UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 JULY 31, 2003:
FON COMMON STOCK 903,168,126
PCS COMMON STOCK:
Series 1 813,568,852
Series 2 220,895,330
CLASS A COMMON STOCK 43,118,018
TABLE OF CONTENTS
Page
Reference
Part I - Financial Information
Item 1. Financial Statements
Consolidated Financial Statements (including Consolidating Information)
Consolidated Statements of Operations 1
Consolidated Statements of Comprehensive Income (Loss) 5
Consolidated Balance Sheets 9
Consolidated Statements of Cash Flows 13
Consolidated Statement of Shareholders' Equity 15
Condensed Notes to Consolidated Financial Statements 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk 53
Item 4. Controls and Procedures 54
Part II - Other Information
Item 1. Legal Proceedings 55
Item 2. Changes in Securities 55
Item 3. Defaults Upon Senior Securities 56
Item 4. Submission of Matters to a Vote of Security Holders 56
Item 5. Other Information 57
Item 6. Exhibits and Reports on Form 8-K 57
Signature 60
Part I.
Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
--------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Quarters Ended June 30, 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,463 $ 6,703
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,893 3,081
Selling, general and administrative 1,600 1,752
Depreciation 1,252 1,198
Amortization - 2
Restructuring and asset impairments 348 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 6,093 6,033
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income 370 670
Interest expense (351) (386)
Intergroup interest charge - -
Other income (expense), net (21) (277)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes (2) 7
Income tax (expense) benefit - (113)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations (2) (106)
Discontinued operation, net 9 38
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 7 (68)
Preferred stock dividends (paid) received (1) (2)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 6 $ (70)
-- ------------- --- -------------
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
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (163) $ (154) $ 3,530 $ 3,839 $ 3,096 $ 3,018
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(163) (154) 1,535 1,800 1,521 1,435
(10) (8) 903 941 707 819
- - 635 657 617 541
- - - - - 2
- - 348 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(173) (162) 3,421 3,398 2,845 2,797
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
10 8 109 441 251 221
- - (65) (78) (286) (308)
- - 98 92 (98) (92)
(10) (8) 4 (200) (15) (69)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 146 255 (148) (248)
- - (56) (191) 56 78
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 90 64 (92) (170)
- - 9 38 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 99 102 (92) (170)
- - 2 1 (3) (3)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 101 $ 103 $ (95) $ (173)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.10 $ 0.07 $ (0.09) $ (0.17)
0.01 0.05 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.11 $ 0.12 $ (0.09) $ (0.17)
--- ------------- -- ------------- -- ------------- --- -------------
901.7 893.4 1,024.3 1,013.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.10 $ 0.07 $ (0.09) $ (0.17)
0.01 0.05 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.11 $ 0.12 $ (0.09) $ (0.17)
--- ------------- -- ------------- -- ------------- --- -------------
899.9 891.1 1,024.3 1,013.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
--------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Year-to-Date June 30, 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 12,802 $ 13,340
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 5,732 6,251
Selling, general and administrative 3,250 3,507
Depreciation 2,488 2,368
Amortization - 3
Restructuring and asset impairments 358 23
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 11,828 12,152
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 974 1,188
Interest expense (717) (699)
Intergroup interest charge - -
Premium on early retirement of debt (19) -
Other expense, net (82) (308)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes 156 181
Income tax benefit (expense) (61) (187)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations 95 (6)
Discontinued operation, net 1,322 78
Cumulative effect of change in
accounting principles, net 258 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 1,675 72
Preferred stock dividends (paid) received (3) (4)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 1,672 $ 68
-- ------------- --- -------------
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
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (352) $ (269) $ 7,111 $ 7,743 $ 6,043 $ 5,866
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(352) (269) 3,115 3,682 2,969 2,838
(20) (16) 1,822 1,922 1,448 1,601
- - 1,263 1,301 1,225 1,067
- - - - - 3
- - 348 - 10 23
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(372) (285) 6,548 6,905 5,652 5,532
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
20 16 563 838 391 334
- - (130) (157) (587) (542)
- - 180 173 (180) (173)
- - (19) - -
(20) (16) - (198) (62) (94)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 594 656 (438) (475)
- - (225) (346) 164 159
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 369 310 (274) (316)
- - 1,322 78 - -
- - 258 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,949 388 (274) (316)
- - 4 3 (7) (7)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,953 $ 391 $ (281) $ (323)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.41 $ 0.35 $ (0.27) $ (0.32)
1.47 0.09 - -
0.29 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 2.17 $ 0.44 $ (0.27) $ (0.32)
--- ------------- -- ------------- -- ------------- --- -------------
900.2 892.9 1,023.2 1,011.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.41 $ 0.35 $ (0.27) $ (0.32)
1.47 0.09 - -
0.29 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 2.17 $ 0.44 $ (0.27) $ (0.32)
--- ------------- -- ------------- -- ------------- --- -------------
898.2 890.4 1,023.2 1,011.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.25 $ 0.25 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
--------------------------------------------- ----------------- ----------------- -- -------------------------------
Quarters Ended June 30, 2003 2002
--------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 7 $ (68)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities 41 (24)
Income tax benefit (expense) (15) 7
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period 26 (17)
Reclassification adjustment for gains on securities
included in net income (loss) (2) (1)
Income tax benefit 1 -
------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Net reclassification adjustment for gains
included in net income (1) (1)
Foreign currency translation adjustments (3) 6
Unrealized gains (losses) on qualifying cash flow hedges (28) 20
Income tax benefit (expense) 11 (8)
--------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on qualifying
cash flow hedges during the period (17) 12
--------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) 5 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 12 $ (68)
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ------------------------------- -- ----------------------------------
2003 2002 2003 2002 2003 2002
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 99 $ 102 $ (92) $ (170)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 41 (24) - -
- - (15) 7 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 26 (17) - -
- - (2) (1) - -
- - 1 - - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1) (1) - -
- - (3) - - 6
- - (28) 20 - -
- - 11 (8) - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (17) 12 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 5 (6) - 6
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 104 $ 96 $ (92) $ (164)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
--------------------------------------------- ----------------- ----------------- -- -------------------------------
Year-to-Date June 30, 2003 2002
--------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 1,675 $ 72
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities 40 (30)
Income tax benefit (expense) (15) 12
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities
during the period 25 (18)
Reclassification adjustment for gains on securities
included in net income (loss) (3) (1)
Income tax benefit 2 -
--------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Reclassifications adjustment for gains included in
net income (loss) (1) (1)
Foreign currency translation adjustments (1) 3
Unrealized gains (losses) on qualifying
cash flow hedges (30) 28
Income tax benefit (expense) 12 (6)
--------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized gains (losses) on qualifying
cash flow hedges (18) 22
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income 5 6
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income $ 1,680 $ 78
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ---------------------------------- ----------------------------------
2003 2002 2003 2002 2003 2002
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,949 $ 388 $ (274) $ (316)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 40 (30) - -
- - (15) 12 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 25 (18) - -
- - (3) (1) - -
- - 2 - - -
----- ------------- --- ------------- -- --- ------------- -- ------------- --- -- ------------- --- -------------
- - (1) (1) - -
- - (1) (2) - 5
- - (30) 28 - -
- - 12 (6) - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (18) 22 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 5 1 - 5
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,954 $ 389 $ (274) $ (311)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 2,739 $ 1,035
Accounts receivable, net of consolidated allowance for doubtful accounts of
$320 and $414 2,902 2,951
Inventories 654 682
Deferred tax asset 10 806
Current tax benefit receivable from the FON Group - -
Prepaid expenses 351 360
Intergroup receivable - -
Other 220 244
-------------------------------------------------------------------------------------------------------------------------
Total current assets 6,876 6,078
Assets of discontinued operation - 391
Property, plant and equipment
FON Group 35,114 35,055
PCS Group 17,819 16,978
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 52,933 52,033
Accumulated depreciation (25,146) (23,288)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 27,787 28,745
Investments in and advances to affiliates 45 73
Intangibles
Goodwill 4,401 4,401
Spectrum licenses 4,618 4,620
Other intangibles 29 26
-------------------------------------------------------------------------------------------------------------------------
Total intangibles 9,048 9,047
Accumulated amortization (3) (2)
-------------------------------------------------------------------------------------------------------------------------
Net intangibles 9,045 9,045
Other assets 891 961
-------------------------------------------------------------------------------------------------------------------------
Total $ 44,644 $ 45,293
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ----------------------------------- -----------------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2003 2002 2003 2002 2003 2002
------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 1,742 $ 641 $ 997 $ 394
- - 1,567 1,650 1,335 1,301
- - 221 219 433 463
- - 10 42 - 764
(375) - - - 375 -
- - 173 215 178 145
(601) (536) 601 536 - -
- - 117 114 103 130
------------------------------------- ----------------------------------- -----------------------------------
(976) (536) 4,431 3,417 3,421 3,197
- - - 391 - -
- - 35,114 35,055 - -
- - - - 17,819 16,978
------------------------------------- ----------------------------------- -----------------------------------
- - 35,114 35,055 17,819 16,978
(48) (46) (18,675) (18,161) (6,423) (5,081)
------------------------------------- ----------------------------------- -----------------------------------
(48) (46) 16,439 16,894 11,396 11,897
(279) (280) 252 252 72 101
- - 27 27 4,374 4,374
- - 1,521 1,520 3,097 3,100
- - 26 24 3 2
------------------------------------- ----------------------------------- -----------------------------------
- - 1,574 1,571 7,474 7,476
- - (3) (2) - -
------------------------------------- ----------------------------------- -----------------------------------
- - 1,571 1,569 7,474 7,476
- - 560 610 331 351
------------------------------------- ----------------------------------- -----------------------------------
$ (1,303) $ (862) $ 23,253 $ 23,133 $ 22,694 $ 23,022
------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 1,330 $ 1,887
Current maturities of intergroup debt - -
Accounts payable 1,964 2,151
Accrued interconnection costs 563 626
Accrued taxes 402 358
Advance billings 559 510
Accrued restructuring costs 185 277
Payroll and employee benefits 534 579
Accrued interest 394 416
Intergroup payable - -
Other 1,044 1,004
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,975 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 17,107 18,405
Intergroup debt - -
Equity unit notes 1,725 1,725
Deferred income taxes 2,039 2,025
Postretirement and other benefit obligations 1,779 1,712
Other 932 769
-------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 23,582 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, 901.4 and 895.1
shares issued and outstanding 1,803 1,790
PCS, par value $1.00 per share, 4,600.0 shares authorized, 1,025.7 and
999.8 shares issued and outstanding 1,026 1,000
Capital in excess of par or stated value 10,004 9,931
Retained earnings 1,703 252
Accumulated other comprehensive loss (696) (701)
Combined attributed net assets - -
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,840 12,294
-------------------------------------------------------------------------------------------------------------------------
Total $ 44,644 $ 45,293
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------ ----------------------------------- -----------------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2003 2002 2003 2002 2003 2002
------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 353 $ 1,234 $ 977 $ 653
- - (1,076) - 1,076 -
- - 777 808 1,187 1,343
- - 551 614 12 12
(25) - 291 122 136 236
- - 230 232 329 278
- - 181 251 4 26
- - 441 488 93 91
- - 84 116 310 300
(601) (536) - - 601 536
(48) (46) 562 545 530 505
------------------------------------ ----------------------------------- -----------------------------------
(674) (582) 2,394 4,410 5,255 3,980
(350) - 350 - - -
- - - 299 - -
- - 2,868 3,142 14,239 15,263
- - - (406) - 406
- - - - 1,725 1,725
- - 1,884 1,825 155 200
- - 1,744 1,677 35 35
- - 398 362 534 407
------------------------------------ ----------------------------------- -----------------------------------
- - 6,894 6,600 16,688 18,036
(279) (280) - 10 526 526
- 22 - - - -
1,803 1,790 - - - -
1,026 1,000 - - - -
10,004 9,931 - - - -
1,703 252 - - - -
(696) (701) - - - -
(13,840) (12,294) 13,615 11,814 225 480
------------------------------------ ----------------------------------- -----------------------------------
- - - - - -
------------------------------------ ----------------------------------- -----------------------------------
$ (1,303) $ (862) $ 23,253 $ 23,133 $ 22,694 $ 23,022
------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
------------------------------------------------------------------ ----------------- ----------------------------------
Year-to-Date June 30, 2003 2002
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ 1,675 $ 72
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Discontinued operation, net (1,322) (78)
Cumulative effect of change in accounting principle, net (258) -
Equity in net losses of affiliates 28 102
Depreciation and amortization 2,488 2,371
Deferred income taxes 644 628
Net losses on write-down of assets 347 254
Changes in assets and liabilities:
Accounts receivable, net 49 76
Inventories and other current assets (288) (123)
Accounts payable and other current liabilities (729) (622)
Current tax benefit receivable from the FON Group - -
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net 234 11
Other, net 100 25
------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided by operating activities of continuing operations 2,968 2,716
------------------------------------------------------------------------------------ --- ------------- -- -------------
Investing Activities
Capital expenditures (1,492) (2,509)
Investments in and loans to other affiliates, net (12) 12
Net proceeds from sales of assets 77 60
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities of continuing operations (1,427) (2,437)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt 44 5,980
Payments on debt (1,903) (5,777)
Dividends paid (228) (226)
Intergroup advances, net - -
Other, net 19 14
------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided (used) by financing activities of continuing operations (2,068) (9)
------------------------------------------------------------------------------------ --- ------------- -- -------------
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash from discontinued operations 2,231 65
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 1,704 335
Cash and Equivalents at Beginning of Period 1,035 313
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 2,739 $ 648
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2003 2002 2003 2002 2003 2002
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,949 $ 388 $ (274) $ (316)
- - (1,322) (78) - -
- - (258) - - -
- - (1) 14 29 88
- - 1,263 1,301 1,225 1,070
- - (75) 247 719 381
- - 337 253 10 1
- - 83 192 (34) (116)
375 - 38 (106) (701) (17)
(375) (20) (184) (774) (170) 172
- 20 - - - (20)
- - (38) 157 38 (157)
- - 102 (17) 132 28
- - 60 (12) 40 37
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,954 1,565 1,014 1,151
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (772) (1,081) (720) (1,428)
- - - (26) (12) 38
- - 77 60 - -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (695) (1,047) (732) (1,390)
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
--
- - 44 1,244 - 4,736
- - (1,873) (1,781) (30) (3,996)
- - (221) (219) (7) (7)
- - - 158 - (158)
- - 11 (73) 8 87
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (2,039) (671) (29) 662
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,881 65 350 -
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,101 (88) 603 423
- - 641 134 394 179
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,742 $ 46 $ 997 $ 602
----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
Year-to-date June 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 - - - (3)
Conversion of PCS common stock
underlying Class A common stock (22) - 22 -
FON Series 1 common stock issued - 13 - 62
PCS Series 1 common stock issued - - 4 14
Other, net - - - -
----------------------------------------------------------------------------------------------------------------
June 2003 balance $ - $ 1,803 $ 1,026 $ 10,004
------------------------------------------------------------------
Shares Outstanding
------------------------------------------------------------------------------------------------
Beginning 2003 balance 43.1 895.1 999.8
FON Series 1 common stock issued - 6.3 -
PCS Series 1 common stock issued - - 4.3
Conversion of Class A FT - - 21.6
------------------------------------------------------------------------------------------------
June 2003 balance 43.1 901.4 1,025.7
--------------------------------------------------
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
1,675 - 1,675 1,949 (274)
(225) - (225) (225) -
- - (3) 4 (7)
- - - - -
- - 75 75 -
- - 18 - 18
1 5 6 (2) 8
------------------------------------------------------------------------------------
$ 1,703 $ (696) $ 13,840 $ 13,615 $ 225
------------------------------------------------------------------------------------
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
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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 $177 million in the 2003 and 2002 second quarters and
$350 million and $325 million in the 2003 and 2002 year-to-date periods,
respectively. The intercompany profit on capitalized charges totaled $2 million
and $1 million in the 2003 and 2002 second quarters and $3 million and $4
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 second quarter and $5 million in the
year-to-date period. In the 2002 second quarter and year-to-date period, the PCS
Group credited the FON Group for $22 million and $52 million, respectively. 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 $10 million and $8 million in the 2003 and 2002 second
quarters and $20 million and $16 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, 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
$148 million and $79 million in the 2003 and 2002 second quarters and $259
million and $135 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. Also included in these amounts are
charges that were capitalized by the PCS Group. These capitalized charges
totaled $4 million and $3 million in the 2003 and 2002 second quarters and $9
million and $5 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 $422 million and $129 million in
the 2003 and 2002 second quarters and $542 million and $252 million in the 2003
and 2002 year-to-date periods, respectively. The percentage of these costs
allocated to the PCS Group were approximately 51% and 29% in the 2003 and 2002
second quarters and 47% and 28% 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. Divisional direct costs for these services
have dropped 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 $92 million in
the 2003 and 2002 second quarters and $180 million and $173 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.
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2. Investments
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Investments in Securities
The cost of investments in marketable securities, which is included in "Other
assets" on the balance sheets, was $140 million at the end of June 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 June 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, at year-end 2002. Both gains and losses are included in
"Accumulated other comprehensive loss" in the Sprint Consolidated Balance
Sheets.
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 June 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 June 2003, investments accounted for using the equity method
consisted primarily of the PCS Group's $72 million investment in Virgin Mobile,
U.S.A. At the end of June 2002, investments accounted for using the equity
method consisted primarily of the PCS Group's investment in Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso), SVC BidCo L.P., and Virgin Mobile,
U.S.A. During 2002, the PCS Group's investment in BidCo was dissolved. In the
third quarter of 2002, the PCS Group sold its investment in Pegaso to Telefonica
Moviles.
Combined, unaudited, summarized financial information (100% basis) of entities
accounted for using the equity method was as follows:
Quarters Ended Year-to-Date
June 30, June 30,
--- ------------------------------- -- -------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
Net operating revenues $ 184 $ 192 $ 347 $ 384
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (32) $ (87) $ (54) $ (122)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (19) $ (248) $ (51) $ (381)
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Equity in net losses of affiliates $ (10) $ (82) $ (28) $ (102)
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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.
While adoption of SFAS No. 143 did not result in the recognition of asset
retirement obligations, adoption of this standard did affect 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.
Sprint FON Group
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Quarters Ended June 30, Year-to-Date June 30,
--- ------------------------------- -- -------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Net income, as reported $ 99 $ 102 $ 1,949 $ 388
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 - 3 - 6
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Pro forma net income $ 99 $ 105 $ 1,691 $ 394
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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 June 30, 2003 Consolidated Group Group
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 55 $ 208 $ (153)
Effect of:
State income taxes, net of federal income tax effect 8 18 (10)
Equity in losses of foreign joint ventures 2 2 -
Other, net (4) (3) (1)
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 61 $ 225 $ (164)
--- ------------- --- -------------- -- --------------
Effective income tax rate 39.1% 37.9% 37.4%
--- ------------- --- -------------- -- --------------
Sprint Sprint Sprint
Corporation FON PCS
Year-to-date June 30, 2002 Consolidated Group Group
------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 63 $ 229 $ (166)
Effect of:
State income taxes, net of federal income tax effect 13 27 (14)
Equity in losses of foreign joint ventures 25 1 24
Write-down of cost-method investment 84 84 -
Other, net 2 5 (3)
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Income tax expense (benefit) $ 187 $ 346 $ (159)
--- ------------- --- -------------- -- --------------
Effective income tax rate 103.3% 52.8% 33.5%
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5. Accounting for Derivative Instruments
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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 holds 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 June 30, 2003, Sprint held no interest rate
swaps. Sprint held cash flow hedges in interest rate swaps in the period ending
June 30, 2002.
Sprint recorded a $6 million pre-tax increase to other comprehensive income in
the 2002 second quarter and 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" on 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
second quarter and 2003 year-to-date period.
Sprint recorded net derivative losses in earnings of $1 million after tax for
the 2002 second quarter and 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 $17 million after-tax decrease to other comprehensive income
in the 2003 second quarter and an $18 million after tax decrease for the 2003
year-to-date period resulting from losses on these cash flow hedges. Sprint
recorded a $9 million after-tax increase to other comprehensive income in the
2002 second quarter and a $10 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" on 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 the 2003 second quarter on this investment in Sprint's
Consolidated Statements of Operations.
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 consisting of asset write-offs and severance costs
associated with work force reductions. The charge for asset impairments was $337
million and the remaining $11 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 June 30, 2003, approximately 250 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 twelve 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 June
30, 2003, approximately 1,800 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 its
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. Sprint expects to pay the majority of severance and other exit costs
by the third quarter of 2003.
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:
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2003 Activity
-----------------------------------------
Total
December 31, Restructuring Cash Non-cash/ June 30,
2002 Liability Charge Payments Adjustments 2003
Balance Liability
Balance
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(millions)
Restructuring Events - 2003
Global Markets Web Hosting Wind-down
Severance $ - $ 11 $ - $ - $ 11
Restructuring Events - 2002
One Sprint Consolidation
Severance 58 - 28 - 30
Other exit costs 51 - 1 - 50
PCS Consolidation
Severance 22 - 16 - 6
Other exit costs 16 - - (3) 13
Global Markets Consolidation
Severance 8 - 7 - 1
Other exit costs 30 - 8 - 22
PCS Customer Service Center Closures
Other exit costs 2 - 1 - 1
Restructuring Events - 2001
Sprint ION Termination
Severance 43 - 17 - 26
Other exit costs 47 - 13 (9) 25
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Total $ 277 $ 11 $ 91 $ (12) $ 185
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Other Asset Impairments
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.
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7. Discontinued Operation
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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. 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:
June 30, December 31,
2003 2002
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(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
June 30,
-- -------------- -- --------------
2003 2002
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ - $ 139
-- -------------- -- --------------
Income before income taxes $ - $ 64
-- -------------- -- --------------
Year-to-Date
June 30,
-- -------------- -- --------------
2003 2002
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ 5 $ 276
-- -------------- -- --------------
Income before income taxes $ 5 $ 127
-- -------------- -- --------------
At June 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 $350 million for the tax allocation between the PCS Group and the FON
Group under the tax sharing agreement.
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8. Short-term Borrowings and Current Maturities of Long-term Debt
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In February 2003, Sprint prepaid the $455 million balance outstanding relating
to the global markets division accounts receivable asset securitization
facility. As of June 30, 2003, no amounts were drawn against the facility.
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. As a result of the
FON Group's repayment of the notes, the allocated debt is now reflected as
intergroup debt on the PCS Group balance sheet. 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. The intergroup debt is
eliminated on the consolidated balance sheet.
In March 2003, Sprint completed a tender offer to purchase $635 million
principal amount of its long-term senior notes before their scheduled maturity.
As of the 2003 second quarter, the allocated debt is reflected as current
maturities of intergroup debt on the PCS balance sheet. See further discussion
in Note 9.
In June 2003, Sprint closed on 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.
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9. Long-term Debt and Capital Lease Obligations
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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 5.875% 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 is now 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. As of the 2003 second quarter, the allocated debt is reflected as
current maturities of intergroup debt on the PCS balance sheet. The intergroup
debt is eliminated on 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.
While the Class A common stock remains outstanding, it is nonvoting.
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
June 30, June 30,
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions, except per share data)
Net income, as reported $ 99 $ 102 $ 1,949 $ 388
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
8 1 8 1
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (25) (25) (39) (47)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Pro forma net income $ 82 $ 78 $ 1,918 $ 342
--- ------------- -- -------------- -- ------------- --- -------------
Earnings per common share:
Basic - as reported $ 0.11 $ 0.12 $ 2.17 $ 0.44
--- ------------- -- -------------- -- ------------- --- -------------
Basic - pro forma $ 0.09 $ 0.09 $ 2.14 $ 0.38
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - as reported $ 0.11 $ 0.12 $ 2.17 $ 0.44
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - pro forma $ 0.09 $ 0.09 $ 2.13 $ 0.38
--- ------------- -- -------------- -- ------------- --- -------------
Sprint PCS Group
--- ------------------------------- -- -------------------------------
Quarters Ended Year-to-Date
June 30, June 30,
--- ------------------------------- -- -------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions, except per share data)
Net loss, as reported $ (92) $ (170) $ (274) $ (316)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
7 1 7 1
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (34) (35) (54) (63)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Pro forma net loss $ (119) $ (204) $ (321) $ (378)
--- ------------- -- -------------- -- ------------- --- -------------
Earnings per common share:
Basic - as reported $ (0.09) $ (0.17) $ (0.27) $ (0.32)
--- ------------- -- -------------- -- ------------- --- -------------
Basic - pro forma $ (0.12) $ (0.20) $ (0.31) $ (0.37)
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - as reported $ (0.09) $ (0.17) $ (0.27) $ (0.32)
--- ------------- -- -------------- -- ------------- --- -------------
Diluted - pro forma $ (0.12) $ (0.20) $ (0.31) $ (0.37)
--- ------------- -- -------------- -- ------------- --- -------------
Sprint recognized pre-tax charges of $8 million in the 2003 second quarter and
$9 million in the year to date period related to newly issued stock-based
grants. An immaterial amount of expense was recognized for grants of restricted
stock made in 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 prices 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.
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. 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. If debarred, Sprint would not be
able to bid on future government contracts. Sprint believes that the request for
debarment consideration is unprecedented and unfounded.
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. Sprint believes these lawsuits
are unfounded and intends to defend them vigorously.
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:
----------------- ----------------
June 30, December 31,
2003 2002
--------------------------------------------------- -----------------------------------
(millions)
FON Group $ 228 $ 279
PCS Group 92 135
--------------------------------------------------- -- -------------- -- --------------
Consolidated $ 320 $ 414
-- -------------- -- --------------
Supplemental Cash Flows Information
Sprint's net cash paid for interest and income taxes was as follows:
Year-to-Date
June 30,
-- ------------- -- -------------
2003 2002
--------------------------------------------------- -- ------------- -- -------------
(millions)
Interest (net of capitalized interest) $ 729 $ 554
-- ------------- -- -------------
Income taxes $ 94 $ (384)
-- ------------- -- -------------
Sprint's non-cash activities included the following:
Year-to-Date
June 30,
-- ------------- -- -------------
2003 2002
--------------------------------------------------- -- ------------- -- -------------
(millions)
Common stock issued under Sprint's employee
benefit stock plans $ 91 $ 114
-- ------------- -- -------------
Tax benefit from stock options exercised $ 1 $ 2
-- ------------- -- -------------
Contribution to equity investment $ - $ 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
June 30, Division Division Other(1) Group(2) Eliminations(3) Consolidated
----------------------------------------------------------------------------------------------------------------
(millions)
2003
Net operating revenues $ 2,002 $ 1,529 $ 210 $ 3,096 $ (374) $ 6,463
Affiliated revenues 170 66 136 2 (374) -
Operating income (loss) (329) 449 (6) 251 5 370
2002
Net operating revenues $ 2,275 $ 1,548 $ 227 $ 3,018 $ (365) $ 6,703
Affiliated revenues 177 72 138 (22) (365) -
Operating income (loss) (30) 481 (4) 221 2 670
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Global Corporate
Year-to-Date Markets Local PCS and
June 30, Division Division Other(1) Group(2) Eliminations(3) Consolidated
----------------------------------------------------------------------------------------------------------------
(millions)
2003
Net operating revenues $ 4,044 $ 3,065 $ 397 $ 6,043 $ (747) $ 12,802
Affiliated revenues 363 118 261 5 (747) -
Operating income (loss) (323) 909 (16) 391 13 974
2002
Net operating revenues $ 4,617 $ 3,113 $ 420 $ 5,866 $ (676) $ 13,340
Affiliated revenues 324 150 254 (52) (676) -
Operating income (loss) (105) 962 (10) 334 7 1,188
----------------------------------------------------------------------------------------------------------------
(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 second 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 Eliminations
June 30, Division Division Other(1) Group (2),(3) Consolidated
----------------------------------------------------------------------------------------------------------------------
(millions)
2003
Voice $ 1,243 $ - $ - $ - $ (103) $ 1,140
Data 463 - - - (42) 421
Internet 245 - - - (23) 222
Local service - 762 - - - 762
Network access - 519 - - (57) 462
Long distance - 133 - - - 133
Wireless services - - - 3,096 (3) 3,093
Other 51 115 210 - (146) 230
----------------------------------------------------------------------------------
Total net operating revenues $ 2,002 $ 1,529 $ 210 $ 3,096 $ (374) $ 6,463
----------------------------------------------------------------------------------
2002
Voice $ 1,468 $ - $ - $ - $ (176) $ 1,292
Data 467 - - - - 467
Internet 247 - - - - 247
Local service - 763 - - - 763
Network access - 518 - - (53) 465
Long distance - 156 - - - 156
Wireless services - - - 3,018 21 3,039
Other 93 111 227 - (157) 274
----------------------------------------------------------------------------------
Total net operating revenues $ 2,275 $ 1,548 $ 227 $ 3,018 $ (365) $ 6,703
----------------------------------------------------------------------------------
(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 was not tracked at a specific products and services level. All
eliminations were considered voice revenues.
----------------------------------------------------------------------------------------------------------------------
Global
Year-to-Date Markets Local PCS Eliminations
June 30, Division(1) Division Other(1) Group (2),(3) Consolidated
----------------------------------------------------------------------------------------------------------------------
(millions)
2003
Voice $ 2,535 $ - $ - $ - $ (296) $ 2,239
Data 924 - - - (42) 882
Internet 488 - - - (23) 465
Local service - 1,527 - - (1) 1,526
Network access - 1,042 - - (100) 942
Long distance - 277 - - - 277
Wireless services - - - 6,043 (5) 6,038
Other 97 219 397 - (280) 433
----------------------------------------------------------------------------------
Total net operating revenues $ 4,044 $ 3,065 $ 397 $ 6,043 $ (747) $ 12,802
----------------------------------------------------------------------------------
2002
Voice $ 3,004 $ - $ - $ - $ (324) $ 2,680
Data 951 - - - - 951
Internet 492 - - - - 492
Local service - 1,524 - - - 1,524
Network access - 1,036 - - (112) 924
Long distance - 324 - - - 324
Wireless services - - - 5,866 52 5,918
Other 170 229 420 - (292) 527
----------------------------------------------------------------------------------
Total net operating revenues $ 4,617 $ 3,113 $ 420 $ 5,866 $ (676) $ 13,340
----------------------------------------------------------------------------------
(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 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 will be applicable to agreements entered into in
quarters beginning after June 15, 2003. Sprint will adopt 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 will
result in this activation fee revenue being recognized at the time the related
wireless phone is sold, and will classify it as equipment sales. The associated
costs will no longer be deferred.
While Sprint expects this change to accelerate the recognition of revenue and
associated expense over the next twenty-four months, which is the average life
of service, the impact to results of operations and cash flows will not be
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 will adopt this standard effective July 1, 2003, but does not expect a
material impact to its Consolidated Balance Sheet.
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 will be effective for Sprint beginning in
the 2003 third quarter. Sprint is currently assessing the application of FIN No.
46 as it relates to variable interests acquired prior to January 31, 2003, but
does not expect a material impact will be recorded in the third quarter 2003
financial statements.
--------------------------------------------------------------------------------
16. Subsequent Events
--------------------------------------------------------------------------------
Dividend Declaration
On August 12, 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 September 30,
2003.
Debt Repurchase
On July 2, 2003, Sprint gave notice of its intent to redeem before its scheduled
maturity $84 million of secured debt that was issued by its local telephone
companies. This redemption was completed on August 1, 2003. These borrowings had
interest rates ranging from 9.14% to 9.33%. A premium of $4.8 million was paid
as part of the redemption.
Pension Contribution
On July 22, 2003, Sprint contributed $400 million to its pension fund. This
contribution is allowable under ERISA rules and is tax deductible.
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
telecommunication 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;
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 possibility of one or more of the markets in which Sprint competes
being impacted by changes in political or other factors such as
monetary policy, legal and regulatory changes, including the impact of
the Telecommunications Act of 1996 (Telecom Act), or other external
factors over which Sprint has no control; and
o other risks referenced from time to time in Sprint's filings with the
Securities and Exchange Commission (SEC).
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are found throughout Management's Discussion and Analysis. The reader
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. Sprint is not obligated to publicly release any
revisions to forward-looking statements to reflect events after the date of this
report or unforeseen events. Sprint provides a detailed discussion of risk
factors in various SEC filings, including its 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 8.0 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.
Operating Segments
Sprint's business is divided into three lines of business: the global markets
division, the local division and the PCS wireless telephony products and
services business.
Board Discretion Regarding Tracking Stocks
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
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.
--------------------------------------------------------------------------------
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.
In the 2003 second quarter, Sprint announced the wind-down of its web hosting
business.
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. Sprint is evaluating alternative strategies with respect to the MMDS
spectrum leases and licenses.
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. If debarred, Sprint would not be
able to bid on future government contracts. Sprint believes that the request for
debarment consideration is unprecedented and unfounded.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.0 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
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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.
At the end of the 2003 second quarter, the PCS Group, together with third party
affiliates, operated 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 also use their phones in Canada and Mexico through
roaming agreements.
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 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. One affiliate filed for bankruptcy
protection and made claims against Sprint in the bankruptcy court. Another
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 provide for the ultimate resolution of these disputes.
The PCS Group may incur additional expenses to ensure that service is available
to its customers in the areas served by these 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.
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.
The wireless industry, including the PCS Group, typically generates a higher
number of subscriber additions and handset sales in the fourth quarter of each
year compared to the remaining quarters. This is due to the use of retail
distribution, which is dependent on the holiday shopping season; the timing of
new products and service introductions; and aggressive marketing and sales
promotions.
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Results of Operations
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Consolidated
Total net operating revenues were as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 3,530 $ 3,839 $ 7,111 $ 7,743
PCS Group 3,096 3,018 6,043 5,866
Intergroup eliminations (163) (154) (352) (269)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 6,463 $ 6,703 $ 12,802 $ 13,340
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues decreased 4% in both the 2003 second quarter and the 2003
year-to-date period compared to the same 2002 periods reflecting declining FON
Group long distance voice revenues and product distribution revenues partially
offset by growth in the PCS Group revenues.
Income (Loss) from continuing operations was as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 90 $ 64 $ 369 $ 310
PCS Group (92) (170) (274) (316)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations $ (2) $ (106) $ 95 $ (6)
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In the 2003 second quarter, income from continuing operations 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. This charge includes a
non-cash charge for the impairment of hosting assets and a charge related to
cash requirements for employee terminations. Sprint will record additional
charges for facility lease terminations, customer migration, employee
termination and other wind-down costs in subsequent periods.
In the 2003 first quarter, income from continuing operations 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 second quarter, income from continuing operations includes $25
million related to a gain from the sale of customer contracts and a $241 million
charge related to a write-down of an investment due to declining market value.
In the 2002 first quarter, income from continuing operations includes a $15
million restructuring charge representing the closing of five PCS customer
solution centers, as well as additional steps to reduce operating costs in the
PCS business units. This charge was offset by favorable true-ups of unrelated
items. In total, the charge and true-ups had no effect on income from continuing
operations.
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Segmental Results of Operations
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Global Markets Division
Selected Operating Results
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Quarters Ended
June 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 1,243 $ 1,468 $ (225) (15.3)%
Data 463 467 (4) (0.9)%
Internet 245 247 (2) (0.8)%
Other 51 93 (42) (45.2)%
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Total net operating revenues 2,002 2,275 (273) (12.0)%
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Operating expenses
Costs of services and products 1,063 1,329 266 20.0%
Selling, general and administrative 558 612 54 8.8%
Depreciation and amortization 362 364 2 0.5%
Restructuring and asset impairments 348 - (348) NM
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Total operating expenses 2,331 2,305 (26) (1.1)%
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Operating loss $ (329) $ (30) $ (299) NM
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
Selected Operating Results
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Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 2,535 $ 3,004 $ (469) (15.6)%
Data 924 951 (27) (2.8)%
Internet 488 492 (4) (0.8)%
Other 97 170 (73) (42.9)%
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Total net operating revenues 4,044 4,617 (573) (12.4)%
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Operating expenses
Costs of services and products 2,166 2,750 584 21.2%
Selling, general and administrative 1,131 1,251 120 9.6%
Depreciation and amortization 722 721 (1) (0.1)%
Restructuring and asset impairments 348 - (348) NM
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Total operating expenses 4,367 4,722 355 7.5%
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Operating loss $ (323) $ (105) $ (218) NM
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
NM = Not meaningful
Net Operating Revenues
Net operating revenues decreased 12% in the 2003 second 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 15% in the 2003 second quarter and 16% in the 2003
year-to-date period from the same 2002 periods due to a decline in consumer
voice revenues resulting from wireless and e-mail substitution, aggressive
competition from RBOCs for consumer and small business customers and business
voice contract renewals occurring at lower prices. Minute volume decreased 7% in
the 2003 second quarter compared to the 2002 second quarter. The minute decline
was primarily driven by the loss of a major wholesale customer and a large
prepaid customer.
Data Revenues
Data revenues decreased 1% in the 2003 second quarter and 3% in the 2003
year-to-date period from the same 2002 periods due to declines in private line
services and rate reductions in ATM partially offset by an increase in frame
relay.
Internet Revenues
Internet revenues decreased 1% in both the 2003 second quarter and the 2003
year-to-date period from the same 2002 periods. Increases in dedicated IP and
web hosting services were more than offset by the final, contractually-scheduled
repricing of the AOL dial IP agreement, as well as a general decline in dial IP
pricing.
Other Revenues
Other revenues decreased 45% in the 2003 second quarter and 43% 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 the long distance network and the IP network, and costs of equipment
sales. These costs decreased 20% in the 2003 second quarter and 21% in the 2003
year-to-date period from the same 2002 periods. The decrease was due to volume
declines, an improving product mix, successful initiatives to reduce access unit
costs and lower international settlements. Costs of services and products for
the global markets division were 53.1% of net operating revenues in the 2003
second quarter and 53.6% in the 2003 year-to-date period compared to 58.4% and
59.6% for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses decreased 9% in the 2003
second quarter and 10% 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 27.9%
of net operating revenues in the 2003 second quarter and 28.0% in the 2003
year-to-date period compared to 26.9% and 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 1.9% in the 2003 second quarter
and 2.2% in the 2003 year-to-date period compared to 3.4% in both of the 2002
periods. This reduction reflects an improvement in collections and aging.
Reserve for bad debt as a percent of outstanding accounts receivable was 14.3%
at the end of the 2003 second 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 1% in the
2003 second quarter and remained the same in the 2003 year-to-date period from
the same periods a year ago. Depreciation and amortization expense was 18.1% of
net operating revenues in the 2003 second quarter and 17.9% in the 2003
year-to-date period compared to 16.0% and 15.6% for the same 2002 periods.
Restructuring and Asset Impairment
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.
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
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Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
2003 2002 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 762 $ 763 $ (1) (0.1)%
Network access 519 518 1 0.2%
Long distance 133 156 (23) (14.7)%
Other 115 111 4 3.6%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,529 1,548 (19) (1.2)%
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Operating expenses
Costs of services and products 490 474 (16) (3.4)%
Selling, general and administrative 318 305 (13) (4.3)%
Depreciation and amortization 272 288 16 5.6%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,080 1,067 (13) (1.2)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 449 $ 481 $ (32) (6.7)%
--- ------------- -- -------------- -- -------------
Operating margin 29.4% 31.1%
--- ------------- -- --------------
Selected Operating Results
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Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
2003 2002 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 1,527 $ 1,524 $ 3 0.2%
Network access 1,042 1,036 6 0.6%
Long distance 277 324 (47) (14.5)%
Other 219 229 (10) (4.4)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 3,065 3,113 (48) (1.5)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 980 954 (26) (2.7)%
Selling, general and administrative 638 623 (15) (2.4)%
Depreciation and amortization 538 574 36 6.3%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 2,156 2,151 (5) (0.2)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 909 $ 962 $ (53) (5.5)%
--- ------------- -- -------------- -- -------------
Operating margin 29.7% 30.9%
--- ------------- -- --------------
Net Operating Revenues
Net operating revenues decreased 1% in the 2003 second quarter and 2% in the
2003 year-to-date period from the same 2002 periods. The year-to-date decline is
driven by lower long distance services and equipment sales. The local division
ended the 2003 second quarter with approximately 8.0 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 cable substitution,
and losses to competitive local providers. The reduction in access lines is
expected to continue as Sprint believes its access line loss for 2003 will be
comparable to its loss for the past 12 months, and will 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 7% 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, remained flat in
both the 2003 second quarter and the 2003 year-to-date period from the same 2002
periods as the increase in vertical services revenue, driven by the success of
bundled offerings, was 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 second quarter and
increased 1% in the 2003 year-to-date period compared to a year ago. Strong
growth in DSL services in the 2003 second quarter was largely 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 15% in both the
2003 second quarter and 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 increased 4% in the 2003 second quarter and decreased 4% in the
2003 year-to-date period from the same 2002 periods principally driven by
equipment sales. The year-to-date decrease in equipment sales was primarily the
result of the economic slowdown causing a reduction in customer demand for
equipment.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs increased 3% in both the 2003
second quarter and the 2003 year-to-date period compared to the same 2002
periods. This increase was mainly driven by higher pension and retiree benefit
costs as well as higher employee healthcare costs. Costs of services and
products were 32.0% of net operating revenues in both the 2003 second quarter
and the 2003 year-to-date period compared to 30.6% for the same periods a year
ago.
Selling, General and Administrative Expense
SG&A expense increased 4% in the 2003 second quarter and 2% in the 2003
year-to-date period compared to the same 2002 periods. This increase was
primarily due to additional pension and retiree benefit costs, higher employee
healthcare costs and the cost of executive separation agreements reached during
the second quarter partially offset by a decline in bad debt expense. SG&A
expense was 20.8% of net operating revenues in both the 2003 second quarter and
the 2003 year-to-date period compared to 19.7% and 20.0% for the same periods a
year ago. Bad debt expense as a percentage of net revenues was 1.1% in the 2003
second quarter and 1.3% in the 2003 year-to-date period compared to 2.5% in the
same periods a year ago. This reflects an improvement in collections and aging.
Reserve for bad debt as a percent of outstanding accounts receivable was 10.2%
at the end of the 2003 second quarter and 13.9% at year-end 2002.
Depreciation and Amortization Expense
Estimates and assumptions are used in setting depreciable lives. 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 6% in both the 2003 second quarter and the
2003 year-to-date period 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
17.8% of net operating revenues in the 2003 second quarter and 17.6% in the 2003
year-to-date period compared to 18.6% and 18.4% for the same periods a year ago.
PCS Group
Selected Operating Results
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Quarters Ended
June 30, Variance
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2003 2002 $ %
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(millions)
Net operating revenues $ 3,096 $ 3,018 $ 78 2.6%
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Operating expenses
Costs of services and products 1,521 1,435 (86) (6.0)%
Selling, general and administrative 707 819 112 13.7%
Depreciation 617 541 (76) (14.0)%
Amortization - 2 2 100.0%
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Total operating expenses 2,845 2,797 (48) (1.7)%
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-- ------------- -- -------------- -- -------------
Operating income $ 251 $ 221 $ 30 13.6%
-- ------------- -- -------------- -- -------------
Selected Operating Results
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Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
2003 2002 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 6,043 $ 5,866 $ 177 3.0%
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Operating expenses
Costs of services and products 2,969 2,838 (131) (4.6)%
Selling, general and administrative 1,448 1,601 153 9.6%
Depreciation 1,225 1,067 (158) (14.8)%
Amortization - 3 3 100.0%
Restructuring and asset impairment 10 23 13 56.5%
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Total operating expenses 5,652 5,532 (120) (2.2)%
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-- ------------- -- -------------- -- -------------
Operating income $ 391 $ 334 $ 57 17.1%
-- ------------- -- -------------- -- -------------
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 20.6% of net operating revenues in the 2003 second quarter and
21.7% in the 2003 year-to-date period compared to 22.5% and 22.6% for the same
2002 periods.
Net Operating Revenues
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Customers (millions) 15.3 14.6 15.3 14.6
--- ------------- -- -------------- -- ------------- --- -------------
Average monthly service revenue
per user (ARPU) $ 62 $ 61 $ 60 $ 61
--- ------------- -- -------------- -- ------------- --- -------------
Customer churn rate 2.4% 2.9% 2.8% 3.0%
--- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues include service revenues, sales of handsets and accessory
equipment, and other revenues. Service revenues consist of monthly recurring
charges, a pro rata portion of activation fees, usage charges and miscellaneous
fees such as directory assistance, operator-assisted calling, handset insurance
and late payment charges. Service revenues increased 5.0% in the 2003 second
quarter and year-to-date period from the same 2002 periods reflecting an
increase in the number of customers, higher monthly recurring charges,
recognition of state Universal Service Fund (USF) fees and late fees initiated
in the third quarter of 2002. The higher monthly recurring charges and
recognition of state USF fees were partially offset by lower overage charges
from usage-based plans. Average monthly usage increased by more than two hours
when compared to the 2002 second quarter.
The PCS Group had 360,000 post-paid retail additions in the 2003 second quarter,
ending the period with approximately 15.3 million customers compared to
approximately 14.6 million customers at the end of the 2002 second quarter.
Resellers added 177,000 customers in the second quarter of 2003, which increased
their customer base to 767,000, principally due to Virgin Mobile. The PCS Group
third party affiliates added 80,000 customers in the second 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 18.8 million. In the 2003 second quarter, nearly 40 percent of new
post-paid retail customers chose to include PCS Vision in their service package.
This is up from 26 percent in the 2003 first quarter.
In addition, the quality of the PCS subscriber base has improved due to better
customer mix for new additions and lower churn. The customer churn rate in the
2003 second quarter was 2.4% compared to 2.9% 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 7.7% of net operating revenues in the 2003 second
quarter and 8.4% in the 2003 year-to-date period compared to 9.8% and 10.1% for
the same 2002 periods. The decline was 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 1.8% of net operating revenues in the 2003 second
quarter and 2.1% in the 2003 year-to-date period compared to 1.7% for the same
2002 periods. The increase mainly reflects 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
June 30, June 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Acquisition costs per gross customer
addition (CPGA) $ 415 $ 350 $ 390 $ 325
--- ------------- -- -------------- -- ------------- --- -------------
Monthly cash costs per user (CCPU) $ 31 $ 32 $ 31 $ 32
--- ------------- -- -------------- -- ------------- --- -------------
Cost per Gross Customer Addition
CPGA, a measure of the costs of acquiring a new subscriber, increased
approximately 19% in the 2003 second quarter and 20% in the 2003 year-to-date
period from the same 2002 periods. The CPGA increase was primarily due to
certain fixed costs being spread across lower gross customer additions, as well
as higher handset rebates.
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.
Cash Cost per User
CCPU, a measure of the cash costs to operate the business on a per user basis,
decreased approximately 3% in the 2003 second quarter and year-to-date period
from the same 2002 periods. The reduction in CCPU occurred primarily due to
lower bad debt 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
existing 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 care costs and other
network-related costs. These costs increased 6% in the 2003 second quarter and
5% in the 2003 year-to-date period from the same 2002 periods. The increase was
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 36% of total costs
of services and products in the 2003 second quarter and 38% in the 2003
year-to-date period compared to 37% and 38% for the same periods a year ago.
Costs of services and products were 49.1% of net operating revenues in the 2003
second quarter and year-to-date period compared to 47.5% and 48.4% 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 14% in the 2003
second quarter and 10% 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 22.8% of net
operating revenues in the 2003 second quarter and 24.0% in the 2003 year-to-date
period compared to 27.1% and 27.3% for the same periods a year ago. Bad debt
expense as a percentage of net revenues was 1.8% in the 2003 second quarter and
2.4% in the 2003 year-to-date period compared to 5.5% and 5.0% 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 second 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 14% in the 2003 second quarter
and year-to-date periods from the same 2002 periods due to an increase in the
network asset investment during 2002 and first half of 2003.
Depreciation and amortization expense was 19.9% of net operating revenues in the
2003 second quarter and 20.3% in the 2003 year-to-date period compared to 18.0%
and 18.2% 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 7.0% in the 2003 second
quarter compared to 7.1% in the 2002 second quarter. Interest costs on
short-term borrowings, including short-term borrowings classified as long-term
debt, and interest costs on deferred compensation plans have been excluded so as
not to distort the effective interest rate on long-term debt. See "Liquidity and
Capital Resources" for more information on Sprint's financing activities.
Premium on Early Retirement of Debt
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 5.875% 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
June 30, June 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Dividend and interest income $ 7 $ 13 $ 21 $ 21
Equity in net losses of affiliates (10) (82) (28) (102)
Net losses from investments - (243) - (253)
Gains (losses) on sales of assets (3) 50 (3) 50
Amortization of debt costs (8) (12) (15) (20)
Losses from disposal of PPE (4) (1) (5) (2)
Royalties 4 3 7 6
Litigation settlement - - (50) -
Other, net (7) (5) (9) (8)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (21) $ (277) $ (82) $ (308)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates was driven by the PCS Group's investment in
Virgin Mobile, U.S.A., in the 2003 second quarter and year-to-date period and by
the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso)
and Virgin Mobile, U.S.A., in the 2002 second quarter and year-to-date period.
Net losses from investments in the 2002 second quarter and year-to-date periods
mainly include the write-down of EarthLink preferred shares to current market
value and Sprint's equity investment in Intelig Telecommunicacoes Ltda.
(Intelig).
In the first quarter of 2003, Sprint recorded a $50 million charge to settle
shareholder litigation. 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. 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:
----------------------------------
June 30, December 31,
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 23,253 $ 23,133
PCS Group 22,694 23,022
Intergroup eliminations (1,303) (862)
------------------------------------------------------------------------
Consolidated assets $ 44,644 $ 45,293
----------------------------------
Sprint's consolidated assets decreased $649 million in the 2003 year-to-date
period. Cash and equivalents increased $1,704 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 $958 million. Capital expenditures were more than
offset by depreciation expense and the 2003 year-to-date period asset
impairments.
--------------------------------------------------------------------------------
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
June 30,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 1,954 $ 1,565
PCS Group 1,014 1,151
------------------------------------------------------------------------
Cash flows provided by operating
activities $ 2,968 $ 2,716
----------------------------------
Cash flow from operations increased $252 million in the 2003 year-to-date period
from the same 2002 period. This increase was driven 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. This was partially offset by the PCS Group's increased working
capital requirements related mainly to a decrease in accounts payable.
Investing Activities
Year-to-Date
June 30,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ (695) $ (1,047)
PCS Group (732) (1,390)
------------------------------------------------------------------------
Cash flows used by
investing activities $ (1,427) $ (2,437)
----------------------------------
The FON Group's capital expenditures totaled $772 million in the 2003
year-to-date period and $1,081 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 the needs of growth in
customer demand. Global markets division capital expenditures were incurred
mainly to expand its global IP network 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 packet switching, and continue the build-out
of high-speed DSL services.
PCS Group capital expenditures were $720 million in the 2003 year-to-date period
and $1,428 million in the same 2002 period. Capital expenditures in both years
were incurred to increase capacity and expand coverage. Lower capital spending
in the 2003 year-to-date period was due to reprioritization efforts initiated
late last year to re-focus capital spending on markets with greater impact.
Despite lower capital spending, PCS has experienced strong improvements in
network performance since the deployment of 1x technology. The 2002 year-to-date
period capital expenditures also include the deployment of 3G technology, which
was launched nationwide in the 2002 third quarter.
Proceeds from the sale of assets in the 2003 year-to-date period mainly includes
sale of marketable securities. The 2002 year-to-date period mainly includes
proceeds from sales of certain contracts, investment securities, and other
administrative assets.
Financing Activities
Year-to-Date
June 30,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ (2,039) $ (671)
PCS Group (29) 662
------------------------------------------------------------------------
Cash flows provided (used) by
financing activities $ (2,068) $ (9)
----------------------------------
Financing activities include a debt reduction of $1.9 billion in the 2003
year-to-date period compared to a $203 million increase 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 and the prepayment of the
global markets division accounts receivable asset securitization facility.
Sprint paid cash dividends of $228 million in the 2003 year-to-date period
compared to $226 million in the same 2002 period.
Capital Requirements
Sprint's 2003 investing activities, mainly consisting of capital expenditures,
are expected to total approximately $3.9 billion. FON Group capital expenditures
are expected to be approximately $1.8 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 $2.7 billion cash balance at June 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 closed on 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 $128 million as of June 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
June 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 June 30, 2003, Sprint had more than $416 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 remainder of 2003 total approximately $635 million. Debt
maturities for 2004 total approximately $850 million. Sprint's $2.7 billion cash
balance at June 30, 2003, existing financing agreements, and expected 2003 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 $5.4 billion at June 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. Sprint continually evaluates various factors and, as
a result, may repurchase additional debt in the future.
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 is
significant volatility in the markets at this time caused by the economic
downturn, recent business failures and reduced confidence in the financial
accounting process. Sprint continues to monitor the markets closely and to take
steps to maintain as much financial flexibility as possible, while maintaining a
reasonable capital structure cost. Sprint currently does not 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. As of June 30, 2003, Sprint had no outstanding fair value
hedges.
Cash Flow Hedges
Sprint enters into interest rate swap agreements designated as cash flow hedges
to reduce the impact of interest rate movements on future interest expense by
effectively converting a portion of its floating-rate debt to a fixed-rate. As
of June 30, 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 June 30, 2003 or results of operations or
cash flows for the quarter ended June 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 93%
of Sprint's debt at June 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.
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 $8 million pre-tax on the statements of
operations and cash flows at June 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 $545 million increase in fair market value of its
debt to $20.9 billion. This analysis 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 $4 million at June 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 less than $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 June 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 second 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
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. If debarred, Sprint would not
be able to bid on future government contracts. Sprint believes that
the request for debarment consideration is unprecedented and
unfounded.
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. Sprint believes these
lawsuits are unfounded and intends to defend them vigorously.
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
Articles Amendments
At the annual meeting of shareholders of Sprint held on May 13, 2003,
the shareholders approved an amendment to Sprint's Articles of
Incorporation declassifying the Board of Directors. Under the
amendment, each director elected at or after the 2004 annual meeting
of shareholders will be elected for a one-year term. Directors elected
before that meeting will serve the remaining duration of their
three-year terms. A director who fills a vacancy will have the same
remaining term as his or her predecessor.
Sprint filed a certificate changing its registered office and
registered agent with the Kansas Secretary of State on May 16, 2003.
This changed the registered address of the corporation to 200 S.W.
30th Street, Topeka, Shawnee County, Kansas 66611 and changed the
registered agent to the Corporation Service Company.
Sale of Unregistered Equity Securities
In April and May, 2003, Sprint issued to certain of its executive
officers an aggregate of 100,630 restricted stock units relating to
shares of FON Stock and an aggregate of 100,630 restricted stock units
relating to shares of PCS Stock. The restricted stock units were
granted to executive officers as part of their long-term incentive
compensation. In June 2003, Sprint issued to its outside directors an
aggregate of 25,725 restricted stock units relating to shares of FON
Stock and an aggregate of 25,725 restricted stock units relating to
shares of PCS Stock. These restricted stock units were granted to the
directors as part of their annual equity 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, the grantee of the
units is entitled to additional shares of the stock when the units
vest. In the case of some of the restricted stock units granted to Mr.
Forsee in the 2003 first quarter, the dividend equivalents are paid to
him in cash. The units granted to the executive officers vest at
various times beginning in 2004 and ending in 2006. The units granted
to the outside directors all vest in 2006.
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 transactions not involving a public offering. Sprint may in the
future register the resale of the shares of stock to be received by
the executive officers and the directors once the units vest.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended June 30,
2003.
Item 4. Submission of Matters to a Vote of Security Holders
On May 13, 2003, Sprint held its annual meeting of shareholders. In
addition to the election of three Class II Directors to serve a term
of three years, the shareholders approved an amendment to Sprint's
Articles of Incorporation declassifying the Board, approved an
amendment to Sprint's Employees Stock Purchase Plan to increase the
shares available for purchase under the plan, ratified the appointment
of Ernst & Young LLP as independent auditors of Sprint for 2003, and
approved one shareholder proposal relating to severance packages. The
shareholders did not approve two shareholder proposals.
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
For Withheld
Gary D. Forsee 983,951,842 37,929,704
Charles E. Rice 686,044,925 335,836,622
Louis W. Smith 675,133,337 346,748,210
The following votes were cast with respect to the proposal to amend
the Articles of Incorporation to eliminate classification of Sprint's
Board of Directors:
For 989,787,266
Against 22,124,078
Abstain 9,970,199
The following votes were cast with respect to the proposal to amend
the 1988 Employees Stock Purchase Plan to increase the number of
shares available for purchase under the Plan:
For 806,531,303
Against 49,985,853
Abstain 10,211,194
Broker non-votes 155,153,196
The following votes were cast with respect to the proposal to ratify
the appointment of Ernst & Young LLP as independent auditors of Sprint
for 2003:
For 609,527,472
Against 392,037,170
Abstain 20,316,901
The following votes were cast with respect to a shareholder proposal
urging the Sprint Board to adopt a policy that Sprint will not,
without prior approval of the shareholders, reprice to a lower
exercise price, or terminate and regrant at a lower price, stock
options granted to any executive officer or director of Sprint, or
grant new options to executive officers or directors on account of the
market price dropping below the exercise price of prior options:
For 282,014,618
Against 573,084,694
Abstain 11,629,037
Broker non-votes 155,153,196
The following votes were cast with respect to a shareholder proposal
urging the Sprint Board to seek shareholder approval for future
severance agreements with senior executives that provide benefits in
an amount exceeding two times the sum of the executive's base salary
and bonus:
For 544,199,685
Against 309,998,474
Abstain 12,530,189
Broker non-votes 155,153,199
The following votes were cast with respect to a shareholder proposal
asking the Sprint Board to (1) establish a cap on the total
compensation that may be paid to the chief executive officer in a
given year: and (2) report to shareholders on the policy before the
2004 annual meeting of shareholders:
For 124,529,653
Against 727,118,645
Abstain 15,080,049
Broker non-votes 155,153,199
Item 5. Other Information
Ratios of Earnings to Fixed Charges
Sprint's earnings, as adjusted, were inadequate to cover fixed charges
by $12 million in the 2003 second quarter. The ratio of earnings to
fixed charges was 1.15 in the 2003 year-to-date period. Sprint's ratio
of earnings to fixed charges was 1.12 in the 2002 second quarter and
1.23 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 (filed as Exhibit 3.2 to Amendment No. 4
to Sprint Corporation's Registration Statement on Form 8-A
relating to Sprint's Series 1 PCS Common Stock, filed April
17, 2002, and incorporated herein by reference).
(4) Instruments defining the Rights of Sprint's Security Holders:
(a) The rights of Sprint's equity security holders are defined
in the Fifth, Sixth, Seventh and Eighth Articles of Sprint's
Articles of Incorporation. See Exhibit 3(a).
(b) Provisions regarding Stockholders' Meetings are set forth in
Article III of the Bylaws. Provisions regarding the Capital
Stock Committee are set forth in Article IV, Section 12 of
the Bylaws. See Exhibit 3(b).
(c) 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).
(10) Material Contracts:
(a) 364-Day Credit Agreement dated as of June 24, 2003, among
Sprint Corporation and Sprint Capital Corporation, as
Borrowers, the initial Lenders named therein, as Initial
Lenders, Citibank, N.A., as Administrative Agent, Citigroup
Global Markets Inc and J.P. Morgan Securities Inc., as joint
lead arrangers and as book managers, JPMorgan Chase Bank, as
syndication agent, and Bank of America, N.A., Deutsche Bank
AG New York Branch and UBS AG, Cayman Islands Branch, as
documentation agents.
Executive Compensation Plans and Arrangements:
(b) Letter Agreement dated April 9, 2003 and Separation
Agreement dated as of April 9, 2003 by and among Sprint
Corporation, Sprint/United Management Company and Ronald T.
LeMay (filed as Exhibit 10(d) to Sprint Corporation's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2003 and incorporated herein by reference).
(c) Letter Agreement dated May 12, 2003 and Full and Final
General Release effective May 12, 2003 between Sprint
Corporation and J. Richard Devlin (filed as Exhibit 99(a) to
Sprint Corporation's Current Report on Form 8-K dated June
10, 2003 and incorporated herein by reference).
(d) Separation Agreement dated as of May 12, 2003 by and among
Sprint Corporation, Sprint/United Management Company and
William T. Esrey (filed as Exhibit 99(b) to Sprint
Corporation's Current Report on Form 8-K dated June 10, 2003
and incorporated herein by reference).
(e) Summary of Executive Officer Benefits and Board of Directors
Benefits and Fees.
(f) Special Compensation and Non-Compete Agreements between
Sprint Corporation and certain of its Executive Officers
(Messrs. Hawthorne, Janzen, Stout, Gerke and White).
(g) Form of Award Agreement (awarding restricted stock units)
with Directors.
(h) Form of Award Agreement (awarding restricted stock units and
stock options) with Executive Officers.
(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 April 21, 2003, in
which it reported that it announced first quarter 2003 results. The
news release regarding first 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 - Local Division Selected Information
Sprint Corporation PCS Group Net Customer Additions
Sprint filed a Current Report on Form 8-K dated June 10, 2003, in
which it reported that it would take second quarter earnings charges
resulting from its decision to wind down its web hosting business and
from executive separation agreements.
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
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPRINT CORPORATION
------------------
(Registrant)
By /s/ John P. Meyer
-----------------------------------
John P. Meyer
Senior Vice President -- Controller
Principal Accounting Officer
Dated: August 12, 2003