SPRINT CORP

 

2330 SHAWNEE MISSION PKWY

WESTWOOD, KS 66205

Corporate Financial Report

Part 2

Fall 1997

CERTIFICATION

I, the undersigned, certify that this document is my work product, and that I have reviewed and proofread the document completely before submitting it for grading.

 

Andrew B. Gruenbaum

 

____________________________

 

• Exhibit C, Information from 1996 Annual Report.

 

• To determine common equity, I subtracted current liabilities($3,314.2) and preferred stock($11.8) from current assets($4,352.8). This leaves $1,026.8 million as common equity. This results in 12.6% of the asset base being financed by common equity. (The entire capital structure is $8,140 million.)

2. Sprint Investor Relations.

• Sprint stated its target debt to capital ratio as 40%. Sprint is more cash heavy than it wishes to be. If it uses more debt, Sprint will be able to take advantage of the tax incentive for debt which is deducting interest.
• Presently, the debt to capital ratio is 26.91%. For Sprint to achieve its goal, it must alter its capital structure so it borrows an additional 13%. The decision is purely an economical one that is a goal of Sprint’s management.

3. Annual Report p44, 52, 53 & financial statements. See exhibit B.

• With the information available, a large amount of Sprint’s recent growth has been financed using retained earnings. As the exhibit shows, Sprint financing activities are not sufficient to cover the investing they have done. Because of the limited use of financing, Sprint must be relying on retained earnings. Sprint’s ample cash makes the use of retained earnings a logical one. This is good for Sprint because its continued use of retained earnings will allow them to continue to keep their competitors guessing as to exactly how much Sprint spends on capital projects. Unfortunately, Sprint’s use of retained earnings limits Sprints ability to take advantage of the tax deductions that would be available to Sprint if they were to use debt.

4. Annual Report

• Yes.
• They paid a $1.00/share for the entire fiscal year ending December 31, 1996.

5. http://www.att.com/ir/sec/8k718.html and Sprint Investor Relations

• Looking forward, AT&T’s dividend policy will continue to be maintained at a regular quarterly dividend of $.33 per share. Sprint also plans on maintaining its current dividend which is $.25 a quarter per share.
• Sprint’s dividend is slightly lower than AT&T, but both plan on maintaining the same quarterly dividend for the foreseeable future.
• Since most of Sprint’s value is in its stock appreciation, the $.08 additional dividend per share paid by AT&T is understandable. Over the past 5 to 10 years, the combination of dividend and appreciation has made Sprint an investment that exceeds an investment in MCI and a large portion of the S & P 500. Sprint is not a stock for investors seeking dividends, but it is a stock that has greatly enhanced the portfolios of its stockholders.

6. CD Disclosure. See Exhibit D.

• In the most recent year, Sprint is making $10.72 for every dollar it is paying to service debt. Both AT&T and MCI have better times-interest-earned ratios. Thus, even though Sprint’s TIE ratio has been steadily increased for the last 3 years and, AT&T and MCI’s TIE ratio stumbled in 1995, Sprint’s debt service record is at best only average.

7. Annual Report pages 30 & 44.

• Sprint has so much cash available to them, a banker may be concerned about Sprint over-extending itself. Sprint has access to a variety of potential methods of acquiring funds in place: Sprint has a revolving credit line of 1.3 billion, Sprint could offer $175 Million of unsecured senior debt securities, and as of year end 1996, Sprint could offer $900 Million of debt securities pursuant to shelf registrations.
  Also, Sprint’s borrowing may be ultimately limited by certain covenants contained in existing debt agreements.
• Additionally, the projects Sprint is embarking on are all new and full of competitors. The returns will not be truly apparent for some years to come. Much of this spending is in business ventures that are in the early stages of development.
• Lastly, Sprint’s times-interest-earned ratio is below it’s closest competitors. This might cause concern regarding their ability to take on more debt.

8. Commerce Clearing House- “Capital Changes Reporter”.

• Yes.
• On March 20, 1995, Sprint issued an exchangeable note paying 8.5% interest due 3/21/2000 (DECS) offered at 100. A DECS is a series of debt securities, and in this case, each note was sold at $31.875. Although not explicitly stated, the term is 5 years.
• The exchange note will be considered as two instruments. The first is a debt instrument that gives the bearer the right to receive principal plus interest. The second is a “purchase contract” requiring the holder to use the principal payment of exchange notes due at maturity to purchase an amount of Southern New England Telecommunications Corp. The amount of the exchange for the shares of Southern New England Telecommunications Corp common is to be determined based on the market value of the common stock prior to the exchange date.

9. Annual Report

• Yes.
• Sprint uses certain derivative instruments in an effort to manage exposure to interest rate risk and foreign exchange risk.
• Sprint’s use of these derivative instruments related to hedging activities is limited to interest rate swap agreements, interest rate caps and forward contracts and options in foreign currencies.

1. Sprint’s interest rate risk management program focuses on minimizing exposure to interest rate movements, setting an optimal mixture of floating-rate and fixed -rate debt in the liability portfolio and preventing liquidity risk.
2. Sprint’s options in foreign currencies and forward contracts is brought about because of Sprint limiting its exposure in foreign exchange rates between the dates Sprint incurs and settles liabilities. These liabilities consist of charges from overseas telephone companies for terminating international calls made by Sprint’s domestic customers.

• Yes. Although Sprint is coming out on the losing end of its foreign contracts, it details what has occurred over the past three years in its use of derivatives. In the “Notes to Consolidated Financial Statements No. 10”, Sprint has a table that specifically addresses all of the derivative usage in which Sprint is involved. As I read Sprint’s description of their use of derivatives, I did not get the sense Sprint was hiding information. They were detailed and quite descriptive in how they related their use of derivatives. Their use of derivatives seemed to be based on sound business principles.

10. Sprint Investor Relations and the Annual Report.

• Yes. Although Sprint’s stock price has reached a record high, Sprint is still an attractive takeover target. As the number 3 telecommunication company, Sprint has a strong foothold in the industry. They are in the long distance market and the emerging telecommunication markets. The takeover possibilities are evidenced by the recent frenzied bidding by WorldCom for MCI (which was the second largest telecommunication company). Various business entities are seeking a more secure position in the industry. In addition, many companies in this market are either consolidating or, in the case of the smaller companies, forming alliances with other providers. Further, Sprint presently has little debt, and its beta of 1.1, shows it to be a stable company in a variety of stock market conditions.

11. See Exhibit A & E.

• The cash flow analysis method gives a price $3 billion below the current market value.
• When analyzing the cash flows, the value of Sprint’s personnel is not taken into account. Sprint’s success is largely attributable to its excellent management team.
• Another key difference is the market price for Sprint is based on information that has been disclosed to the public. If any of this information is slightly inflated or if it has been over-analyzed, the price of the stock would reflect the price based on known information. If, however, certain information were not disclosed that would affect stock price, the price of the stock would be higher than the true value of the stock.
• Lastly, as owning stock in Netscape is owning a part of the internet, owning stock in Sprint is seen as owning part of a long distance company. The mergers and alliances in this segment of the market make it quite possible that stocks are over-valued in this segment of the market.

12. Used LEXIS, 10K and “Sprint 2^nd Quarter 1997 Financial Results” press release.

 

• Sprint Corporation, et. al. v. Network 2000 Communication Corporation, et. al., 96-1333-CV-W-1 (W.D. MO 1996).

An arbitration panel awarded Network 2000 $6.1 million for its breach of contract claim against Sprint Corporation. In response to that award, Sprint filed an action in court in December 1996 naming Network 2000 Communications Corporation, their attorneys, and representatives of a proposed class of independent marketing reps (IMRs) as defendants. Sprint was asking the court to vacate or modify the arbitration award.

In 1996, Sprint accrued $60 million based on its ongoing assessment of the

potential liability related to actions by Network 2000 and its IMRs. This charge

reduced income from continuing operations by $36 million ($0.08 per share). In the 2^nd quarter of 1997, the parties entered into a settlement agreement for $20 million. In conjunction with the settlement, on August 7, 1997, Sprint Corporation was granted its motion to stay proceedings. Since Sprint had already accrued $60 million for this case and it settled for $20 million, the current affect on the company should be positive. Further, there should be no further contingent liabilities with respect to this matter.

 

• Joseph Meyer, et. al. v. Goldman Sachs & Co., et. al., 95/101735 (S. Ct. NY 1995), aff’d. 651 NYS.2d 304 (1^st Dep’t 1996) and Janet Ziemack, et. al. v. Centel Corporation, 1996 U. S. Dist. LEXIS 9294 (E.D. IL June 27, 1996), aff’d. 113 F.3d 738 (7^th Cir. 1997), reh’g den. 1997 U.S. App. LEXIS 15080 (7^th Cir. June 19, 1997).

These actions were filed in both state and federal courts in New York in 1992 soon after Sprint announced its merger agreement with Centel Corporation. In the federal case, Ziemack, the officers and directors of Centel were sued. Centel was awarded summary judgment. The plaintiffs appealed, but the summary judgment was upheld on appeal and the rehearing was denied.

Similarly, in the Meyer class action case filed in New York state court, the financial advisors who represented Centel in the merger were sued for negligence and breach of fiduciary duty. The court granted Centel’s financial advisors’ motion to dismiss. This motion was upheld in the intermediate appellate court of New York. The financial advisors have an agreement with Sprint, that Sprint will indemnify them for any liability they may incur with respect to the financial advisors’ representation of Centel in the merger. As such, should the state law litigation re-merge, Sprint may have an indemnification obligation. This seems unlikely since the appellate court has upheld the motion to dismiss, and the only potential appeal would be to the New York Court of Appeals. Thus, there are no significant contingent liabilities with respect to this case.

As with any other large company, Sprint regularly has other routine matters involving litigation. Such cases were not reported in Sprint’s annual report. Sprint does not believe these cases will have a material effect on Sprint’s consolidated financial statements.

13. Sprint Investor Relations, and press releases on Sprint’s website.

• Healthy.
• Sprint is in the fortunate position to want to borrow more to improve their tax situation. Because it has not relied heavily on debt to provide capital, it is working towards increasing its usage of debt.
• Sprint has a P-2 debt rating as listed in Moody’s. Although this is not the strongest rating that Moody’s issues, the P-2 rating reflects the market’s confidence in Sprint’s ability to pay its debt.
• Over the 3^rd quarter of 1996, Sprint’s long distance division posted a record 13.4% increase in the 3^rd quarter of 1997
• Sprint has paid a dividend for 211 straight quarters. It does not pay a large dividend, but Sprint is very consistent in paying one.

14. Press releases on Sprint’s website and Annual Report.

• Yes.
• Sprint is innovative and continues to market the company with programs that the customers find to be very effective.
• Sprint is aggressively pursuing emerging businesses. They are taking the steps to become leaders in Personal Communication Services (PCS) and internet access services.
• Sprint has formed alliances with the phone companies of France and Germany. This prepares Sprint for the changes that are rapidly taking place within the telecommunication industry abroad. This alliance prepares Sprint for international expansion.
• Sprint is developing partnerships with Radio Shack to more effectively get their products out to a wider customer base.
• Speculatively, if Sprint becomes a candidate for acquisition, there stock price will go up.
• Even with the competitiveness in the long distance market, Sprint has not cut its commitment to customer service. This is evidenced by Sprint winning a customer service award from JD Power for the fourth year in a row.