UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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
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SPRINT CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
KANSAS 48-0457967
- ---------------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
- ---------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (913) 624-3000
------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file these reports), and (2) has been subject to these filing
requirements for the past 90 days.
Yes X No
---------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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COMMON SHARES OUTSTANDING AT APRIL 30, 2003:
FON COMMON STOCK 899,064,109
PCS COMMON STOCK:
Series 1 769,628,142
Series 2 253,787,745
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) 3
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 9
Consolidated Statement of Shareholders' Equity 11
Condensed Notes to Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
Item 4. Controls and Procedures 45
Part II - Other Information
Item 1. Legal Proceedings 46
Item 2. Changes in Securities 46
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 47
Item 6. Exhibits and Reports on Form 8-K 48
Signature 51
Certifications 52
Part I.
Item 1.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Sprint Corporation
-------------------------------
(millions, except per share data) Consolidated
- --------------------------------------------- --- ------------- -- -------------- -- -------------------------------
Quarters Ended March 31, 2003 2002
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Operating Revenues $ 6,339 $ 6,637
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,839 3,170
Selling, general and administrative 1,650 1,755
Depreciation 1,236 1,170
Amortization - 1
Restructuring and asset impairments 10 23
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 5,735 6,119
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income 604 518
Interest expense (366) (313)
Intergroup interest charge - -
Premium on early retirement of debt (19) -
Other income (expense), net (61) (31)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (loss) from continuing operations
before income taxes 158 174
Income tax (expense) benefit (61) (74)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from Continuing Operations 97 100
Discontinued operation, net 1,313 40
Cumulative effect of change in accounting
principle, net 258 -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) 1,668 140
Preferred stock dividends (paid) received (2) (2)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings (Loss) Applicable to Common Stock $ 1,666 $ 138
-- ------------- --- -------------
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
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ (189) $ (115) $ 3,581 $ 3,904 $ 2,947 $ 2,848
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(189) (115) 1,580 1,882 1,448 1,403
(10) (8) 919 981 741 782
- - 628 644 608 526
- - - - - 1
- - - - 10 23
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
(199) (123) 3,127 3,507 2,807 2,735
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
10 8 454 397 140 113
- - (65) (79) (301) (234)
- - 82 81 (82) (81)
- - (19) - - -
(10) (8) (4) 2 (47) (25)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 448 401 (290) (227)
- - (169) (155) 108 81
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 279 246 (182) (146)
- - 1,313 40 - -
- - 258 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 1,850 286 (182) (146)
- - 2 2 (4) (4)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,852 $ 288 $ (186) $ (150)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 0.31 $ 0.27 $ (0.18) $ (0.15)
1.46 0.05 - -
0.29 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 2.06 $ 0.32 $ (0.18) $ (0.15)
--- ------------- -- ------------- -- ------------- --- -------------
899.5 891.5 1,022.1 1,009.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.31 $ 0.27 $ (0.18) $ (0.15)
1.47 0.05 - -
0.29 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ 2.07 $ 0.32 $ (0.18) $ (0.15)
--- ------------- -- ------------- -- ------------- --- -------------
896.6 889.6 1,022.1 1,009.9
--- ------------- -- ------------- -- ------------- --- -------------
$ 0.125 $ 0.125 $ - $ -
--- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) Sprint Corporation
-------------------------------
(millions) Consolidated
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Quarters Ended March 31 2003 2002
- --------------------------------------------- ----------------- ----------------- -- ------------- --- -------------
Net Income (Loss) $ 1,668 $ 140
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding losses on securities (1) (6)
Income tax benefit - 5
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding losses on securities
during the period (1) (1)
Reclassification adjustment for gains on securities
included in net income (loss) (1) -
Income tax expense 1 -
- ------------------------------------------------- ------------- -- -------------- -- ------------- --- -------------
Net reclassification adjustment for gains
included in net income - -
Foreign currency translation adjustments 2 (3)
Unrealized gains (losses) on qualifying cash flow hedges (2) 8
Income tax benefit 1 2
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on qualifying
cash flow hedges during the period (1) 10
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) - 6
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ 1,668 $ 146
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ------------------------------- -- ----------------------------------
2003 2002 2003 2002 2002 2001
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,850 $ 286 $ (182) $ (146)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1) (6) - -
- - - 5 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1) (1) - -
- - (1) - - -
- - 1 - - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - - - - -
- - 2 (2) - (1)
- - (2) 8 - -
- - 1 2 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1) 10 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - - 7 - (1)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,850 $ 293 $ (182) $ (147)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED BALANCE SHEETS
Sprint Corporation
-----------------------------------
(millions) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and equivalents $ 2,095 $ 1,035
Accounts receivable, net of consolidated allowance for doubtful accounts of
$331 and $414 2,813 2,951
Inventories 750 682
Deferred tax asset - 806
Current tax benefit receivable from the FON Group - -
Prepaid expenses 411 360
Intergroup receivable - -
Intergroup debt receivable - -
Other 236 244
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 6,305 6,078
Assets of discontinued operation - 391
Property, plant and equipment
FON Group 35,293 35,055
PCS Group 17,152 16,978
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 52,445 52,033
Accumulated depreciation (23,992) (23,288)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 28,453 28,745
Investments in and advances to affiliates 55 73
Intangibles
Goodwill 4,401 4,401
Spectrum licenses 4,617 4,620
Other intangibles 28 26
- -------------------------------------------------------------------------------------------------------------------------
Total intangibles 9,046 9,047
Accumulated amortization (3) (2)
- -------------------------------------------------------------------------------------------------------------------------
Net intangibles 9,043 9,045
Intergroup debt receivable - -
Other assets 909 961
- -------------------------------------------------------------------------------------------------------------------------
Total $ 44,765 $ 45,293
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------- ----------------------------------- -----------------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2003 2002 2003 2002 2003 2002
- ------------------------------------- ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 1,638 $ 641 $ 457 $ 394
- - 1,614 1,650 1,199 1,301
- - 214 219 536 463
- - - 42 - 764
(760) - - - 760 -
- - 220 215 191 145
(592) (536) 592 536 - -
(36) - 36 - - -
- - 123 114 113 130
- ---------------------------------------- ------------------------------- -----------------------------------
(1,388) (536) 4,437 3,417 3,256 3,197
- - - 391 - -
- - 35,293 35,055 - -
- - - - 17,152 16,978
- ------------------------------------- ----------------------------------- -----------------------------------
- - 35,293 35,055 17,152 16,978
(46) (46) (18,265) (18,161) (5,681) (5,081)
- ------------------------------------- ----------------------------------- -----------------------------------
(46) (46) 17,028 16,894 11,471 11,897
(279) (280) 252 252 82 101
- - 27 27 4,374 4,374
- - 1,520 1,520 3,097 3,100
- - 25 24 3 2
- ------------------------------------- ----------------------------------- -----------------------------------
- - 1,572 1,571 7,474 7,476
- - (3) (2) - -
- ------------------------------------- ----------------------------------- -----------------------------------
- - 1,569 1,569 7,474 7,476
(1,041) (406) 1,041 406 - -
- - 566 610 343 351
- ------------------------------------- ----------------------------------- -----------------------------------
$ (2,754) $ (1,268) $ 24,893 $ 23,539 $ 22,626 $ 23,022
- ------------------------------------- ----------------------------------- -----------------------------------
CONSOLIDATED BALANCE SHEETS (continued)
Sprint Corporation
-----------------------------------
(millions, except per share data) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current maturities of long-term debt $ 987 $ 1,887
Current maturities of intergroup debt - -
Accounts payable 1,917 2,151
Accrued interconnection costs 628 626
Accrued taxes 258 358
Advance billings 525 510
Accrued restructuring costs 216 277
Payroll and employee benefits 451 579
Accrued interest 361 416
Intergroup payable - -
Other 1,068 1,004
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,411 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 17,753 18,405
Intergroup debt - -
Equity unit notes 1,725 1,725
Deferred income taxes 2,117 2,025
Postretirement and other benefit obligations 1,750 1,712
Other 874 769
- -------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 24,219 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, 897.9 and 895.1
shares issued and outstanding 1,796 1,790
PCS, par value $1.00 per share, 4,600.0 shares authorized, 1,022.9 and
999.8 shares issued and outstanding 1,023 1,000
Capital in excess of par or stated value 9,961 9,931
Retained earnings 1,809 252
Accumulated other comprehensive loss (701) (701)
Combined attributed net assets - -
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,888 12,294
- -------------------------------------------------------------------------------------------------------------------------
Total $ 44,765 $ 45,293
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ------------------------------------ ----------------------------------- -----------------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2003 2002 2003 2002 2003 2002
- ------------------------------------ ----------------------------------- -----------------------------------
(Unaudited) (Unaudited) (Unaudited)
$ - $ - $ 371 $ 1,234 $ 616 $ 653
(36) - - - 36 -
- - 675 808 1,242 1,343
- - 618 614 10 12
(60) - 208 122 110 236
- - 230 232 295 278
- - 209 251 7 26
- - 373 488 78 91
- - 100 116 261 300
(592) (536) - - 592 536
(46) (46) 586 545 528 505
- ------------------------------------ ----------------------------------- -----------------------------------
(734) (582) 3,370 4,410 3,775 3,980
(700) - 700 - - -
- - - 299 - -
- - 3,144 3,142 14,609 15,263
(1,041) (406) - - 1,041 406
- - - - 1,725 1,725
- - 2,026 1,825 91 200
- - 1,715 1,677 35 35
- - 351 362 523 407
- ------------------------------------ ----------------------------------- -----------------------------------
(1,041) (406) 7,236 7,006 18,024 18,036
(279) (280) - 10 526 526
- 22 - - - -
1,796 1,790 - - - -
1,023 1,000 - - - -
9,961 9,931 - - - -
1,809 252 - - - -
(701) (701) - - - -
(13,888) (12,294) 13,587 11,814 301 480
- ------------------------------------ ----------------------------------- -----------------------------------
- - - - - -
- ------------------------------------ ----------------------------------- -----------------------------------
$ (2,754) $ (1,268) $ 24,893 $ 23,539 $ 22,626 $ 23,022
- ------------------------------------ ----------------------------------- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(millions) Sprint Corporation
----------------------------------
Consolidated
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Quarters Ended March 31, 2003 2002
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
Net income (loss) $ 1,668 $ 140
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Discontinued operation, net (1,313) (40)
Cumulative effect of change in accounting principle, net (258) -
Equity in net losses of affiliates 18 20
Depreciation and amortization 1,236 1,171
Deferred income taxes 736 498
Net losses on write-down of assets 10 11
Changes in assets and liabilities:
Accounts receivable, net 138 66
Inventories and other current assets (107) (474)
Accounts payable and other current liabilities (1,315) (776)
Affiliate receivables and payables, net - -
Noncurrent assets and liabilities, net 200 (47)
Other, net 45 6
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided by operating activities of continuing operations 1,058 575
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
Investing Activities
Capital expenditures (547) (1,146)
Investments in and loans to other affiliates, net (12) (8)
Net proceeds from sales of assets 3 3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities of continuing operations (556) (1,151)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from debt - 5,704
Payments on debt (1,555) (3,219)
Proceeds from common stock issued 2 1
Dividends paid (114) (114)
Other, net 10 (3)
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
Net cash provided (used) by financing activities of continuing operations (1,657) 2,369
- ------------------------------------------------------------------------------------ --- ------------- -- -------------
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash from discontinued operations 2,215 60
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase in Cash and Equivalents 1,060 1,853
Cash and Equivalents at Beginning of Period 1,035 313
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 2,095 $ 2,166
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
2003 2002 2003 2002 2003 2002
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,850 $ 286 $ (182) $ (146)
- - (1,313) (40) - -
- - (258) - - -
- - (1) (1) 19 21
- - 628 644 608 527
- - 81 131 655 367
- - - 10 10 1
- - 36 72 102 (6)
760 447 (5) (409) (862) (512)
(760) (447) (308) (341) (247) 12
- - (43) 121 43 (121)
- - 83 (62) 117 15
- - 22 - 23 6
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 772 411 286 164
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (360) (543) (187) (603)
- - - (8) (12) -
- - 3 3 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (357) (548) (199) (603)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - - 968 - 4,736
- - (1,534) (483) (21) (2,736)
- - 2 - - 1
- - (110) (110) (4) (4)
- - 9 2 1 (5)
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - (1,633) 377 (24) 1,992
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 2,215 60 - -
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
- - 997 300 63 1,553
- - 641 134 394 179
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
$ - $ - $ 1,638 $ 434 $ 457 $ 1,732
- ----- ------------- --- ------------- --- ------------- -- ------------- -- ------------- --- -------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
Quarter Ended March 31, 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 - - - (2)
Conversion of PCS common stock
underlying Class A common stock (22) - 22 -
FON Series 1 common stock issued - 6 - 27
PCS Series 1 common stock issued - - 1 5
Other, net - - - -
- ----------------------------------------------------------------------------------------------------------------
March 2003 balance $ - $ 1,796 $ 1,023 $ 9,961
------------------------------------------------------------------
Shares Outstanding
- ------------------------------------------------------------------------------------------------
Beginning 2003 balance 43.1 895.1 999.8
FON Series 1 common stock issued - 2.8 -
PCS Series 1 common stock issued - - 1.5
Conversion of Class A FT - - 21.6
- ------------------------------------------------------------------------------------------------
March 2003 balance 43.1 897.9 1,022.9
--------------------------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
- ------------------------------------------------------------------------------------
Accumulated
Other
Retained Comprehensive Consolidated Combined Attributed Net Assets
Earnings Loss Total Sprint FON Group Sprint PCS Group
- ------------------------------------------------------------------------------------
$ 252 $ (701) $ 12,294 $ 11,814 $ 480
1,668 - 1,668 1,850 (182)
(112) - (112) (112) -
- - (2) 2 (4)
- - - - -
- - 33 33 -
- - 6 - 6
1 - 1 - 1
- ------------------------------------------------------------------------------------
$ 1,809 $ (701) $ 13,888 $ 13,587 $ 301
- ------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
1. Basis of Consolidation and Presentation
- --------------------------------------------------------------------------------
Tracking Stock
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
but rather represent a direct equity interest in our assets and liabilities as a
whole.
Board Discretion Regarding Tracking Stocks
Sprint's Board has the discretion to, among other things, make operating and
financial decisions that could favor one group over the other and, subject to
the restrictions in Sprint's articles of incorporation, to change the allocation
of the assets and liabilities that comprise each of the FON Group and the PCS
Group without shareholder approval. Under the applicable corporate law, Sprint's
Board owes its fiduciary duties to all of Sprint's shareholders and there is no
Board of Directors that owes separate duties to the holders of either the FON
common stock or the PCS common stock. The Tracking Stock Policies provide that
the Board, in resolving material matters in which the holders of FON common
stock and PCS common stock have potentially divergent interests, will act in the
best interests of Sprint and all of its common shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. These policies may be changed by the
Board without shareholder approval. Given the Board's discretion in these
matters, it may be difficult to assess the future prospects of each group based
on past performance.
Consolidation and Comparative Presentation
The consolidated financial statements include the accounts of Sprint, its wholly
owned subsidiaries and subsidiaries it controls. Investments in entities in
which Sprint exercises significant influence, but does not control, are
accounted for using the equity method (see Note 2).
The consolidated financial statements are prepared using accounting principles
generally accepted in the United States. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
Intergroup Transactions
The PCS Group uses the long distance operation of the FON Group as its
interexchange carrier and purchases wholesale long distance for resale to its
customers. Additionally, the FON Group provides the PCS Group with Caller ID
services and various other goods and services. Also included in these amounts
are goods capitalized by the PCS Group. Charges to the PCS Group for these items
totaled $187 million and $148 million in the 2003 and 2002 first quarters,
respectively. The intercompany profit on capitalized charges totaled $1 million
in the 2003 first quarter and $3 million in the same period last year. 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 $3 million in the 2003 first quarter. In the 2002 first quarter,
the PCS Group credited the FON Group for $30 million. This credit was primarily
related to proceedings initiated by the Federal Communications Commission (FCC)
in 2001 to consider a number of issues regarding compensation arrangements
between carriers that exchange local and long distance traffic, including the
issue of whether wireless carriers should be allowed to charge long distance
carriers for terminating long distance calls to their wireless customers.
The FON Group charges the PCS Group a return on investment or capital carrying
charge for the use of corporate owned capital assets. Charges to the PCS Group
for this item totaled $10 million and $8 million in the 2003 and 2002 first
quarters, 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
$111 million and $56 million in the 2003 and 2002 first quarters, 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 $5
million and $2 million in the 2003 and 2002 first quarters, respectively. The
service charges less capitalized charges are included in the PCS Group's
operating expenses.
Costs for shared services totaled approximately $121 million and $123 million in
the 2003 and 2002 first quarters, respectively. The percentage of these costs
allocated to the PCS Group were approximately 30% and 27% in the 2003 and 2002
first quarters, respectively, with the balance remaining in the FON Group. The
allocation of shared services may change at the discretion of Sprint's Board and
does not require shareholder approval.
Allocation of Group Financing
Financing activities for the groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the groups is specifically allocated
to and reflected in the financial statements of the applicable group. 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 $82 million and $81 million in
the 2003 and 2002 first quarters, 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.
- --------------------------------------------------------------------------------
2. Investments
- --------------------------------------------------------------------------------
Investments in Securities
The cost of investments in marketable securities, which is included in "Other
assets" on the balance sheets, was $95 million at the end of March 2003 and at
December 31, 2002. Accumulated unrealized holding losses were $4 million, gross
and $3 million, net of income taxes, and accumulated unrealized holding gains
were $4 million, gross and $2 million, net of income taxes, at the end of March
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.
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 March 2003 and December 2002.
Investments in and Advances to Affiliates
At the end of March 2003, investments accounted for using the equity method
consisted primarily of the PCS Group's investment in Virgin Mobile, U.S.A. At
the end of March 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, USA. 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
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
Results of operations
Net operating revenues $ 231 $ 267
----------------------------------
Operating loss $ (14) $ (30)
----------------------------------
Net loss $ (31) $ (167)
----------------------------------
Equity in net losses of affiliates $ (18) $ (20)
----------------------------------
- --------------------------------------------------------------------------------
3. Asset Retirement Obligations
- --------------------------------------------------------------------------------
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.
However, these leases do not have termination date certainty, and Sprint expects
to maintain the property as a necessary component of infrastructure required to
maintain FCC licensing. For that reason, Sprint is unable to estimate the
remediation liability. Therefore, Sprint's obligations do not meet the ARO
liability recognition criteria established in the standard at this time.
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
Quarters Ended March 31,
-- ----------- -- ------------
2003 2002
---------------------------------------------------------------------- -- ----------- -- ------------
(millions)
Net income, as reported $ 1,850 $ 286
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
---------------------------------------------------------------------- -- ----------- -- ------------
Pro forma net income $ 1,592 $ 289
-- ----------- -- ------------
- --------------------------------------------------------------------------------
4. Income Taxes
- --------------------------------------------------------------------------------
The differences that caused Sprint's effective income tax rates to vary from the
35% federal statutory rate for income taxes related to continuing operations
were as follows:
Sprint Sprint Sprint
Corporation FON PCS
Quarter Ended March 31, 2003 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 55 $ 157 $ (102)
Effect of:
State income taxes, net of federal income tax effect 8 14 (6)
Equity in losses of foreign joint ventures 1 1 -
Other, net (3) (3) -
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 61 $ 169 $ (108)
--- ------------- --- -------------- -- --------------
Effective income tax rate 38.6% 37.7% 37.2%
--- ------------- --- -------------- -- --------------
Sprint Sprint Sprint
Corporation FON PCS
Quarter Ended March 31, 2002 Consolidated Group Group
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
(millions)
Income tax expense (benefit) at the federal statutory rate $ 61 $ 140 $ (79)
Effect of:
State income taxes, net of federal income tax effect 4 12 (8)
Equity in losses of foreign joint ventures 8 - 8
Other, net 1 3 (2)
- ------------------------------------------------------------- --- ------------- --- -------------- -- --------------
Income tax expense (benefit) $ 74 $ 155 $ (81)
--- ------------- --- -------------- -- --------------
Effective income tax rate 42.5% 38.7% 35.7%
--- ------------- --- -------------- -- --------------
- --------------------------------------------------------------------------------
5. Accounting for Derivative Instruments
- --------------------------------------------------------------------------------
Risk Management Policies
Sprint's derivative instruments include interest rate swaps, stock warrants, net
purchased equity options embedded in forward sale 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 selectively enters into interest rate swap and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint enters into interest
rate swap agreements to minimize exposure to interest rate movements and achieve
an optimal mixture of floating and fixed-rate debt while minimizing liquidity
risk. The interest rate swap agreements designated as fair value hedges
effectively convert Sprint's fixed-rate debt to a floating rate 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 forward sale 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,
which function as natural hedges, are used to offset the impact of foreign
currency fluctuations in 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 March 31, 2003, Sprint held no interest rate
swaps. Sprint held both cash flow hedges and fair value hedges in interest rate
swaps in the 2002 first quarter.
Sprint recorded a $6 million pre-tax increase to other comprehensive income in
the 2002 first quarter resulting from gains on cash flow hedges. The change in
other comprehensive income is included in "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
first quarter.
Sprint recorded net derivative losses in earnings of $2 million after tax for
the 2002 first quarter due to changes in the fair value of stock warrants.
Net Purchased Equity Options
The net purchased equity options embedded in forward sale contracts are
designated as cash flow hedges.
Sprint recorded a $1 million after-tax decrease to other comprehensive income in
the 2003 first quarter resulting from losses on these cash flow hedges. Sprint
recorded a $1 million after-tax increase to other comprehensive income in the
2002 first quarter. 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 first 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 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.
- --------------------------------------------------------------------------------
6. Restructuring and Asset Impairment
- --------------------------------------------------------------------------------
Restructuring Activity
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 on going 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
March 31, 2003, approximately 1,200 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 is
expected to create a more competitive cost structure for the business. This
decision resulted in a $43 million pre-tax charge consisting primarily of
severance costs associated with work force reductions. 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 Division Consolidation). These
decisions resulted in a $202 million pre-tax charge consisting of asset
write-offs, severance costs associated with work force reductions, and
termination of real estate leases and other contractual obligations. 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
restructuring. 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 restructuring charge consisting of severance costs associated
with work force reductions and other exit costs, primarily for the termination
of real estate leases. The charge for severance costs was $13 million with the
remaining $10 million being for other exit costs. 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 consisting of asset
write-offs, severance costs associated with work force reductions, and
termination of supplier agreements, real estate leases, and other contractual
obligations. The charge for asset impairments was $1,327 million, severance
costs totaled $231 million, and the remaining $256 million was accrued for other
exit costs associated with the restructuring. The severance charge was
associated with the involuntary employee separation of approximately 6,000
employees. As of September 30, 2002, substantially all of the employee
separations had been completed. In the 2002 third quarter, Sprint performed an
analysis to finalize the restructuring estimates recorded in the 2001 fourth
quarter. This analysis resulted in a reserve reduction in the third quarter of
2002 of $42 million primarily associated with exit costs and a $34 million
reduction associated with the asset impairment charge. Sprint expects to pay the
majority of the remaining severance costs by December 31, 2003.
In several of these restructuring events, the remaining other exit costs are
primarily lease commitments which will be paid according to their terms.
This activity is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------
2003 Activity
--------------------------------
December 31, 2002 Cash Non-cash/ March 31,
Liability Balance Payments Adjustments 2003
Liability
Balance
- ---------------------------------------------------------------------------------------------------------------------
(millions)
Restructuring Events - 2002
One Sprint Consolidation
Severance $ 58 $ 10 $ - $ 48
Other exit costs 51 1 - 50
PCS Consolidation
Severance 22 13 - 9
Other exit costs 16 - (3) 13
Global Markets Division Consolidation
Severance 8 2 - 6
Other exit costs 30 6 - 24
PCS Customer Service Center Closures
Severance - - - -
Other exit costs 2 1 - 1
Restructuring Events - 2001
Sprint ION Termination
Severance 43 9 - 34
Other exit costs 47 7 (9) 31
- ---------------------------------------------------------------------------------------------------------------------
Total $ 277 $ 49 $ (12) $ 216
------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
7. Discontinued Operation
- --------------------------------------------------------------------------------
In the 2002 third quarter, Sprint reached a definitive agreement to sell its
directory publishing business to R.H. Donnelley for $2.23 billion in cash. The
sale closed on January 3, 2003. In the 2003 first quarter, Sprint recognized a
pretax gain of $2.13 billion, $1.31 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:
----------------- -----------------
March 31, December 31,
2003 2002
--------------------------------------------------- -----------------------------------
(millions)
Assets of discontinued operation
Accounts receivable, net $ - $ 277
Prepaids - 99
Other assets - 15
--------------------------------------------------- -- -------------- -- --------------
Total assets of discontinued operation $ - $ 391
-- -------------- -- --------------
Liabilities of discontinued operation
Advance billings and other $ - $ 299
-- -------------- -- --------------
Quarters Ended
March 31,
-- -------------- -- --------------
2003 2002
--------------------------------------------------- -- -------------- -- --------------
(millions)
Net operating revenues $ 5 $ 137
-- -------------- -- --------------
Income before income taxes $ 5 $ 63
-- -------------- -- --------------
The FON Group has a current tax payable to the PCS Group related to the gain on
the sale of the directory publishing business in the amount of $700 million as
of March 31, 2003 because of the tax allocation between the PCS Group and the
FON Group under the tax sharing agreement.
- --------------------------------------------------------------------------------
8. Short-term Borrowings and Current Maturities of Long-term Debt
- --------------------------------------------------------------------------------
In February 2003, Sprint prepaid the $455 million balance outstanding relating
to the global markets division accounts receivable asset securitization
facility. As of March 31, 2003, the facility was collateralized by $1.5 billion
of gross receivables and 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.
- --------------------------------------------------------------------------------
9. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
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. 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. The intergroup debt is
eliminated on the consolidated balance sheet.
- --------------------------------------------------------------------------------
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.
Sprint's Articles of Incorporation prohibit the issuance of any shares of Series
3 PCS common stock, Series 3 FON common stock, or Class A common stock following
the conversion of the shares of Series 3 PCS common stock into shares of Series
1 PCS common stock and the issuance of the Series 1 PCS common stock underlying
the Class A common stock. Although 100 million shares of Class A common stock,
1.2 billion shares of Series 3 FON common stock and 600 million shares of Series
3 PCS common stock continue to be authorized, this prohibition effectively
limits the authorized common stock reflected on the balance sheet as follows:
o Class A FT is limited to the outstanding 43.1 million shares;
o FON is limited to 3,000 million shares;
o PCS is limited to 4,000 million shares.
- --------------------------------------------------------------------------------
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.
Because grants were made late in March 2003, the impact of adoption was minimal.
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 the
Company applied the fair value recognition provisions of SFAS 123.
Sprint FON Group
Quarters Ended March 31,
- -------------- - -------------
2003 2002
---------------------------------------------------- - -------------- - -------------
(millions, except per share
data)
Net income, as reported $ 1,850 $ 286
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects - -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (14) (22)
---------------------------------------------------- - -------------- - -------------
Pro forma net income $ 1,836 $ 264
- -------------- - -------------
Earnings per common share:
Basic - as reported $ 2.07 $ 0.32
- -------------- - -------------
Basic - pro forma $ 2.05 $ 0.30
- -------------- - -------------
Diluted - as reported $ 2.06 $ 0.32
- -------------- - -------------
Diluted - pro forma $ 2.04 $ 0.30
- -------------- - -------------
Sprint PCS Group
Quarters Ended March 31,
- -------------- - -------------
2003 2002
---------------------------------------------------- - -------------- - -------------
(millions, except per share
data)
Net loss, as reported $ (182) $ (146)
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects - -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (20) (28)
---------------------------------------------------- - -------------- - -------------
Pro forma net loss $ (202) $ (174)
- -------------- - -------------
Earnings per common share:
Basic - as reported $ (0.18) $ (0.15)
- -------------- - -------------
Basic - pro forma $ (0.20) $ (0.18)
- -------------- - -------------
Diluted - as reported $ (0.18) $ (0.15)
- -------------- - -------------
Diluted - pro forma $ (0.20) $ (0.18)
- -------------- - -------------
- --------------------------------------------------------------------------------
12. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
On March 19, 2003, counsel for plaintiffs and defendants announced a settlement,
subject to court approval, of the previously disclosed derivative action filed
by The Amalgamated Bank, an institutional stockholder. The settlement does not
reflect any admission of liability by the defendants and there has been no
finding of any liability by the defendants. The settlement includes the adoption
of certain enhancements to Sprint's corporate governance policies and practices;
an agreement by Board members and certain former senior executives to certain
restrictions on options, or any stock obtained through the exercise of options,
accelerated by stockholder approval of the WorldCom merger; and the payment of
plaintiff's attorneys' fees in the form of 250,000 FON shares and 500,000 PCS
shares. Sprint has reserved $5 million for the payment of these attorney's fees
in the 2003 first quarter in other income (expense), net.
Also on March 19, 2003, as part of the same negotiations, plaintiffs and
defendants announced a settlement, subject to court approval, of the previously
disclosed securities class action filed by The New England Health Care Employees
Pension Fund, an institutional stockholder, and two other stockholders. The
settlement does not reflect any admission of liability by defendants, and there
has been no finding of any violation or liability by defendants. The settlement
provides for the payment to the plaintiff class of a total of $50 million.
Sprint has reserved $45 million for the settlement of the securities class
action in the 2003 first quarter in other income (expense), net. This reserve is
net of insurance coverage that is undisputed by insurance carriers. Sprint
expects further amounts will be reimbursed by insurance carriers and is
currently in negotiations about this claim coverage.
A number of putative class action cases that allege Sprint failed to obtain
easements from property owners during the installation of its fiber optic
network are in process. Several of these cases seek certification of nationwide
classes, and in one case, a nationwide class has been certified. Settlement
negotiations directed to a nationwide, industry-wide settlement of these claims
have resulted in an agreement, not yet approved by the Court. Sprint has
previously accrued for the estimated settlement costs of these suits.
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.
Various other suits, typical for a business enterprise, are pending against
Sprint.
While it is not possible to determine the ultimate disposition of each of these
proceedings, Sprint believes 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:
----------------- ----------------
March 31, December 31,
2003 2002
--------------------------------------------------- -----------------------------------
(millions)
FON Group $ 239 $ 279
PCS Group 92 135
--------------------------------------------------- -- -------------- -- --------------
Consolidated $ 331 $ 414
-- -------------- -- --------------
Supplemental Cash Flows Information
Sprint's net cash paid for interest and income taxes was as follows:
Quarters Ended
March 31,
-- ------------- -- -------------
2003 2002
--------------------------------------------------- -- ------------- -- -------------
(millions)
Interest (net of capitalized interest) $ 419 $ 182
-- ------------- -- -------------
Income taxes $ 9 $ 2
-- ------------- -- -------------
In March 2002, Sprint issued $5 billion of debt securities which replaced the commercial paper program and added additional
liquidity to the balance sheet. This debt has semiannual interest payments, one of which was paid in March 2003.
Sprint's noncash activities included the following:
Quarters Ended
March 31,
-- ------------- -- -------------
2003 2002
--------------------------------------------------- -- ------------- -- -------------
(millions)
Common stock issued under Sprint's employee
benefit stock plans $ 37 $ 64
-- ------------- -- -------------
Tax benefit from stock options exercised $ - $ 1
-- ------------- -- -------------
- --------------------------------------------------------------------------------
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
March 31, Division Division Other(1) Group Eliminations(2) Consolidated
- ----------------------------------------------------------------------------------------------------------------
(millions)
2003
Net operating revenues $ 2,042 $ 1,536 $ 187 $ 2,947 $ (373) $ 6,339
Affiliated revenues 193 52 125 3 (373) -
Operating income (loss) 6 460 (10) 140 8 604
2002
Net operating revenues $ 2,342 $ 1,565 $ 193 $ 2,848 $ (311) $ 6,637
Affiliated revenues 147 78 116 (30) (311) -
Operating income (loss) (75) 481 (6) 113 5 518
- ----------------------------------------------------------------------------------------------------------------
(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.
Net operating revenues by product and services were as follows:
- ----------------------------------------------------------------------------------------------------------------------
Global
Quarters Ended Markets Local PCS
March 31, Division Division Other(1) Group Eliminations(2)Consolidated
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2003
Voice $ 1,292 $ - $ - $ - $ (193) $ 1,099
Data 461 - - - - 461
Internet 243 - - - - 243
Local service - 765 - - (1) 764
Network access - 523 - - (43) 480
Long distance - 144 - - - 144
Wireless services - - - 2,947 (3) 2,944
Other 46 104 187 - (133) 204
----------------------------------------------------------------------------------
Total net operating revenues $ 2,042 $ 1,536 $ 187 $ 2,947 $ (373) $ 6,339
----------------------------------------------------------------------------------
2002
Voice $ 1,536 $ - $ - $ - $ (147) $ 1,389
Data 484 - - - - 484
Internet 245 - - - - 245
Local service - 761 - - - 761
Network access - 518 - - (60) 458
Long distance - 168 - - - 168
Wireless services - - - 2,848 30 2,878
Other 77 118 193 - (134) 254
----------------------------------------------------------------------------------
Total net operating revenues $ 2,342 $ 1,565 $ 193 $ 2,848 $ (311) $ 6,637
----------------------------------------------------------------------------------
(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.
- --------------------------------------------------------------------------------
15. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple
Element Deliverables. 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 package, 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 Company is currently evaluating the
impact of this change.
- --------------------------------------------------------------------------------
16. Subsequent Events
- --------------------------------------------------------------------------------
Investment Activity
In April 2003, Sprint converted 9 million EarthLink preferred shares into common
shares and sold the shares to EarthLink, Inc. for $53 million. Sprint recognized
a $5 million loss on the sale. Sprint then announced, in May 2003, it may sell
up to an additional 4 million shares as part of a prepaid forward contract.
Dividend Declaration
In May 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 June 30, 2003.
Separation Arrangements
Sprint reached agreement on separation terms with certain senior executives.
Charges for associated separation costs will be recorded in the 2003 second
quarter.
New Director
In May 2003, the Sprint Board of Directors elected Michael M. Sears, executive
vice president, office of the chairman and chief financial officer of the Boeing
Company, as a director of Sprint replacing Ronald T. LeMay, who resigned in
April 2003. William T. Esrey resigned as a director of Sprint in May 2003.
New Officers
At its May 2003 meeting, the Sprint Board of Directors elected the following new
executive officers:
Gary D. Forsee, Sprint's chief executive officer, was elected as chairman
of the Board.
Howard E. Janzen, formerly chairman, president and chief executive officer
of Williams Communications, was elected president of the global markets
division.
Bruce N. Hawthorne, formerly a partner at the law firm of King & Spalding,
was elected executive vice president and chief staff officer.
Michael W. Stout, formerly vice president and chief technology and
information officer at GE Capital, was elected executive vice
president-chief information officer.
William K. White, who has held various positions in Sprint's corporate
communications department since 1993, was elected interim senior vice
president-communications and brand management.
The Board of Directors had elected the following executive officers in April
2003:
Thomas A. Gerke, who had held various positions at Sprint, primarily in the
legal department, since 1994, was elected as executive vice
president-general counsel.
James G. Kissinger, who had held various positions in Sprint's human
resources department since 1984, was elected senior vice president-human
resources.
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 to continue to grow a significant
market presence;
o the ability of the PCS Group to improve its profitability and
reduce its 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 and emerging 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 8.1 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 web and applications hosting, consulting
services, and colocation services and international data communications.
The global markets division also includes the operating results of the wireless
high speed data and cable TV service operations of the broadband fixed wireless
companies. In 2001, Sprint announced it would halt further deployment of
Multipoint Multichannel Distribution Services (MMDS) services using current line
of sight technology. Sprint is pursuing alternative strategies with respect to
the MMDS spectrum leases and licenses.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.1 million access lines in 18 states. The local division provides
local voice and data services, including digital subscriber line (DSL), for
customers within its franchise territories, access by phone customers and other
carriers to the local division's local network, nationwide long distance
services to residential customers within its franchise territories, sales of
telecommunications equipment, and other services within specified calling areas
to residential and business customers. DSL enables high speed transmission of
data over existing copper telephone lines.
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates a 100%
digital PCS wireless network with licenses to provide service to the entire
United States population using a single frequency band and a single technology.
At the end of the 2003 first 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, are
evaluating restructuring activities, and in one case, an affiliate has filed for
bankruptcy protection and has made claims against Sprint in the bankruptcy
court. Several of the affiliates are also disputing and refusing to pay amounts
owed to the PCS Group. The amounts currently in dispute have been fully
reserved.
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.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
Quarters Ended
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 3,581 $ 3,904
PCS Group 2,947 2,848
Intergroup eliminations (189) (115)
------------------------------------------------------------------------
Net operating revenues $ 6,339 $ 6,637
----------------------------------
Net operating revenues decreased 4% in the 2003 first quarter compared to the same 2002 quarter 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
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 279 $ 246
PCS Group (182) (146)
------------------------------------------------------------------------
Income from continuing operations $ 97 $ 100
----------------------------------
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 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.
- --------------------------------------------------------------------------------
Segmental Results of Operations
- --------------------------------------------------------------------------------
Global Markets Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
---------------------------------- -------------------------------
2003 2002 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Voice $ 1,292 $ 1,536 $ (244) (15.9)%
Data 461 484 (23) (4.8)%
Internet 243 245 (2) (0.8)%
Other 46 77 (31) (40.3)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total net operating revenues 2,042 2,342 (300) (12.8)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,103 1,421 318 22.4%
Selling, general and administrative 573 639 66 10.3%
Depreciation and amortization 360 357 (3) (0.8)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,036 2,417 381 15.8%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income (loss) $ 6 $ (75) $ 81 NM
-- ------------- -- -------------- -- -------------
Operating margin NM NM
-- ------------- -- --------------
NM = Not meaningful
Net Operating Revenues
Net operating revenues decreased 13% in the 2003 first quarter from the same
2002 period. 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 16% in the 2003 first quarter from the same 2002 period
due to a decline in consumer voice revenues resulting from wireless and e-mail
substitution, aggressive competition from RBOC's for consumer and small business
customers and business voice contract renewals occurring at lower prices. Minute
volume decreased 7% in the 2003 first quarter compared to the 2002 first
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 5% in the 2003 first quarter from the same 2002 period
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 the 2003 first quarter from the same 2002
period. 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 40% in the 2003 first quarter from the same 2002
period. The decrease was primarily due to the sale of a consulting business in
the third quarter of 2002.
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 22% in the 2003 first quarter from the same 2002
period. The decrease was due to improved access economics, exit from low margin
business, restructuring efforts, and volume declines. Costs of services and
products for the global markets division were 54.0% of net operating revenues in
the 2003 first quarter compared to 60.7% for the same period a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses decreased 10% in the 2003
first quarter from the same 2002 period. The decline was due to reduced bad debt
provisions, restructuring efforts, and general cost controls. SG&A expense was
28.1% of net operating revenues in the 2003 first quarter compared to 27.3% for
the same period 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 2.4% in the 2003 first quarter
compared to 3.4% in the same 2002 period. This reflects an improvement in
collections and aging. Reserve for bad debt as a percent of outstanding accounts
receivable was 14.0% at the end of the 2003 first 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 increased 1% in the
2003 first quarter from the same period a year ago. Depreciation and
amortization expense was 17.6% of net operating revenues in the 2003 first
quarter compared to 15.2% for the same 2002 period.
Local Division
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
----------------------------------- -------------------------------
-----------------
2003 2002 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues
Local service $ 765 $ 761 $ 4 0.5%
Network access 523 518 5 1.0%
Long distance 144 168 (24) (14.3)%
Other 104 118 (14) (11.9)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total net operating revenues 1,536 1,565 (29) (1.9)%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 490 480 (10) (2.1)%
Selling, general and administrative 320 318 (2) (0.6)%
Depreciation and amortization 266 286 20 7.0%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,076 1,084 8 0.7%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 460 $ 481 $ (21) (4.4)%
--- ------------- -- -------------- -- -------------
Operating margin 29.9% 30.7%
--- ------------- -- --------------
Net Operating Revenues
Net operating revenues decreased 2% in the 2003 first quarter from the same 2002
period as slight growth in local services and network access was more than
offset by declines in long distance services and equipment sales. The local
division ended the 2003 first quarter with approximately 8.1 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 access line losses in 2003 will
approximate the 2002 loss. 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
the 2003 first quarter from the same 2002 period as an 11% 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, increased 1% in the 2003 first quarter compared
to a year ago. Strong growth in special access services in the 2003 first
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 14% in the 2003
first quarter from the same 2002 period. This was primarily due to a decline in
total long distance minutes of use, as customers shifted more of their
communications to wireless, e-mail and instant messaging.
Other Revenues
Other revenues decreased 12% in the 2003 first quarter from the same 2002 period
principally due to a decline in equipment sales. The decrease in equipment sales
was a result of both a planned shift in focus to selling higher margin products
and 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 2% in the 2003 first
quarter compared to the same 2002 period. This increase was mainly driven by
higher pension and retiree costs. Costs of services and products were 31.9% of
net operating revenues in the 2003 first quarter compared to 30.7% for the same
period a year ago.
Selling, General and Administrative Expense
SG&A expense increased 1% in the 2003 first quarter compared to the same 2002
period. This increase was primarily due to additional pension and retiree
benefit costs somewhat offset by a decline in bad debt expense. SG&A expense was
20.8% of net operating revenues in the 2003 first quarter compared to 20.3% for
the same period a year ago. Bad debt expense as a percentage of net revenues was
1.6% in the 2003 first quarter and 2.5% in the same period a year ago. This
reflects an improvement in collections and aging. Reserve for bad debt as a
percent of outstanding accounts receivable was 10.9% at the end of the 2003
first 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 7% in the 2003 first quarter compared to the
same 2002 period. 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 17.3% of net operating revenues in the 2003 first
quarter compared to 18.3% for the same period a year ago.
PCS Group
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
---------------------------------- -------------------------------
2003 2002 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 2,947 $ 2,848 $ 99 3.5%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,448 1,403 45 3.2%
Selling, general and administrative 741 782 (41) (5.2)%
Depreciation 608 526 82 15.6%
Amortization - 1 (1) (100)%
Restructuring and asset impairment 10 23 (13) (56.5)%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,807 2,735 72 2.6%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 140 $ 113 $ 27 23.9%
-- ------------- -- -------------- -- -------------
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail chain and the service revenues generated by sales to its customers
accounted for 23% of net operating revenues in both the 2003 and 2002 first
quarters.
Net Operating Revenues
Quarters Ended
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
Customers
(millions) 15.0 14.3
----------------------------------
Average monthly service revenue per
user (ARPU) $ 59 $ 60
----------------------------------
Customer churn rate 3.1% 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 4.9% in the 2003 first
quarter from the same 2002 period reflecting an increase in the number of
customers, higher monthly recurring charges, and late fees initiated in the
third quarter of 2002. The higher monthly recurring charge was partially offset
by lower overage charges from usage-based plans driving a slight decline in
year-over-year ARPU. Average monthly usage increased by more than two hours when
compared to the 2002 first quarter.
The PCS Group added 199,000 customers in the 2003 first quarter, ending the
period with approximately 15.0 million customers compared to approximately 14.3
million customers at the end of the 2002 first quarter. Resellers added 175,000
customers in the first quarter of 2003, which increased their customer base to
590,000, principally due to Virgin Mobile. The PCS Group third party affiliates
added 109,000 customers in the first quarter of 2003, bringing the total number
of customers served on the PCS network, including resale customers, at the end
of the quarter to more than 18.2 million.
The customer churn rate in the 2003 first quarter was 3.1% compared to 3.0% for
the same 2002 period. The slight year-over-year increase resulted primarily from
an increase in the voluntary churn rate driven by the competitive climate in the
wireless industry. The involuntary churn rate was down slightly year-over-year
as the PCS Group benefited from credit management policies initiated in the 2002
fourth quarter. Overall churn was down sequentially from the 2002 fourth quarter
and we continue to experience improvement.
Revenues from sales of handsets and accessories, including new customers and
upgrades, were approximately 9.1% of net operating revenues in the 2003 first
quarter compared to 10.4% for the same 2002 period. 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 2.5% of net operating revenues in the 2003 first
quarter compared to 2.0% for the same 2002 period. Other revenues increased in
the 2003 first quarter from the same 2002 period mainly reflecting a net
addition of affiliate and wholesale customers.
Operating Expenses
Quarters Ended
March 31,
----------------------------------
2003 2002
--------------------------------------------------------------------------
Acquisition costs per gross customer
addition (CPGA) $ 365 $ 305
----------------------------------
Monthly cash costs per user (CCPU) $ 31 $ 31
----------------------------------
Cost per Gross Customer Addition
CPGA, a measure of the costs of acquiring a new subscriber, increased
approximately 20% in the 2003 first quarter from the same 2002 period. The CPGA
increase was primarily due to certain fixed costs being spread across lower
gross customer additions, as well as higher equipment costs and rebates.
Cash Cost per User
CCPU, a measure of the cash costs to operate the business on a per user basis,
was down slightly year-over-year from just over $31 to just under $31. The
reduction in CCPU occurred primarily due to lower bad debt expense; however,
this savings was mostly offset by 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 3% in the 2003 first quarter from
the same 2002 period. 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 40% of total costs of services and products in the 2003
first quarter compared to 39% for the same period a year ago. Costs of services
and products were 49.1% of net operating revenues in the 2003 first quarter
compared to 49.3% for the same period 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 5% in the 2003
first quarter from the same 2002 period reflecting a decline in bad debt expense
due to a better credit class mix, leading to lower write-offs and higher
recovery and reduced marketing costs. SG&A expense was 25.1% of net operating
revenues in the 2003 first quarter compared to 27.5% for the same period a year
ago. Bad debt expense as a percentage of net revenues was 3.0% in the 2003 first
quarter compared to 4.6% in the same period a year ago. Reserve for bad debt as
a percent of outstanding
accounts receivable was 7.1% at the end of the 2003 first 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 16% in the 2003 first quarter
from the same 2002 period due to an increase in the network asset investment
during 2002.
Depreciation and amortization expense was 20.6% of net operating revenues in the
2003 first quarter compared to 18.5% for the same period 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
PCS incurring an $18 million charge.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 7.0% in the 2003 first
quarter compared to 6.7% in the 2002 first quarter. The increase in interest
rate is primarily due to additional long-term borrowings with higher interest
rates. Interest costs on short-term borrowings, including short-term borrowings
classified as long-term debt, and interest costs on deferred compensation plans
have been excluded so as not to distort the effective interest rate on long-term
debt. See "Liquidity and Capital Resources" for more information on Sprint's
financing activities.
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
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
Dividend and interest income $ 14 $ 8
Equity in net losses of affiliates (18) (20)
Net losses from investments - (10)
Amortization of debt costs (7) (8)
Losses from disposal of PPE (1) (1)
Royalties 3 3
Litigation settlement (50) -
Other, net (2) (3)
------------------------------------------------------------------------
Total $ (61) $ (31)
----------------------------------
Equity in net losses of affiliates was driven by the PCS Group's investment in
Virgin Mobile in the 2003 first quarter and by the PCS Group's investment in
Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso) in the 2002 first quarter. Net
losses from investments in the 2002 first quarter mainly include the write-down
of the 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 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 first quarter, Sprint recognized
a pretax gain of $2.13 billion, $1.31 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 in the Consolidated Statements of Operations of
$258 million.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
Total consolidated assets were as follows:
----------------------------------
March 31, December 31,
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 24,893 $ 23,539
PCS Group 22,626 23,022
Intergroup eliminations (2,754) (1,268)
------------------------------------------------------------------------
Consolidated assets $ 44,765 $ 45,293
----------------------------------
Sprint's consolidated assets decreased $528 million in the 2003 first quarter.
Cash and equivalents increased $1,060 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 $292 million. Capital expenditures were more than
offset by depreciation expense and the 2003 first quarter asset impairment. The
remaining significant change within consolidated assets includes the $1.1
billion tender offers and prepayment of $455 million related to the global
markets division's borrowings, which together reduced external debt by $1.56
billion.
- --------------------------------------------------------------------------------
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
Quarters Ended
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ 772 $ 411
PCS Group 286 164
------------------------------------------------------------------------
Cash flows provided by operating
activities $ 1,058 $ 575
----------------------------------
Cash flow from operations increased $483 million in the first quarter of 2003
from the same 2002 period. This increase was driven primarily by the PCS Group's
improvement in cash from operations. Additionally, the FON
Group had an improvement in its use of working capital related to a
receipt in the 2002 second quarter of tax refunds carried as a receivable in
the 2002 first quarter. This was partially offset by the PCS Group's increased
use of working capital related to a decrease in accounts payable.
Investing Activities
Quarters Ended
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ (357) $ (548)
PCS Group (199) (603)
------------------------------------------------------------------------
Cash flows used by
investing activities $ (556) $ (1,151)
----------------------------------
The FON Group's capital expenditures totaled $360 million in the 2003 first
quarter and $543 million in the same 2002 period. Global markets division
capital expenditures were incurred mainly to enhance network reliability and
upgrade capabilities for providing new products and services. The local division
incurred capital expenditures to accommodate voice grade equivalent growth,
expand capabilities for providing enhanced services, convert our network from
circuit to packet switching, and continue the build-out of high-speed DSL
services.
PCS Group capital expenditures were $187 million in the 2003 first quarter and
$603 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 first quarter was due to reprioritization efforts initiated late last year
to re-focus capital spending on markets with greater impacts. Despite lower
capital spending, PCS has experienced strong improvements in network performance
since the deployment of 1x technology. The first quarter of 2002 capital
expenditures also include the deployment of 3G technology, which was launched
nationwide in the 2002 third quarter.
Financing Activities
Quarters Ended
March 31,
----------------------------------
2003 2002
------------------------------------------------------------------------
(millions)
FON Group $ (1,633) $ 377
PCS Group (24) 1,992
------------------------------------------------------------------------
Cash flows provided (used) by
financing activities $ (1,657) $ 2,369
----------------------------------
Financing activities include a debt reduction of $1.6 billion in the 2003 first
quarter compared to an increase of $2.5 billion in the same 2002 period. The
debt reduction in the 2003 first quarter 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 $114 million in both the 2003 and 2002
year-to-date periods.
Capital Requirements
Sprint's 2003 investing activities, mainly consisting of capital expenditures,
are expected to total approximately $4.1 billion. FON Group capital expenditures
are expected to be approximately $2.0 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 $2.1 billion cash balance at March 31, 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.
Sprint has a revolving credit facility with a syndicate of banks totaling $1.5
billion which expires in August 2003. The $1.5 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 $125 million as of March 31,
2003.
Sprint has a PCS Group accounts receivable asset securitization facility that
provides Sprint with up to $500 million of additional liquidity. The facility is
a three-year program 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 $210 million was available as of March 31,
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 is a three-year program 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 March 31, 2003, Sprint had more than $470 million total funding available
under the facility, and these funds are available to be redrawn at any time.
The undrawn loan facilities described above have interest rates equal to LIBOR
or Prime Rate plus a spread that varies depending on our credit ratings.
Debt maturities for the remainder of 2003 total approximately $965 million.
Sprint's $2.1 billion cash balance at March 31, 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 $5.1 billion at March 31,
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. Moody's Investors Service (Moody's) currently rates
Sprint's long-term senior unsecured debt at Baa3 with a negative outlook.
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 and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint also enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. Sprint seeks to minimize counterparty credit
risk through stringent credit approval and review processes, the selection of
only the most creditworthy counterparties, continual review and monitoring of
all counterparties, and thorough legal review of contracts. Sprint also controls
exposure to market risk by regularly monitoring changes in foreign exchange and
interest rate positions under normal and stress conditions to ensure they do not
exceed established limits.
Sprint's derivative transactions are used principally for hedging purposes and
comply with Board-approved policies. Senior management receives frequent status
updates of all outstanding derivative positions.
Interest Rate Risk Management
Fair Value Hedges
Sprint enters into interest rate swap agreements to minimize exposure to
interest rate movements and achieve an optimal mixture of floating and
fixed-rate debt while minimizing liquidity risk. The interest rate swap
agreements designated as fair value hedges effectively convert Sprint's
fixed-rate debt to a floating rate by receiving fixed rate amounts in exchange
for floating rate interest payments over the life of the agreement without an
exchange of the underlying principal amount. As of March 31, 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 March 31, 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, Sprint entered into forward sale contracts with net purchased
equity option derivatives to monetize equity securities held as available for
sale. The derivatives have been designated as cash flow hedges to reduce the
variability in expected cash flows related to the forecasted sale of the
underlying equity securities.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on reducing
transaction exposure to optimize consolidated cash flow. Sprint's primary
transaction exposure results from payments made to and received from overseas
telecommunications companies for completing international calls made by Sprint's
domestic customers. These international operations were not material to the
consolidated financial position at March 31, 2003 or results of operations or
cash flows for the quarter ended March 31, 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 March 31, 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 $10 million pre-tax on the statements of
operations and cash flows at March 31, 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 $421 million increase in fair market value
of its debt to $18.0 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 $2 million at March 31,
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 within 90 days before the filing of the report, Sprint's Chief
Executive Officer and Chief Financial Officer directed Sprint's internal
auditors to conduct a 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. No significant changes
were made in Sprint's internal controls or in other factors that could
significantly affect those controls after the date of the evaluation.
PART II.
Other Information
PART II. - Other Information
Item 1. Legal Proceedings
On March 19, 2003, counsel for plaintiffs and defendants announced a
settlement, subject to court approval, of the derivative action filed
by The Amalgamated Bank, an institutional stockholder, which was
reported in Sprint's 2002 Form 10-K. The settlement does not reflect
any admission of liability by the defendants and there has been no
finding of any liability by the defendants. The settlement includes
the adoption of certain enhancements to Sprint's corporate governance
policies and practices; an agreement by Board members and certain
former senior executives to certain restrictions on options, or any
stock obtained through the exercise of options, accelerated by
stockholder approval of the WorldCom merger; and the payment of
plaintiff's attorneys' fees in the form of 250,000 FON shares and
500,000 PCS shares. Sprint has reserved $5 million for the payment of
these attorney's fees in the 2003 first quarter in other income
(expense), net.
Also on March 19, 2003, as part of the same negotiations, plaintiffs
and defendants announced a settlement, subject to court approval, of
the securities class action filed by The New England Health Care
Employees Pension Fund, an institutional stockholder, and two other
stockholders, which was reported in Sprint's 2002 Form 10-K. The
settlement does not reflect any admission of liability by defendants,
and there has been no finding of any violation or liability by
defendants. The settlement provides for the payment to the plaintiff
class of a total of $50 million.
Sprint has reserved $45 million for the settlement of the securities
class action in the 2003 first quarter in other income (expense), net.
This reserve is net of insurance coverage that is undisputed by
insurance carriers. Sprint expects further amounts will be reimbursed
by insurance carriers and is currently in negotiations about this
claim coverage.
Item 2. Changes in Securities
Articles Amendment
All of the outstanding shares of Preferred Stock-Fifth Series were
repurchased on March 14, 2003. Following the repurchase and retirement
of the shares of Preferred Stock-Fifth Series, Sprint filed a
Certificate of Retirement with the Kansas Secretary of State on March
25, 2003. This amended Sprint's Articles of Incorporation to eliminate
all reference to the Preferred Stock-Fifth Series. The 95 shares were
added back to shares of preferred stock authorized and available for
issuance.
Shareholder Rights Plan Amendment
On March 12, 2003, the Sprint Board of Directors approved an amendment
to the Amended and Restated Rights Agreement between Sprint and UMB
Bank, n.a., as Rights Agent, adding a provision requiring the
Nominating and Corporate Governance Committee of the Sprint Board to
review the Rights Agreement at least every three years in order to
consider whether maintenance of the Rights Agreement continues to be
in the best interests of Sprint and its shareholders.
Sale of Unregistered Equity Securities
In March, 2003, Sprint issued to certain of its executive officers an
aggregate of 1,202,750 restricted stock units relating to shares of
FON Stock and an aggregate of 1,202,750 restricted stock units
relating to shares of PCS Stock. Included in these restricted stock
units were 799,300 restricted stock units relating to shares of FON
Stock and 799,300 restricted stock units relating to shares of PCS
Stock issued to Gary Forsee, Sprint's new Chief Executive Officer,
under his employment contract. The other restricted stock units were
granted to executive officers as part of their long-term incentive
compensation. Each restricted stock unit represents the right to one
share of common stock once the unit vests. The restricted stock units
also include dividend equivalent rights, which means that, when Sprint
pays a dividend on the stock represented by the units, the grantee of
the units is entitled to additional shares of the stock when the units
vest. The units vest at various times beginning in 2004 and ending in
2008.
Neither the units nor the common stock issuable once the units vest
were registered under the Securities Act of 1933. The issuance of the
restricted stock units was exempt from registration under the
Securities Act in reliance on the exemption provided by Section 4(2)
of the Securities Act because the restricted stock
units were issued in 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 once the units vest.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended March 31,
2003.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended March 31,
2003.
Item 5. Other Information
Ratios of Earnings to Fixed Charges
Sprint's ratio of earnings to fixed charges was 1.32 in the 2003 first
quarter and 1.36 in the 2002 first quarter. 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.
New Director
In May 2003, the Sprint Board of Directors elected Michael M. Sears,
executive vice president, office of the chairman and chief financial
officer of the Boeing Company, as a director of Sprint replacing
Ronald T. LeMay, who resigned in April 2003. William T. Esrey resigned
as a director of Sprint in May 2003.
New Officers
At its May 2003 meeting, the Sprint Board of Directors elected the
following new executive officers:
Gary D. Forsee, Sprint's chief executive officer, was elected as
chairman of the Board.
Howard E. Janzen, formerly chairman, president and chief
executive officer of Williams Communications, was elected
president of the global markets division.
Bruce N. Hawthorne, formerly a partner at the law firm of King &
Spalding, was elected executive vice president and chief staff
officer.
Michael W. Stout, formerly vice president and chief technology
and information officer at GE Capital, was elected executive vice
president-chief information officer.
William K. White, who has held various positions in Sprint's
corporate communications department since 1993, was elected
interim senior vice president-communications and brand
management.
The Board of Directors had elected the following executive officers in
April 2003:
Thomas A. Gerke, who had held various positions at Sprint,
primarily in the legal department, since 1994, was elected as
executive vice president-general counsel.
James G. Kissinger, who had held various positions in Sprint's
human resources department since 1984, was elected senior vice
president-human resources.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession:
(a) Stock Purchase Agreement, by and between Sprint Corporation,
Centel Directories LLC and R.H. Donnelley Corporation, dated as
of September 21, 2002 (filed as Exhibit 2 to Sprint Corporation
Current Report on Form 8-K dated September 21, 2002 and
incorporated herein by reference).
(b) Supplemental Agreement to Stock Purchase Agreement, by and
between Sprint Corporation, Centel Directories LLC and R.H.
Donnelley Corporation, dated as of December 31, 2002 (filed as
Exhibit 2(b) to Sprint Corporation Current Report on Form 8-K
dated January 3, 2003 and incorporated herein by reference).
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended.
(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) Executive Compensation Plans and Arrangements:
(a) 1990 Restricted Stock Plan, as amended (filed as Exhibit
(10)(g) to Sprint Corporation's Annual Report on Form 10-K for
the year ended December 31, 2002 and incorporated herein by
reference).
(b) 1990 Stock Option Plan, as amended (filed as Exhibit (10)(f)
to Sprint Corporation's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference).
(c) Employment Agreement dated as of March 19, 2003, by and among
Sprint Corporation, Sprint/United Management Company and Gary D.
Forsee.
(d) 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.
(e) Form of Indemnification Agreements between Sprint Corporation
and its Directors and Officers.
(f) Summary of Executive Officer Benefits and Board of Directors
Benefits and Fees.
(12) Computation of Ratios of Earnings to Fixed Charges
(99)(a) Statement of Sprint Corporation's Chief Executive Officer in
compliance with 18 U.S.C. ss.1350 as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002.
(99)(b) Statement of Sprint Corporation's Chief Financial Officer in
compliance with 18 U.S.C. ss.1350 as adopted pursuant to ss.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 January 3, 2003 in
which it reported that it had closed the sale of its directory
business.
Sprint filed a Current Report on Form 8-K dated February 5, 2003, in
which it reported that it had announced fourth quarter 2002 and
calendar year 2002 results. The news release regarding fourth quarter
2002 and calendar year 2002 results, which was included 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 Selected Operating Results
Sprint Corporation Pro Forma Selected Operating Results
Sprint FON Group Summary Financial Information
Sprint Corporation Directory Publishing Business
Sprint Corporation PCS Group Net Customer Additions
Sprint filed a Current Report on Form 8-K dated March 7, 2003, in
which it reported that Sprint's Chief Executive Officer and Chief
Financial Officer filed with the Securities and Exchange Commission
statements in compliance with 18 U.S.C. ss.1350 as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002 with respect to Sprint
Corporation's 2002 Form 10-K.
Sprint filed a Current Report on Form 8-K dated March 18, 2003 in
which it reported that it had announced that Gary D. Forsee, formerly
Vice Chairman of BellSouth Corporation, would become Chief Executive
Officer of Sprint and a member of its board of directors effective
March 19, 2003.
Sprint filed a Current Report on Form 8-K dated March 19, 2003 in
which it reported that it had announced a settlement, subject to court
approval, of the securities class-action and derivative lawsuits
related to the failed merger with WorldCom.
Sprint filed a Current Report on Form 8-K dated April 21, 2003, in
which it reported that it had 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
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPRINT CORPORATION
-----------------------------------
(Registrant)
By /s/ John P. Meyer
-----------------------------------
John P. Meyer
Senior Vice President -- Controller
Principal Accounting Officer
Dated: May 14, 2003
CERTIFICATIONS
I, Gary D. Forsee, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sprint Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Gary D. Forsee
------------------------------------
Gary D. Forsee
Chief Executive Officer
CERTIFICATIONS
I, Robert J. Dellinger, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sprint Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Robert J. Dellinger
------------------------------------
Robert J. Dellinger
Executive Vice President
and Chief Financial Officer