2.1)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,473 1,467 (6) (0.4)%
Selling, general and administrative 946 946 - -
Depreciation and amortization 808 865 57 6.6%
Restructuring - 3 3 100.0%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 3,227 3,281 54 1.6%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 1,368 $ 1,412 $ (44) (3.1)%
--- ------------- -- -------------- -- -------------
Operating margin 29.8% 30.1%
--- ------------- -- --------------
Net Operating Revenues
Net operating revenues decreased 3% in the 2003 third quarter and 2% in the 2003
year-to-date period from the same 2002 periods. The decline is driven by lower
long distance services and equipment sales. The local division ended the 2003
third quarter with approximately 7.9 million switched access lines, a 2%
decrease during the past 12 months. The reduction in access lines was driven by
the continuing economic slowdown, wireless and broadband substitution, and
losses to competitive local providers. The reduction in access lines is expected
to continue although Sprint expects the rate of line loss to remain below the
losses experienced by the other major carriers. On a voice-grade equivalent
basis, which includes both traditional switched services and high capacity
lines, voice-grade equivalents grew 6% during the past 12 months. This growth
reflects growth in DSL as well as many business customers switching from
individual lines to high capacity dedicated circuits.
Local Service Revenues
Local service revenues, derived from local exchange services, decreased 1% in
the 2003 third quarter and remained flat in the 2003 year-to-date period from
the same 2002 periods as the increase in vertical services revenue and local
service rates were more than offset by the decrease in access lines.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, remained flat in the 2003 third quarter and the
2003 year-to-date period compared to a year ago. Strong growth in DSL services
in the 2003 third quarter was offset by a 4% decline in access minutes of use,
as well as by regulator-mandated access rate reductions.
Long Distance Revenues
Long distance revenues are mainly derived from providing nationwide long
distance services to residential customers within Sprint's local franchise
territories and other services within specified regional call areas, or LATAs,
to residential and business customers. These revenues declined 13% in the 2003
third quarter and 14% in the 2003 year-to-date period from the same 2002
periods. This was primarily due to a decline in total long distance minutes of
use, as customers shifted more of their communications to wireless, e-mail and
instant messaging.
Other Revenues
Other revenues decreased 16% in the 2003 third quarter and 9% in the 2003
year-to-date period from the same 2002 periods principally driven by lower
equipment sales. The decrease in equipment sales was primarily the result of the
economic slowdown causing a reduction in customer demand for equipment and
increased focus toward selling network solutions.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs decreased 4% in the 2003 third
quarter and remained flat in the 2003 year-to-date period compared to the same
2002 periods. This decrease was mainly driven by general expense controls and
lower costs associated with equipment and long distance revenues somewhat offset
by higher pension costs. Costs of services and products were 32.2% of net
operating revenues in the 2003 third quarter and 32.1% in the 2003 year-to-date
period compared to 32.5% and 31.3% for the same periods a year ago.
Selling, General and Administrative Expense
SG&A expense decreased 5% in the 2003 third quarter and remained flat in the
2003 year-to-date period compared to the same 2002 periods. The third quarter
decrease was primarily due to lower bad debt expense driven by a $27 million
charge associated with the WorldCom bankruptcy in third quarter 2002 somewhat
offset by additional pension costs. SG&A expense was 20.1% of net operating
revenues in the 2003 third quarter and 20.6% in the 2003 year-to-date period
compared to 20.4% and 20.2% for the same periods a year ago. Bad debt expense as
a percentage of net revenues was 1.6% in the 2003 third quarter and 1.4% in the
2003 year-to-date period compared to 3.2% and 2.7% in the same periods a year
ago. This reflects an improvement in collections and aging, as well as the
charges for the WorldCom bankruptcy in the 2002 third quarter. Reserve for bad
debt as a percent of outstanding accounts receivable was 9.9% at the end of the
2003 third quarter and 13.9% at year-end 2002.
Depreciation and Amortization Expense
Estimates and assumptions are used in setting depreciable lives and testing for
recoverability. Assumptions are based on internal studies of use, industry data
on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense decreased 7% in both
the 2003 third quarter and the year-to-date periods compared to the same 2002
periods. This decline was driven by the implementation of Statement of Financial
Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which eliminated the accrual for removal cost from the depreciable
rate, as well as declines in circuit switching depreciation rates due to a
revised schedule for converting from a digital to a packet network. Depreciation
and amortization expense was 17.6% of net operating revenues in the 2003 third
quarter and year-to-date periods compared to 18.4% for both of the same periods
a year ago.
PCS Group
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 3,340 $ 3,157 $ 183 5.8%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,628 1,478 (150) (10.1)%
Selling, general and administrative 800 955 155 16.2%
Depreciation and amortization 628 588 (40) (6.8)%
Restructuring - (5) (5) (100.0)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 3,056 3,016 (40) (1.3)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 284 $ 141 $ 143 101.4%
-- ------------- -- -------------- -- -------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 9,383 $ 9,023 $ 360 4.0%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 4,597 4,316 (281) (6.5)%
Selling, general and administrative 2,248 2,556 308 12.1%
Depreciation and amortization 1,853 1,658 (195) (11.8)%
Restructuring and asset impairment 10 18 8 44.4%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 8,708 8,548 (160) (1.9)%
- ----------------------------------------------
-- ------------- -- -------------- -- -------------
Operating income $ 675 $ 475 $ 200 42.1%
-- ------------- -- -------------- -- -------------
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail chain and the service revenues generated by sales to its customers
accounted for 20.3% of net operating revenues in the 2003 third quarter and
21.2% in the 2003 year-to-date period compared to 22.2% and 22.5% for the same
2002 periods.
Net Operating Revenues
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Customers (millions) 15.5 14.5 15.5 14.5
--- ------------- -- -------------- -- ------------- --- -------------
Average monthly service revenue
per user (ARPU) $ 63 $ 63 $ 61 $ 62
--- ------------- -- -------------- -- ------------- --- -------------
Customer churn rate 2.7% 3.8% 2.7% 3.3%
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues include service revenues, sales of handsets and accessory
equipment, and other revenues. Service revenues consist of monthly recurring
charges, usage charges and miscellaneous fees such as directory assistance,
operator-assisted calling, handset insurance and late payment charges. Service
revenues increased 6.6% in the 2003 third quarter and 5.6% in the 2003
year-to-date period from the same 2002 periods reflecting an increase in the
number of customers, higher monthly recurring charges and increased fees. These
increases were partially offset by lower overage charges from usage-based plans.
Average monthly usage in the 2003 third quarter increased by more than 3 hours
when compared to the 2002 third quarter.
The PCS Group had 184,000 post-paid retail additions in the 2003 third quarter,
ending the period with approximately 15.5 million customers compared to
approximately 14.5 million customers at the end of the 2002 third quarter.
Resellers added 290,000 customers in the third quarter of 2003, which increased
their customer base to 1.1 million, principally due to Virgin Mobile. The PCS
Group third party affiliates added 22,000 customers in the third quarter of
2003. This brings the total number of customers served on the PCS network,
including post-paid retail, affiliate and resale customers, at the end of the
quarter to more than 19.3 million. In the 2003 third quarter, nearly 41 percent
of new post-paid retail customers chose to include PCS Vision in their service
package.
The customer churn rate in the 2003 third quarter was 2.7% compared to 3.8% for
the same 2002 period. Improvement was primarily due to reduction in the
involuntary churn rate as the PCS Group benefited from credit management
policies initiated in the 2002 fourth quarter.
Revenues from sales of handsets and accessories, including new customers and
upgrades, were approximately 10.2% of net operating revenues in the 2003 third
quarter and 9.0% in the 2003 year-to-date period compared to 10.9% and 10.4% for
the same 2002 periods. These declines were mainly due to higher rebates and
lower gross additions. As part of the PCS Group's marketing plans, handsets are
normally sold at prices below the PCS Group's cost.
Other revenues consist of net fees collected from affiliates for network
operation and customer maintenance. It also includes revenues from the wholesale
of PCS services to companies that resell to their customers on a retail basis.
Other revenues represented 3.0% of net operating revenues in the 2003 third
quarter and 2.4% in the 2003 year-to-date period compared to 1.7% and 1.8% for
the same 2002 periods. These increases mainly reflect net additions to the
affiliate and wholesale customer base.
The PCS Group assesses access charges to long distance carriers for the
termination of landline originated calls. Though regulations generally entitle a
carrier that terminates a call on behalf of another to be compensated for
providing that service, these regulations were developed in a period where
services of this nature were provided exclusively by local exchange carriers.
Certain long distance carriers have disputed the PCS Group's assessment of these
charges as well as the corresponding rate at which the charges were determined.
In July 2002, the FCC released a ruling affirming that nothing prohibited
wireless carriers from imposing access charges for the use of their networks;
however, the FCC also stated that inter-exchange carriers could not be
unilaterally required to pay these charges without a contractual obligation to
do so. The FCC referred the matter back to the Federal District Court for the
Western District of Missouri. The decision has been appealed to the D.C. Circuit
Court of Appeals. In light of this ruling, in the 2002 second quarter the PCS
Group recorded an additional provision for outstanding receivables related to
amounts previously billed and is fully reserved for 2003.
Operating Expenses
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Acquisition costs per gross customer
addition (CPGA) $ 465 $ 395 $ 415 $ 350
--- ------------- -- -------------- -- ------------- --- -------------
Monthly cash costs per user (CCPU) $ 31 $ 33 $ 31 $ 32
--- ------------- -- -------------- -- ------------- --- -------------
Cost per Gross Customer Addition
CPGA, a measure of the costs of acquiring a new subscriber, increased
approximately 18% in the 2003 third quarter and 19% in the 2003 year-to-date
period from the same 2002 periods. These CPGA increases were primarily due to
certain fixed costs being spread across lower gross customer additions, higher
handset rebates in exchange for one- and two-year service agreements, and a $27
million write-down to replacement cost of the first generation camera phone.
Cash Cost per User
CCPU, a measure of the cash costs to operate the business on a per user basis,
decreased approximately 6% in the 2003 third quarter and 3% in the 2003
year-to-date period from the same 2002 periods. The reduction in CCPU occurred
primarily due to lower bad debt expense and decreases in customer solutions
expense; however, this savings was partially offset by increased USF charges,
charges associated with the executive separation agreements reached in the
second quarter and upgrade equipment rebate costs incurred to retain customers
initiated in the fourth quarter of 2002.
Costs of Services and Products
The PCS Group's costs of services and products mainly include handset and
accessory costs, switch and cell site expenses, customer solutions costs and
other network-related costs. These costs increased 10% in the 2003 third quarter
and 7% in the 2003 year-to-date period from the same 2002 periods. These
increases were primarily due to network support of a larger customer base,
expanded market coverage, and increased unit handset costs. These increases were
somewhat offset by scale benefits resulting from the increased customer base and
decreases in customer solutions expense. Handset and equipment costs were 41% of
total costs of services and products in the 2003 third quarter and 39% in the
2003 year-to-date period compared to 40% and 39% for the same periods a year
ago. Costs of services and products were 48.7% of net operating revenues in the
2003 third quarter and 49.0% in the 2003 year-to-date period compared to 46.8%
and 47.8% for the same periods a year ago.
Selling, General and Administrative Expense
SG&A expense mainly includes marketing costs to promote products and services as
well as related salary and benefit costs. SG&A expense decreased 16% in the 2003
third quarter and 12% in the 2003 year-to-date period from the same 2002 periods
reflecting a decline in bad debt expense due to a better credit class mix,
leading to lower write-offs and higher recovery, and reduced sales and marketing
costs, partially offset by the cost of the executive separation agreements
reached in the second quarter. SG&A expense was 24.0% of net operating revenues
in the 2003 third quarter and year-to-date periods compared to 30.3% and 28.3%
for the same periods a year ago. Bad debt expense as a percentage of net
revenues was 2.3% in the 2003 third quarter and year-to-date periods compared to
6.8% and 5.6% in the same periods a year ago. Reserve for bad debt as a percent
of outstanding accounts receivable was 6.4% at the end of the 2003 third quarter
and 9.4% at year-end 2002. These improvements were mainly driven by credit
management policies initiated in the 2002 fourth quarter resulting in lower
involuntary churn and improved receivables aging.
Depreciation and Amortization Expense
Estimates and assumptions are used both in setting depreciable lives and testing
for recoverability. Assumptions are based on internal studies of use, industry
data on lives, recognition of technological advancements and understanding of
business strategy. Depreciation and amortization expense consists mainly of
depreciation of network assets and amortization of definite life intangible
assets. The definite life intangible assets include various customer bases,
which became fully amortized in August 2002.
Depreciation and amortization expense increased 7% in the 2003 third quarter and
12% in the 2003 year-to-date period from the same 2002 periods due to an
increase in the network asset investment during 2002 and the 2003 year-to-date
period.
Depreciation and amortization expense was 18.8% of net operating revenues in the
2003 third quarter and 19.7% in the 2003 year-to-date period compared to 18.6%
and 18.4% for the same periods a year ago.
Restructuring and Asset Impairment
In the first quarter of 2003, the PCS Group recorded a charge of $10 million
associated with the termination of a software development project.
In the first quarter of 2002, the PCS Group announced plans to reduce operating
costs through the closing of five PCS customer solution centers, as well as
additional steps to reduce operating costs in the PCS business units. These
actions were finalized in the third quarter of 2002, and ultimately resulted in
the PCS Group incurring an $18 million charge.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 6.9% in the 2003 third
quarter compared to 7.0% in the 2002 third quarter. Interest costs on short-term
borrowings and interest costs on deferred compensation plans have been excluded
so as not to distort the effective interest rate on long-term debt. See
"Liquidity and Capital Resources" for more information on Sprint's financing
activities.
Premium on Early Retirement of Debt
In the third quarter of 2003, Sprint recorded a net premium of $2 million due to
the early retirement of $118 million of debt primarily consisting of the local
division's first mortgage bonds. This debt had interest rates ranging from 5.7%
to 9.3% and maturity dates ranging from 2003 to 2021.
In March 2003, Sprint completed a tender offer to purchase $442 million
principal amount of current senior notes before their scheduled maturity. The
notes had an interest rate of 5.7% and a maturity date of November 15, 2003. A
premium of $6 million was paid as part of the tender offer.
Also in March 2003, Sprint completed a tender offer to purchase $635 million
principal amount of its long-term senior notes before their scheduled maturity.
The notes had an interest rate of 5.9% and a maturity date of May 1, 2004. A
premium of $13 million was paid as part of the tender offer.
Other Income (Expense), net
Other income (expense), net consisted of the following:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Dividend and interest income $ 17 $ 4 $ 38 $ 25
Equity in net losses of affiliates (17) (4) (45) (105)
Net losses from investments - - - (253)
Gains (losses) on sales of assets - 67 (3) 117
Amortization of debt costs (11) (7) (26) (27)
Losses from disposal of PPE (2) (1) (7) (3)
Royalties 3 3 10 9
Litigation settlement 17 - (33) -
Gains (losses) from foreign currency
transactions (3) 7 (3) 7
Other, net - 5 (9) (4)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 4 $ 74 $ (78) $ (234)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates was driven by the PCS Group's investment in
Virgin Mobile, U.S.A., in all periods presented as well as the PCS Group's
investment in Pegaso Telecomunicaciones, S.A. de C.V. in the 2002 year-to-date
period.
Net losses from investments in the 2002 year-to-date period mainly consists of
the write-down of EarthLink preferred shares to current market value and
Sprint's equity investment in Intelig Telecommunicacoes Ltda.
In the first quarter of 2003, Sprint recorded a $50 million charge to settle
shareholder litigation. In the 2003 third quarter, Sprint recorded a $17 million
credit from an insurance recovery related to this action. See Note 12 of
Condensed Notes to Consolidated Financial Statements for additional information.
Beginning in January 2002, Call-Net began making a royalty payment of 2.5% of
revenues to Sprint. Currently, this is approximately $3 million per quarter.
Income Taxes
See Note 4 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 2002 third quarter, Sprint reached a definitive agreement to sell its
directory publishing business to R.H. Donnelley for $2.23 billion in cash. The
sale closed on January 3, 2003. In the 2003 second quarter, Sprint recognized a
pretax gain of $14 million, $9 million after-tax, primarily related to a working
capital payment. In the 2003 third quarter, Sprint recognized a loss of $1
million primarily related to a state tax rate true-up. The pretax gain
recognized in the year-to-date period was $2.14 billion, $1.32 billion
after-tax. In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, Sprint has presented the directory publishing
business as a discontinued operation in the consolidated financial statements.
Cumulative Effect of Change in Accounting Principle, Net
In the 2003 first quarter, Sprint adopted SFAS No. 143, Accounting for Asset
Retirement Obligations. Upon adoption of SFAS No. 143, the FON Group recorded a
reduction in the local division's depreciation reserves to remove previously
accrued costs of removal. Historically, the local division accrued costs of
removal in its depreciable rate, a practice consistent with regulatory
requirements and others in the industry. These costs of removal do not meet the
standard's definition of an asset retirement obligation liability. This one-time
benefit of approximately $420 million resulted in a cumulative effect of change
in accounting principle credit, net of tax, in the Consolidated Statements of
Operations of $258 million.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
Total consolidated assets were as follows:
----------------------------------
September 30, December 31,
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 21,201 $ 23,133
PCS Group 22,769 23,022
Intergroup eliminations (1,074) (862)
------------------------------------------------------------------------
Consolidated assets $ 42,896 $ 45,293
----------------------------------
Sprint's consolidated assets decreased $2,397 million in the 2003 year-to-date
period. Cash and equivalents increased $1,566 million due to improved operating
cash flows, reduced capital expenditures, and the sale of Sprint's directory
publishing business to R.H. Donnelley in the 2003 first quarter. Net property,
plant, and equipment decreased $1,358 million. Capital expenditures were more
than offset by depreciation expense and the asset impairments in the 2003
year-to-date period. Spectrum licenses declined due to an impairment charge of
$1.2 billion related to the write-down in the fair value of Sprint's MMDS
spectrum.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Sprint's board of directors exercises discretion regarding the liquidity and
capital resource needs of the FON Group and the PCS Group. This includes the
ability to prioritize the use of capital and debt capacity, to determine cash
management policies and to make decisions regarding the timing and amount of
capital expenditures. The actions of the board of directors are subject to its
fiduciary duties to all shareholders of Sprint, and not just to the holders of a
particular class of common stock. Given the above, it may be difficult for
investors to assess each group's liquidity and capital resources and in turn the
future prospects of each group based on past performance.
Operating Activities
Year-to-Date
September 30,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 2,594 $ 2,739
PCS Group 1,785 1,687
------------------------------------------------------------------------
Cash flows provided by operating
activities $ 4,379 $ 4,426
----------------------------------
Cash flow from operations decreased $47 million in the 2003 year-to-date period
from the same 2002 period. The decline was primarily due to the $400 million
cash contribution to the pension trust in July 2003, most of which was allocated
to the FON Group. This decline was mostly offset by the FON Group's improvements
in its operations as cost controls have mitigated the revenue erosion seen in
the global market division and also reduced its working capital requirements.
Investing Activities
Year-to-Date
September 30,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ (1,152) $ (1,510)
PCS Group (1,226) (2,035)
------------------------------------------------------------------------
Cash flows used by
investing activities $ (2,378) $ (3,545)
----------------------------------
The FON Group's capital expenditures totaled $1,141 million in the 2003
year-to-date period and $1,550 million in the same 2002 period. The decline in
capital expenditures is primarily due to the global markets division continuing
to take advantage of existing network capacity to meet customer demand. Global
markets division capital expenditures were incurred mainly to support increasing
demand, enhance network reliability and upgrade capabilities for providing new
products and services. The local division incurred capital expenditures to
accommodate voice grade equivalent growth, expand capabilities for providing
enhanced services, convert its network from circuit to next generation packet
switching, and continue the build-out of high-speed DSL services.
PCS Group capital expenditures were $1,211 million in the 2003 year-to-date
period and $2,078 million in the same 2002 period. Capital expenditures in both
years were incurred to increase capacity and expand coverage. The 2002
year-to-date period capital expenditures also include the deployment of 3G
technology, which was launched nationwide in the 2002 third quarter. Despite
lower capital spending in 2003, PCS has experienced strong improvements in
network performance since the deployment of 1x technology. The PCS Group
continues to expect a significant increase in capital expenditures in the 2003
fourth quarter.
Proceeds from the sale of assets in the 2003 year-to-date period mainly consists
of the sale of marketable securities. The 2002 year-to-date period mainly
consists of the proceeds from sales of certain contracts, investment securities,
and other administrative assets.
Investments in debt securities in the 2003 year-to-date period consists of
investments in marketable securities.
Financing Activities
Year-to-Date
September 30,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ (2,643) $ (1,366)
PCS Group (22) 806
------------------------------------------------------------------------
Cash flows provided (used) by
financing activities $ (2,665) $ (560)
----------------------------------
Financing activities include a debt reduction of $2.3 billion in the 2003
year-to-date period compared to a $263 million decline in debt in the same 2002
period. The debt reduction in the 2003 year-to-date period is mainly due to the
March 2003 tender for the 2003 and 2004 senior notes, the prepayment of the
global markets division accounts receivable asset securitization facility, the
prepayment of the Export Development Canada loan, and other scheduled maturities
for the 2003 year-to-date period.
Sprint paid cash dividends of $343 million in the 2003 year-to-date period
compared to $341 million in the same 2002 period.
Capital Requirements
Sprint's 2003 investing activities, mainly consisting of capital expenditures,
are expected to total approximately $3.8 billion. FON Group capital expenditures
are expected to be approximately $1.7 billion. PCS Group capital expenditures
are expected to be approximately $2.1 billion. Sprint continues to review
capital expenditures and will adjust capital investment in concert with growth.
Dividend payments are expected to approximate $463 million in 2003. Sprint
expects these capital requirements and dividend payments to be funded by
Sprint's $2.6 billion cash balance at September 30, 2003, existing financing
agreements, and expected 2003 cash flow from operations.
Liquidity
In recent years, Sprint has used the long-term bond market as well as other
financial markets to fund its needs. As a result of its improved liquidity
position, Sprint currently does not expect to borrow funds through the capital
markets in 2003 to fund capital expenditures and operating and working capital
requirements.
In January 2003, Sprint closed on the $2.23 billion cash sale of its directory
publishing business to R.H. Donnelley.
In June 2003, Sprint entered into a new revolving credit facility with a
syndicate of banks. The $1.0 billion facility is unsecured, with no springing
liens, and is structured as a 364-day credit line with a subsequent one-year,
$1.0 billion term-out option. Sprint does not intend to draw against this
facility. Sprint had standby letters of credit serving as a backup to various
obligations of approximately $127 million as of September 30, 2003.
Sprint has a PCS Group accounts receivable asset securitization facility that
provides Sprint with up to $500 million of additional liquidity. The facility,
which expires in 2005, is subject to annual renewals and does not include any
ratings triggers that would allow the lenders involved to terminate the facility
in the event of a credit rating downgrade. The maximum amount of funding
available is based on numerous factors and will fluctuate each month. Sprint has
not drawn against the facility and more than $208 million was available as of
September 30, 2003.
Sprint has a global markets division accounts receivable asset securitization
facility that provides Sprint with up to $700 million of additional liquidity.
The facility, which expires in 2005, is subject to annual renewals and does not
include any ratings triggers that would allow the lenders involved to terminate
the facility in the event of a credit rating downgrade. The maximum amount of
funding available is based on numerous factors and will fluctuate each month. In
February 2003, Sprint prepaid all outstanding borrowings under this facility. As
of September 30, 2003, Sprint had more than $462 million total funding available
under the facility.
The undrawn loan facilities described above would charge interest rates equal to
LIBOR or Prime Rate plus a spread that varies depending on Sprint's credit
ratings.
Debt maturities for the 2003 fourth quarter total approximately $566 million.
Debt maturities for 2004 total approximately $519 million. Sprint's $2.6 billion
cash balance at September 30, 2003, existing financing agreements, and expected
2003 and 2004 cash flow from operations more than fund these requirements.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $7.9 billion at September 30,
2003 under the most restrictive of its debt covenants. Sprint is currently in
compliance with all debt covenants associated with its borrowings.
Sprint completed its tender offers to repurchase senior notes in March 2003 in
the amount of $1.1 billion and repaid, before scheduled maturities, $118 million
of debt primarily consisting of the local division's first mortgage bonds in the
2003 third quarter. Sprint continually evaluates various factors and, as a
result, may repurchase additional debt in the future.
In September 2003, Sprint repaid the $300 million Export Development Canada
loan.
Fitch Ratings (Fitch) currently rates Sprint's long-term senior unsecured debt
at BBB with a stable outlook. Standard and Poor's Corporate Ratings (Standard
and Poor's) currently rates Sprint's long-term senior unsecured debt at BBB-
with a stable outlook. In June 2003, Moody's Investors Service (Moody's) raised
Sprint's outlook to stable. Moody's currently rates Sprint's long-term senior
unsecured debt at Baa3.
Sprint's ability to fund its capital needs is ultimately impacted by the overall
capacity and terms of the bank, term-debt and equity markets. There continues to
be significant volatility in the markets. Sprint continues to monitor the
markets closely and to take steps to maintain as much financial flexibility as
possible, while maintaining a reasonable capital structure cost. Sprint
currently does not intend to access the markets other than extending, replacing
or renewing current credit arrangements.
Off-Balance Sheet Financing
Sprint does not participate in, nor secure, financings for any unconsolidated,
special purpose entities.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
General Risk Management Policies
Sprint selectively enters into interest rate swap 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 manage 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. During the 2003 third quarter, Sprint entered into interest
rate swap agreements, which were designated as fair value hedges.
Cash Flow Hedges
Sprint enters into interest rate swap agreements designated as cash flow hedges
to reduce the impact of interest rate movements on future interest expense by
effectively converting a portion of its floating-rate debt to a fixed-rate. As
of September 30, 2003, Sprint had no outstanding interest rate cash flow hedges.
Other Derivatives
In certain business transactions, Sprint is granted warrants to purchase the
securities of other companies at fixed rates. These warrants are supplemental to
the terms of the business transaction and are not designated as hedging
instruments.
During 2002 and 2003, Sprint entered into variable prepaid forward contracts to
monetize equity securities held as available for sale. The derivatives have been
designated as cash flow hedges to reduce the variability in expected cash flows
related to the forecasted sale of the underlying equity securities.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on reducing
transaction exposure to optimize consolidated cash flow. Sprint's primary
transaction exposure results from payments made to and received from overseas
telecommunications companies for completing international calls made by Sprint's
domestic customers. These international operations were not material to the
consolidated financial position at September 30, 2003 or results of operations
or cash flows for the quarter ended September 30, 2003. 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 95% of Sprint's outstanding debt at September 30, 2003 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.
In the 2003 third quarter, Sprint entered into fair value interest rate swaps
effectively converting approximately 5% of its outstanding debt to variable rate
debt. These interest rate swaps have maturities ranging from 2008 to 2012.
Assuming a one percentage point increase in the prevailing forward yield curve,
the fair value of the interest rate swaps and the underlying senior notes would
change by $57 million. These interest rate swaps met all the requirements for
perfect effectiveness under derivative accounting rules; therefore there is no
impact to earnings and cash flows for any fair value fluctuations.
Sprint performs interest rate sensitivity analyses on its variable-rate debt.
These analyses indicate that a one percentage point change in interest rates
would have an annual impact of $17 million pre-tax on the statements of
operations and cash flows at September 30, 2003. 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 performs a sensitivity analysis on the fair market value of its
outstanding debt. A 10% decline in market interest rates would cause a $542
million increase in fair market value of its debt of $20 billion. This analysis
includes the hedged debt, but excludes Sprint's equity unit notes.
Foreign Currency Risk
Sprint also enters into forward contracts and options in foreign currencies to
reduce the impact of changes in foreign exchange rates. Sprint uses foreign
currency derivatives to hedge its foreign currency exposure related to
settlement of international telecommunications access charges. The dollar
equivalent of Sprint's net foreign currency payables was $10.5 million at
September 30, 2003. The potential immediate pre-tax loss to Sprint that would
result from a hypothetical 10% change in foreign currency exchange rates based
on these positions would be approximately $1 million.
PART I.
Item 4
Item 4. Controls and Procedures
In response to adoption of the Sarbanes-Oxley Act of 2002, Sprint formalized its
disclosure controls and procedures. In connection with the preparation of this
Form 10-Q and as of September 30, 2003, Sprint's Chief Executive Officer and
Chief Financial Officer directed Sprint's internal auditors to update their
review of the effectiveness of these disclosure controls and procedures and
report their conclusions. The Chief Executive Officer and Chief Financial
Officer also met with other members of management, members of the financial
accounting and legal departments, and Sprint's independent auditors to discuss
and evaluate Sprint's disclosures and the effectiveness of the disclosure
controls and procedures. Based on these discussions and the report of the
internal auditors, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of the disclosure controls and
procedures were effective and enabled Sprint to disclose all material financial
and non-financial information affecting its businesses as required by the rules
governing this report. No changes were made in Sprint's internal controls over
financial reporting during the third quarter that have materially affected or
are reasonably likely to materially affect Sprint's financial reporting.
PART II.
Other Information
PART II. - Other Information
Item 1. Legal Proceedings
Sprint reported in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, that the Inspector General of the General
Services Administration (GSA) had recommended that the GSA Debarment
Official consider whether to initiate debarment proceedings against
Sprint following a billing error related to Sprint's FTS 2001 contract
with the GSA. In October 2003, the GSA's Debarment Official decided,
based on a review of the record, not to initiate debarment proceedings
against Sprint.
In October 2003, the settlements in the derivative action and the
securities class action reported by Sprint in its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, were each
preliminarily approved by the court in which each case is pending.
Final approval hearings in both cases have been set for December 16,
2003.
The three putative class action lawsuits alleging ERISA violations,
filed by participants in the Sprint Retirement Savings Plan and the
Centel Retirement Savings Plan for Bargaining Unit Employees and
reported by Sprint in its Form 10-Q for the quarter ended June 30,
2003, have been consolidated in the U.S. District Court for the
District of Kansas for all purposes. Plaintiffs seek to recover any
decline in the value of their FON and PCS stock during the class
period.
Various other suits, proceedings and claims, including purported class
actions, typical for a business enterprise, are pending against
Sprint.
While it is not possible to determine the ultimate disposition of each
of these proceedings and whether they will be resolved consistent with
Sprint's beliefs, Sprint expects the outcome of such proceedings,
individually or in the aggregate, will not have a material adverse
effect on the financial condition or results of operations of Sprint,
the FON Group or the PCS Group.
Item 2. Changes in Securities
Bylaw Amendment
On August 12, 2003, the Sprint Board of Directors amended Sprint's
Bylaws to provide that the Kansas Control Share Acquisition Act does
not apply to acquisitions of Sprint stock. Article II, Section 5. The
Kansas Control Share Acquisition Act provides that a person loses the
right to vote shares of a publicly traded Kansas corporation acquired
in a transaction resulting in beneficial ownership of voting stock in
excess of certain thresholds (20%, 33 1/3% and 50% of the voting power
of the corporation) unless the acquisition is approved by the
shareholders of the corporation. By opting out of this Act, shares of
Sprint stock acquired in a transaction resulting in beneficial
ownership of voting stock in excess of one of these thresholds would
retain their voting rights without shareholder approval.
Sale of Unregistered Equity Securities
In September 2003, Sprint issued to Len Lauer, Sprint's new President
and Chief Operating Officer, 50,000 restricted stock units relating to
shares of FON Stock and 50,000 restricted stock units relating to
shares of PCS Stock. The restricted stock units were granted to Mr.
Lauer in connection with his promotion to President and Chief
Operating Officer as part of his long-term incentive compensation.
Each restricted stock unit represents the right to one share of common
stock once the unit vests. The restricted stock units also include
dividend equivalent rights, which means that, when Sprint pays a
dividend on the stock represented by the units, Mr. Lauer is entitled
to additional shares of the stock when the units vest. The units vest
at various times beginning in 2006 and ending in 2008.
Neither the units nor the common stock issuable once the units vest
were registered under the Securities Act of 1933. The issuance of the
restricted stock units was exempt from registration under the
Securities Act in reliance on the exemption provided by Section 4(2)
of the Securities Act because the restricted stock units were issued
in a transaction not involving a public offering. Sprint may in the
future register the resale of the shares of stock to be received by
Mr. Lauer once the units vest.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended September 30,
2003.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended September 30,
2003.
Item 5. Other Information
Ratios of Earnings to Fixed Charges
Sprint's earnings, as adjusted, were inadequate to cover fixed charges
by $777 million in the 2003 third quarter and by $633 million in the
year-to-date period. Sprint's ratio of earnings to fixed charges was
1.45 in the 2002 third quarter and 1.30 in the 2002 year-to-date
period. The ratio of earnings to fixed charges was computed by
dividing fixed charges into the sum of earnings, after certain
adjustments, and fixed charges. Earnings include income or loss from
continuing operations before income taxes plus net losses in equity
method investees, less capitalized interest. Fixed charges include
interest on all debt of continuing operations, including amortization
of debt issuance costs, and the interest component of operating rents.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit
3.1 to Amendment No. 5 to Sprint Corporation's
Registration Statement on Form 8-A relating to Sprint's
Series 1 FON Common Stock, filed May 22, 2003, and
incorporated herein by reference).
(b) Bylaws, as amended.
(4) Instruments defining the Rights of Sprint's Security
Holders:
(a) The rights of Sprint's equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth
Articles of Sprint's Articles of Incorporation. See
Exhibit 3(a).
(b) Provision regarding Kansas Control Share Acquisition
Act is in Article II, Section 5 of the Bylaws.
Provisions regarding Stockholders' Meetings are set
forth in Article III of the Bylaws. Provisions
regarding the Capital Stock Committee are set forth in
Article IV, Section 12 of the Bylaws. See Exhibit 3(b).
(c) Amended and Restated Rights Agreement dated as of
November 23, 1998, between Sprint Corporation and UMB
Bank, n.a. (filed as Exhibit 4.1 to Amendment No. 1 to
Sprint Corporation's Registration Statement on Form 8-A
relating to Sprint's PCS Group Rights, filed November
25, 1998, and incorporated herein by reference).
(d) Amendment dated March 28, 2003, to Amended and Restated
Rights Agreement between the Registrant and UMB, n.a.,
as Rights Agent (filed as Exhibit 4.2 to Amendment No.
3 to Sprint Corporation's Registration Statement on
Form 8-A relating to Sprint's PCS Group Rights, filed
April 2, 2003, and incorporated herein by reference).
(e) 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).
(f) Tracking Stock Policies of Sprint Corporation, as
amended (filed as Exhibit 4(c) to Sprint Corporation's
Annual Report on Form 10-K/A for the year ended
December 31, 2001 and incorporated herein by
reference).
(12) Computation of Ratios of Earnings to Fixed Charges
(31) (a) Certification of Chief Executive Officer Pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a).
(b) Certification of Chief Financial Officer Pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a).
(32) (a) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Sprint will furnish to the Securities and Exchange Commission, upon request, a
copy of the instruments defining the rights of holders of long-term debt that
does not exceed 10% of the total assets of Sprint.
(b) Reports on Form 8-K
Sprint filed a Current Report on Form 8-K dated July 28, 2003, in
which it reported that it announced second quarter 2003 results. The
news release regarding second quarter 2003 results, which was
furnished as an exhibit to the Current Report, included the following
financial information:
Sprint Corporation Consolidated Statements of Operations
Sprint Corporation Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
Sprint Corporation Reconciliation of Non-GAAP Liquidity Measures
Sprint Corporation FON Group Operating Statistics
Sprint Corporation PCS Group Operating Statistics
Sprint filed a Current Report on Form 8-K dated September 10, 2003 in
which it reported that it had announced the appointment of Len Lauer
as President and Chief Operating Officer of Sprint.
Sprint filed a Current Report on Form 8-K dated October 14, 2003 in
which it reported that the Audit Committee of its Board of Directors
had determined that Sprint's independent auditor, Ernst and Young LLP,
would be replaced by KPMG LLP as the independent auditor for Sprint
for the year ending December 31, 2004. Ernst and Young will continue
as Sprint's independent auditor for the year ending December 31, 2003.
Sprint filed a Current Report on Form 8-K dated October 23, 2003, in
which it reported that it announced third quarter 2003 results. The
news release regarding third quarter 2003 results, which was furnished
as an exhibit to the Current Report, included the following financial
information:
Sprint Corporation Consolidated Statements of Operations
Sprint Corporation Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
Sprint Corporation Reconciliation of Non-GAAP Liquidity Measures
Sprint Corporation FON Group Operating Statistics
Sprint Corporation PCS Group Operating Statistics
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPRINT CORPORATION
------------------
(Registrant)
By /s/ John P. Meyer
-----------------------------------
John P. Meyer
Senior Vice President -- Controller
Principal Accounting Officer
Dated: November 10, 2003