SFAS No. 150 and Mandatorily Redeemable Preferred Stock

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1 DuPree Financial Analysis Lab 800 West Peachtree St. NW Atlanta, GA Dr. Charles W. Mulford, CPA, Director Invesco Chair and Professor of Accounting Kerianne Maloney Graduate Research Assistant SFAS No. 150 and Mandatorily Redeemable Preferred Stock Executive Summary In May, 2003 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This report highlights the provisions of SFAS 150 and the impact it will have on selected companies financial statements. October, 2003

2 SFAS No. 150 and Mandatorily Redeemable Preferred Stock DuPree Financial Analysis Lab DuPree College of Management Georgia Institute of Technology Atlanta, GA DuPree Financial Analysis Lab The DuPree Financial Analysis Lab conducts unbiased stock market research. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants. Because our Lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large. A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times our research may look at stock prices generally, though from a fundamental and not technical point of view. Contact Information Charles Mulford. Invesco Chair, Professor of Accounting and the Lab's Director. Phone: (404) charles.mulford@mgt.gatech.edu Michael L. Ely. MBA, Financial Analyst. Phone: (404) michael.ely@mgt.gatech.edu Kerianne Maloney. Graduate research assistant and MBA student. Mario Martins. Graduate research assistant and MBA student. Raul Quiroz. Graduate research assistant and MBA student. Website: by the DuPree College of Management, Georgia Institute of Technology, Atlanta, GA ALL RIGHTS RESERVED. The information in this research report was based on sources believed to be reliable and accurate, consisting principally of required filings submitted by the companies represented to the Securities and Exchange Commission. However, no warranty can be made. No data or statement is or should be construed to be a recommendation for the purchase, retention, or sale of the securities mentioned. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

3 DuPree Financial Analysis Lab Companies Named In This Report Page AOL Time Warner Inc. 7, 8 Cinergy Corp. 6, 9 CIT Group Inc. 6, 10 Duquesne Light Co. 6, 11 Exelon Corp. 7, 24 Ford Motor Company 6, 12 Goodrich Corp 6, 13 H. J. Heinz Company and subsidiaries 7, 25 International Paper Co. 6, Korn/Ferry International and Subsidiaries 6, Loral Space & Communications Ltd 6, Lucent Technologies Inc. and Subsidiaries 7, 26 Motorola Inc. 6, Nextel Communications 6, Nextel Partners Inc. 6, Priceline.Com Incorporated 6, 21 Southern Co 6, 22 Xerox Corp 6, 23 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

4 SFAS No. 150 and Mandatorily Redeemable Preferred Stock In May, 2003 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150 Accounting for Certain Financial Statements with Characteristics of Both Liabilities and Equity. Most noteworthy in applying the provisions of this Statement is that many companies that have been reporting qualifying securities between the liabilities and equity section of their balance sheets, the so-called mezzanine section, will have to reclassify the instruments to the liabilities section. According to the Statement, an issuer must classify the following financial instruments as liabilities (or assets, depending on the circumstances): A financial instrument issue in the form of shares that is mandatorily redeemable, thus representing an unconditional obligation to the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon a future event A financial instrument, other than an outstanding share, that, at inception, represents an obligation to repurchase the issuer s equity shares and requires the issuers to settle the obligation by transferring assets. A financial instrument that represents an unconditional obligation, or a financial instrument other than an outstanding share that represents a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on any of the following: a. A fixed monetary amount known at inception. b. Variations in something other than the fair value of the issuer s equity shares. c. Variations inversely related to changes in the fair value of the issuer s equity shares. SFAS 150 is a response to the investment and accounting community s concerns surrounding issuers classification of certain financial instruments that have characteristics of both liabilities and equity as entirely equity or between the equity and liabilities sections of the balance sheet. The Statement also clarifies the appropriate classification of certain financial instruments that represent obligations to issue equity shares. SFAS 150 defines an obligation as a conditional or unconditional duty or responsibility to transfer assets or to issue equity shares. An entity incurs an obligation to transfer assets that requires or could require a net cash or net share settlement. If, upon issuance of shares of stock an entity does not incur an obligation to redeem the shares, then the entity does not incur an obligation to transfer assets or issue additional equity shares. However, certain issuances of stock, such as mandatorily redeemable preferred stock, do impose an obligation requiring the issuer to transfer assets or issue its equity shares. Thus, unless the redemption of redeemable stock is required to occur only upon the liquidation or termination of the reporting entity, the stock should be classified as a liability. Mandatorily redeemable financial instruments are to be measured at their monetary value, or fair value of the cash, shares, or other instruments that a financial instrument obligates the issuer to convey to the holder at the settlement date under specified market conditions. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

5 DuPree Financial Analysis Lab Disclosures SFAS 150 requires issuers to disclose the nature and terms of the financial instruments within the scope of the Statement and the rights and obligations embodied in the instruments. Effective date SFAS 150 is effective for financial instruments entered into or modified after May 31, Thus we can expect to see the statement applied beginning in the third quarter, Leverage implications Depending on debt covenant provisions, compliance with SFAS 150 may cause some firms to be in default of their debt covenants or experience large increases in interest costs upon reclassifying financial instrument balances to the liabilities section. However, it is possible for liabilities to increase, but debt, as defined by the covenants, to remain unchanged. Cash flow implications The reclassification of the mandatorily redeemable preferred shares will affect firms operating cash flow. When classified between the liabilities and equity section of the balance sheet, payments to the holders are deemed to be dividends, and thus would be classified in the financing section of the cash flow statement. Yet, since the provisions of the Statement require classifying the instruments as liabilities, payments to the holders represent interest expense and thus would be classified in the operating section of the cash flow statement. Firms can therefore expect a decrease in cash from operating activities as a result of SFAS 150. Generally, company disclosures were insufficient for us to determine the effect of SFAS 150 on operating cash flow. Leverage analyses The following series of leveage analyses compare the ratio of total liabilities/total shareholders equity before and after reclassification of mandatorily redeemable preferred to the liabilities section of the balance sheet. The following companies have included the mandatorily redeemable preferred stock balance in the mezzanine section of the balance sheet. The mandatorily redeemable balance reported on the balance sheet is assumed to be the amount that will be reclassified to liabilities. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

6 SFAS No. 150 and Mandatorily Redeemable Preferred Stock (Dollars in thousands) Company Name Total Liabilities* S/Hs Equity Ratio ** Mandatorily Redeemable Preferred Adjusted Total Liabilities ^ Adjust. Ratio ^^ Cinergy Corp. $ 9,307,508 $3,671, $309,216 $ 9,616, CIT Group 37,870,700 5,057, ,400 38,127, Duquesne Light 1,691, , ,000 1,841, Goodrich Corp 4,660,600 1,002, ,600 4,786, International Paper 24,227,000 7,857, ,255,000 25,482, Korn/Ferry 192, , , , Loral Space 2,823,447 (377,740) n/a - 2,823,447 n/a Motorola Inc. 17,561,000 11,858, ,000 18,047, Nextel Commun. 17,248,000 3,428, ,000 18,109, Nextel Partners 1,841,565 (74,898) n/a 37,112 1,878,677 n/a Priceline.Com 72, , ,470 86, Southern Co 21,472,558 9,640, ,180,000 23,652, Note that Loral Space s adjusted total liabilities are the same as total liabilities because the Company does not consider its Series C and D convertible redeemable preferred to be mandatorily redeemable. The following companies have included the mandatorily redeemable preferred balance in the mezzanine section of the balance sheet but noted in the footnotes to the financial statements that a different amount than the amount shown on the balance sheet will be reclassified. (Dollars in thousands) Company Name Total Liabilities* S/Hs Equity Ratio ** Mandatorily Redeemable Preferred Adjusted Total Liabilities ^ Adjust. Ratio ^^ Ford Motor Company $292,436,000 $8,084, $669,000 $293,105, Xerox Corp 18,888,000 3,874, ,000 19,584, AOL Time Warner Inc. (now Time Warner, Inc.) has been including the mandatorily redeemable preferred balance in the equity section of the balance sheet. Thus both the liability and equity portions of the leverage ratio will be impacted by the reclassification. The amount of mandatorily redeemable preferred subject to reclassification is per the financial statement footnotes. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

7 DuPree Financial Analysis Lab (Dollars in thousands) Company Name Total Liabilities* S/Hs Equity Ratio ** Mandatorily Redeemable Preferred Adjusted Total Liabilities ^ Adjust. Ratio ^^^ AOL Time Warner Inc. $57,334,000 $55,999, $1,500,000 $64,157, The following companies have already included the mandatorily redeemable preferred balance in the liabilities section of the balance sheet, so the ratio of total liabilities/shareholders equity will remain unchanged. (Dollars in thousands) Company Name Total S/Hs Ratio Liabilities* Equity ** Exelon Corp. $31,242,000 $8,967, H. J. Heinz 8,025,594 1,199, Lucent Technologies claims its redeemable convertible preferred stock is conditional and is therefore unaffected by the Statement. If the open condition were to be fulfilled then the Company s redeemable preferred stock would fall within the reporting requirements of Statement 150. (Dollars in thousands) Company Name Total Liabilities* S/Hs Equity Ratio ** Lucent Technologies $19,961,000 ($3,025,000) n/a Footnotes to leverage analyses: Balances shown are most recent balances reported. * Includes all liabilities: current liabilities, long-term debt, other liabilities and minority interest if the company reports minority interest as a liability; does not include mezzanine section. ** Ratio: Total Liabilities/Shareholders Equity. ^ Adjusted to include mandatorily redeemable preferred balance, given provisions of SFAS 150. ^^ (Total Liabilities + Mandatorily Redeemable Preferred)/Shareholders Equity ^^^ (Total Liabilities + Mandatorily Redeemable Preferred)/(Shareholders Equity Mandatorily Redeemable Preferred) SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

8 SFAS No. 150 and Mandatorily Redeemable Preferred Stock Financial Statement Examples Now consider the following examples of companies impacted by SFAS 150. Quoted relevant sections from the companies financial statement footnotes have been highlighted. Prior to implementing SFAS 150 AOL Time Warner s mandatorily convertible preferred stock had not even been in the mezzanine section of its balance sheet; the preferred stock was classified as equity. Thus both debt and equity will be affected by the Statement. AOL Time Warner Inc. Form 10-Q For the period ending 06/30/03 (filing date 08/13/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $12,692 $13,395 Long-term debt 25,898 27,354 Other liabilities 18,744 16,836 Minority interests 5,323 5,048 Shareholders equity: Convertible Preferred Stock, $0.10 par value, 1 share authorized, issued, and outstanding, $0.10 liquidation preference 1,500 Series LMCN-V Common Stock, $0.01 par value, million shares outstanding in each period 2 2 AOL Time Warner Common Stock, $0.01 par value, and billion shares outstanding Paid-in capital 155, ,134 Accumulated other comprehensive loss, net (460) (428) Retained earnings (loss) (100,474) (101,934) Reported total shareholders equity 55,999 52,817 shareholders equity $118,656 $115,450 FAS 150 will be effective for AOL Time Warner in the third quarter of The adoption of the provisions of FAS 150 will require the Company to reclassify $1.5 billion of mandatorily convertible preferred stock issued to Comcast from shareholders equity to liabilities. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

9 DuPree Financial Analysis Lab Consider the following examples of companies that, prior to the implementation of SFAS 150 had classified mandatorily redeemable preferred stock in the mezzanine section of the balance sheet. Note the variety of ways in which companies address the SFAS 150 in the notes to the financial statements. Some companies only mention that they are currently evaluating the impact of SFAS 150, while others provide specific amounts by which the financial statements will be impacted. Cinergy Corp. Form 10-Q For the period ending 06/30/03 (filing date 08/13/03) (Dollars in thousands) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $2,675,239 $2,995,945 Long-term debt 3,977,446 4,011,568 Other liabilities 2,645,946 2,526,191 Liabilities of discontinued operations 8, ,833 Reported total liabilities 9,307,508 9,642,537 Preferred trust securities - Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company 309, ,187 Cumulative preferred stock of subsidiaries Not subject to mandatory redemption 62,818 62,828 Reported total common stock equity 3,608,816 3,293,476 shareholders equity $13,288,358 $13,307,028 Statement 150 will require the preferred trust securities (currently recorded as Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company with a carrying value of $309 million) to be classified as long-term debt, effective July 1, Dividends paid on the preferred trust securities will be recorded as Interest Expense after July 1, Prior period financial statements are not permitted to be restated for either of these changes. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

10 SFAS No. 150 and Mandatorily Redeemable Preferred Stock CIT Group Inc. For the period ending 07/30/03 (filing date 08/12/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Reported total debt $32,430.8 $31,681.3 Other liabilities 5, ,123.2 Reported total liabilities 37, ,804.5 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company Reported total shareholders equity 5, ,870.7 shareholders equity $43,184.7 $41,932.4 In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This pronouncement establishes standards for classifying and measuring certain financial instruments as a liability (or an asset in some circumstances). This pronouncement will require CIT to display the "Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company" within the liability section on the face of the consolidated balance sheet and show the related expense, with interest expense on a pre-tax basis. There will be no impact to net income upon adoption. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

11 DuPree Financial Analysis Lab Duquesne Light Co. Form 10-Q For the period ending 06/30/03 (filing date 08/14/03) (Dollars in millions) Capitalization and liabilities: June 30, 2003 December 31, 2002 Reported common shareholder s equity $525.2 $521.0 Company obligated mandatorily redeemable preferred securities Preferred and preference stock Long-term debt Reported total capitalization 1, ,700.3 Reported total current liabilities Reported total non-current liabilities capitalization $2,436.2 $2,473.2 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This standard requires that an issuer classify a financial instrument that falls within its scope as a liability, or as an asset in some circumstances. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, Management does not believe the adoption of SFAS No. 150 will have an impact on our financial position, results of operations or cash flows. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

12 SFAS No. 150 and Mandatorily Redeemable Preferred Stock Ford Motor Company Form 10-Q For the period ending 06/30/03 (filing date 08/08/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Payables $21,832 $18,981 Debt 169, ,222 Other liabilities 101,139 95,925 Liabilities of discontinued/held-forsale operations Total liabilities 292, ,097 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of the Company 5,669 5,670 Reported total shareholders equity 8,084 5,590 shareholders equity $306,189 $289,357 We are adopting SFAS No. 150 as it becomes effective. We expect to reclassify the trust preferred securities of Ford Motor Company Capital Trust I ($669 million at June 30, 2003), which are presently reported in the mezzanine section of the balance sheet. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

13 DuPree Financial Analysis Lab Goodrich Corp Form 10-Q For the period ending 06/30/03 (filing date 08/12/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $1,284.5 $1,562.9 Long-term debt and capital lease 2,133.2 obligations 2,129.0 Other liabilities 1, ,248.1 Mandatorily redeemable preferred securities of trust Reported total shareholders equity 1, shareholders equity $5,788.7 $5,998.3 The Company is currently assessing the effect of Statement 150, but does not expect the Statement to have a material effect on its consolidated financial condition or results of operations. International Paper Co. Form 10-Q For the period ending 06/30/03 (filing date 08/14/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $5,108 $4,579 Long-term debt 13,496 13,042 Other liabilities 5,623 5,543 Minority interest 1,737 1,449 International Paper - Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding International Paper Debentures 1,255 1,805 Reported total shareholders equity 7,857 7,374 shareholders equity $35,076 $33,792 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

14 SFAS No. 150 and Mandatorily Redeemable Preferred Stock In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." It establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This standard is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, International Paper will adopt this standard for the quarter ending September 30, At that time, approximately $1.3 billion of Mandatorily Redeemable Preferred Securities, currently classified in a separate line item on the Company's consolidated balance sheet, will be included in Long-term debt, with no effect on existing debt covenants. Also, beginning in the 2003 third quarter, preferred dividends of approximately $90 million per year relating to these securities that had been reported in Minority interest expense will be reported as Interest expense in the Company's consolidated income statement. Dividends for periods prior to the 2003 third quarter will continue to be reported in Minority interest expense, as required under the new standard. Implementation of this standard will have no cash Korn/Ferry International and Subsidiaries Form 10-K FYE 04/30/01 (filing date 07/22/03) (Dollars in thousands) Liabilities and shareholders equity: April 30, 2003 April 30, 2002 Current liabilities $88,962 $146,285 Long-term debt 41,364 1,634 Other liabilities 62,626 50,358 Reported total liabilities 192, , % Convertible mandatorily redeemable preferred stock, net of unamortized discount and issuance costs, redemption value $10,100 9,606 - Reported total shareholders equity 166, ,297 shareholders equity $369,013 $377,574 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

15 DuPree Financial Analysis Lab In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective at the beginning of the first interim period beginning after June 15, 2003; including all financial instruments created or modified after May 31, This Statement requires mandatorily redeemable instruments be classified as liabilities. The Company will adopt this Statement in the first quarter of fiscal 2004, and our convertible mandatorily redeemable preferred stock will be classified as a liability. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

16 SFAS No. 150 and Mandatorily Redeemable Preferred Stock Loral Space & Communications Ltd Form 10-K For the year ending 12/31/02 (filing date 03/31/03) (Dollars in thousands) Liabilities and shareholders equity: December 31, 2002 December 31, 2001 Current liabilities $461,143 $584,517 Long-term debt 2,112,627 2,226,525 Other liabilities 332, ,596 Minority interest 16,150 18,681 Convertible redeemable preferred stock: 6% Series C ($105,995 redemption value), $0.01 par value 104,582-6% Series D($21,118 redemption value), $0.01 par value 20,499 - Shareholders (deficit) equity: 6% Series C convertible redeemable preferred stock ($81,255 and $491,994 redemption value), $.01 par value; 20,000,000 shares authorized, 3,745,485 and 9,839,874 shares issued 80, ,371 6% Series D convertible redeemable preferred stock ($15,582 and $305,539 redemption value), $.01 par value; 20,000,000 shares authorized, 734,135 and 6,110,788 shares issued 15, ,529 Common stock, $.10 par value; 750,000,000 shares authorized, 429,260,197 and 336,789,16 shares issued 4,293 3,368 Paid-in-capital 3,389,035 2,771,964 Treasury stock, at cost; 174,195 shares (3,390) (3,360) Unearned compensation (151) (81) Retained deficit (3,782,107) (2,223,710) Accumulated other comprehensive (loss) income (57,233) 20,787 Reported total shareholders (deficit) equity (354,227) 1,350,868 shareholders (deficit) equity $2,692,802 $4,426,187 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

17 DuPree Financial Analysis Lab Form 10-Q For the period 06/30/03 (filing date 08/14/03) (Dollars in thousands) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $2,515,159 $461,143 Long-term debt - 2,112,627 Other liabilities 308, ,028 Minority interest 2,559 16,150 Convertible redeemable preferred stock: 6% Series C ($106,009 redemption value), $0.01 par value - 104,582 6% Series D($21,122 redemption value), $0.01 par value - 20,499 Shareholders (deficit): 6% Series C convertible redeemable preferred stock ($187,274 and $81,265 redemption value), $.01 par value 184,753 80,171 6% Series D convertible redeemable preferred stock ($36,707 and $15,585 redemption value), $.01 par value 35,624 15,125 Common stock, $.10 par value 4,409 4,293 Paid-in-capital 3,392,821 3,389,035 Treasury stock (3,360) (3,360) Unearned compensation (208) (151) Retained deficit (3,932,790) (3,782,107) Accumulated other comprehensive loss (58,989) (57,233) Reported total shareholders deficit (377,740) (354,227) shareholders deficit $2,448,266 $2,692,802 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

18 SFAS No. 150 and Mandatorily Redeemable Preferred Stock The Company s 6% Series C convertible redeemable preferred stock ( the Series C Preferred Stock ) and 6% Series D convertible redeemable preferred stock ( the Series D Preferred Stock ) have mandatory redemption dates in 2006 and 2007, respectively. The Company has the right to make mandatory redemption payments to the holders in either cash or common stock, or a combination of the two. As a result of obtaining shareholder approval to increase the authorized number of shares of the Company s common stock to 125,000,000, the Company would be able to effect payment of the total mandatory redemptions in common stock based on the volume weighted average daily price of the Company s common stock as defined at June 30, Accordingly, as of June 30, 2003, all of the Company s outstanding preferred stock was classified within the shareholders deficit section of the condensed consolidated balance sheet. SFAS 150 The Company is currently evaluating the provisions of SFAS 150. Motorola Inc. Form 10-Q For the period ending 06/30/03 (filing date 08/01/03) (Dollars in millions) Liabilities and shareholders equity: June 28, 2003 December 31, 2002 Current liabilities 8,324 $9,810 Long-term debt 6,686 7,189 Other liabilities 2,551 2,429 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company-guaranteed debentures Reported total shareholders equity 11,858 11,239 shareholders equity $29,905 $31,152 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

19 DuPree Financial Analysis Lab In February 1999, Motorola Capital Trust I, a Delaware statutory business trust and wholly owned subsidiary of the Company (the "Trust"), sold Trust Originated Preferred Securities sm ("TOPrS") to the public at an aggregate offering price of $500 million. The Trust used the proceeds from this sale, together with the proceeds from its sale of common stock to the Company, to buy a series of 6.68% Deferrable Interest Junior Subordinated Debentures due March 31, 2039 ("Subordinated Debentures") from the Company with the same payment terms as the TOPrS. The sole assets of the Trust are the Subordinated Debentures. The TOPrS are shown as "Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company-guaranteed debentures" in the Company's condensed consolidated balance sheets. The Company's obligations relating to the TOPrS include obligations to make payments on the Subordinated Debentures and obligations under the related Indenture, Trust Guarantee and Declaration of Trust. Taken together, these obligations represent a full and unconditional guarantee of amounts due under the TOPrS. Nextel Communications Form 10-Q For the period ending 06/30/03 (filing date 08/08/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $2,949 $2,756 Long-term debt 11,495 12,079 Other liabilities 2,804 2,788 Reported total liabilities 17,248 17,623 Mandatorily redeemable preferred stock 861 1,015 Reported total stockholders equity 3,428 2,846 stockholders equity $21,537 $21,484 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

20 SFAS No. 150 and Mandatorily Redeemable Preferred Stock The adoption of SFAS No. 150 will require us to reclassify and account for our series D and series E mandatorily redeemable preferred stock as liabilities on July 1, 2003 as these mandatorily redeemable financial instruments embody an unconditional obligation that requires us to redeem the instrument at a specified date and/or upon an event certain to occur. As discussed in note 7, we redeemed all of our series D preferred stock in July 2003 and expect to redeem all of our series E preferred stock in August Accordingly, the implementation of SFAS No. 150 is not expected to have a material impact on our financial position or results of operations. The balance sheet classification of our zero coupon convertible preferred stock will remain the same, as this preferred stock is convertible into a fixed number of shares of our common stock. Nextel Partners Inc. Form 10-Q For the period ending 06/30/03 (filing date 08/14/03) (Dollars in thousands) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $135,086 $161,567 Long-term debt 1,706,479 1,463,008 Reported total liabilities $1,841,565 $1,624,575 Mandatorily Redeemable Preferred Stock, Series B Mandatorily redeemable 2010, par value $.001 per share, 12% cumulative annual dividend, 13,110,000 shares issued and outstanding 37,112 34,971 Reported total shareholders (deficit) equity (74,898) 76,379 Reported liabilities and shareholders (deficit) equity $1,803,779 $1,735,925 SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

21 DuPree Financial Analysis Lab In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This statement is effective for all freestanding financial instruments entered into or modified after May 31, 2003; otherwise it is effective at the beginning of the first interim period beginning after June 15, We have identified that our mandatorily redeemable preferred stock is within the scope of this statement and will be reclassified to long-term debt and the mandatorily redeemable preferred stock dividends will be recorded as interest expense beginning July 1, Priceline.Com Incorporated Form 10-Q For the period ending 06/30/03 (filing date 08/14/03) (Dollars in thousands) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $72,293 $65,327 Long-term accrued expenses Reported total liabilities 72,569 66,042 Series B Mandatorily Redeemable Preferred Stock, $0.01 par value; 80,000 authorized shares; $1,000 liquidation value per share; 80,000 shares issued; 13,470 and 13,470 shares outstanding, respectively 13,470 13,470 Reported total stockholders' equity 142, ,650 stockholders' equity $229,006 $211,162 The Company does not expect the adoption of SFAS 150 to have a material impact on its results of operations or financial condition. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

22 SFAS No. 150 and Mandatorily Redeemable Preferred Stock Southern Co Form 10-Q For the period ending 06/30/03 (filing date 08/13/03) (Dollars in thousands) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $4,145,408 $4,968,840 Long-term debt 9,525,874 8,692,962 Reported total deferred credits and other liabilities 7,801,276 6,698,769 Company or subsidiary obligated mandatorily redeemable Capital and preferred securities 2,180,000 2,380,000 Cumulative preferred stock of subsidiaries 423, ,126 Reported total common stockholders' equity 9,217,610 8,710,103 stockholders' equity $33,293,294 $31,748,800 In accordance with Statement No. 150, Southern Company and the operating companies reclassified $2.2 billion of mandatorily redeemable preferred securities as liabilities effective July 1, The implementation of Statement No. 150 did not have a material effect on Southern Company's Statements of Income and Cash Flows. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

23 DuPree Financial Analysis Lab Xerox Corp Form 10-Q For the period ending 06/30/03 (filing date 08/11/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $6,810 $7,787 Long-term debt 7,928 9,794 Other liabilities 4,150 3,702 Reported total liabilities 18,888 21,283 Minorities interests in equity of subsidiaries Company-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of the Company 1,716 1,701 Preferred stock Deferred ESOP benefits (42) (42) Mandatory convertible preferred stock 889 Common stock, including additional paid-in capital 3,229 2,739 Retained earnings 1,025 1,025 Accumulated other comprehensive loss (1,748) (1,871) shareholders equity $24,549 $25,458 As a result of adopting SFAS No. 150, certain securities included within the balance sheet caption Company-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of the Company which are currently classified between liabilities and equity in our Condensed Consolidated Balance Sheet, will be reclassified to a separate line within liabilities. In addition, the distributions related to these instruments which are currently reported net of tax as a component of Minorities interests in earnings of subsidiaries in our Condensed Consolidated Statement of Income, will be prospectively accounted for as interest expense within Other expenses, net, with the tax effects presented within the income tax provision. As of July 1, 2003, the third quarter balance sheet reclassification was $696. After-tax annual distributions and related accretion associated with these instruments are approximately $34 ($55 pre-tax). SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

24 SFAS No. 150 and Mandatorily Redeemable Preferred Stock The following companies have included mandatorily redeemable preferred shares in the liabilities section of the balance sheet prior to the release of SFAS 150. Exelon Corp. Form 10-Q For the period ending 06/30/03 (filing date 07/30/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 December 31, 2002 Current liabilities $6,629 $5,874 Long-term debt 12,480 13,127 Mandatorily redeemable preferred securities Reported total deferred credits and other liabilities* 12,112 10,070 Minority interest of consolidated subsidiaries Preferred securities of subsidiaries Reported total shareholders equity 8,378 7,742 shareholders equity $40,288 $37,485 * Includes mandatorily redeemable preferred securities. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective for Exelon as of July 1, During June 2003, PECO issued $100 million of trust preferred securities. These securities were recorded as liabilities (see Note 9 - Long-Term Debt and Preferred Securities). SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

25 DuPree Financial Analysis Lab H. J. Heinz Company and subsidiaries Form 10-K For the year ending 04/30/03 (filing date 07/24/03) (Dollars in thousands) Liabilities and shareholders equity: April 30, 2003 May 1, 2002 Current liabilities $1,926,134 $2,509,169 Long-term debt 4,776,143 4,642,968 Other liabilities* 1,323,317 1,407,601 Reported total shareholders equity 1,199,157 1,718,616 Total liabilities and shareholders equity $9,224,751 $10,278,354 * Includes minority interest - $415,559 (2003) and 440,648 (2002). The adoption of SFAS No. 150 will require the reclassification of the Company's $325 million of mandatorily redeemable preferred shares from minority interest to long-term debt on the consolidated balance sheet and the $20.2 million annual preferred dividend from other expenses, net, to interest expense on the consolidated statement of income with no resulting effect on the Company's profitability. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,

26 SFAS No. 150 and Mandatorily Redeemable Preferred Stock Further consider Lucent who states that its financial statements fall outside of the scope of SFAS 150. Lucent Technologies Inc. and Subsidiaries Form 10-Q For the period ending 06/30/03 (filing date 08/13/03) (Dollars in millions) Liabilities and shareholders equity: June 30, 2003 September 30, 2002 Current liabilities $5,479 $6,326 Long-term debt 4,687 3,236 Other liabilities 8,643 9,533 Company-obligated mandatorily redeemable preferred securities of subsidiary trust 1,152 1,750 Reported total liabilities 19,961 20, % redeemable convertible preferred stock 933 1,680 Reported total shareowners' deficit (3,958) (4,734) Reported total liabilities, redeemable convertible preferred stock and shareowners' deficit $16,936 $17,791 Due to its conversion feature, Lucent's 8% redeemable convertible preferred stock is a conditional redeemable obligation and is outside the scope of SFAS 150 and shall continue to be classified in the mezzanine section of the consolidated balance sheet. The FASB intends to provide further accounting guidance on conditional redeemable instruments at a later date. SFAS 150 was adopted on July 1, 2003 and is not expected to materially affect the consolidated financial statements. SFAS No. 150 and Mandatorily Redeemable Preferred Stock, October,