UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
----------------------------------
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 1-4721
SPRINT CORPORATION
(Exact name of registrant as specified in its charter)
KANSAS 48-0457967
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
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(Address of principal executive offices)
(913) 624-3000
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(Registrant's telephone number, including area code)
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(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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
SHARES OF STOCK OUTSTANDING AT JUNE 30, 1996:
COMMON STOCK 344,275,192
CLASS A COMMON STOCK 86,236,036
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SPRINT CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
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Page
Number
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Part I - Financial Information
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Item 1. Financial Statements 1 - 8
Consolidated Balance Sheets 1 - 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Common Stock and Other Shareholders'
Equity 5
Condensed Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 22
Part II - Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23 - 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
Exhibits
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PART I.
Item 1.
SPRINT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
As of As of
June 30, December 31,
1996 1995
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 1,756.6 $ 124.2
Accounts receivable, net of allowance for doubtful accounts of
$123.4 million ($125.8 million in 1995) 2,297.8 1,523.7
Receivable from cellular division -- 1,400.0
Inventories 197.2 171.0
Prepaid expenses 167.8 166.6
Other 226.9 233.9
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
Total current assets 4,646.3 3,619.4
Investments in equity securities 272.8 262.9
Property, plant and equipment
Long distance communications services 6,963.3 6,773.7
Local communications services 13,062.6 12,603.1
Other 541.4 539.1
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
20,567.3 19,915.9
Less accumulated depreciation 10,771.2 10,200.1
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
9,796.1 9,715.8
Investments in affiliates 1,381.6 1,130.1
Net investment in cellular division -- 106.9
Other assets 359.7 360.8
- ---------------------------------------------------------------------- --- ------------------ --- ------------------
$ 16,456.5 $ 15,195.9
--- ------------------ --- ------------------
See accompanying condensed Notes to Consolidated Financial Statements.
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1
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PART I.
Item 1.
SPRINT CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(In Millions)
As of As of
June 30, December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and shareholders' equity
Current liabilities
<S> <C> <C>
Current maturities of long-term debt $ 95.3 $ 280.4
Short-term borrowings 200.0 2,144.0
Accounts payable 830.5 938.9
Accrued interconnection costs 756.2 617.7
Accrued taxes 207.4 235.5
Advance billings 190.6 202.9
Other 708.1 722.7
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,988.1 5,142.1
Long-term debt 3,159.0 3,253.0
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 820.5 843.4
Postretirement and other benefit obligations 904.0 889.3
Other 353.8 393.0
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2,078.3 2,125.7
Redeemable preferred stock 14.1 32.5
Common stock and other shareholders' equity
Common stock, par value $2.50 per share, authorized 1.0 billion shares,
issued 350.3 million (349.2 million in 1995) and
outstanding 344.3 million (349.2 million in 1995) 875.8 872.9
Capital in excess of par or stated value 969.6 956.5
Class A common stock, par value $2.50 per share, authorized 500 million
shares, issued and outstanding 86.2 million shares 3,652.3 --
Retained earnings 2,926.3 2,766.5
Treasury stock, at cost, 6.0 million shares (249.1) --
Other 42.1 46.7
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8,217.0 4,642.6
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$ 16,456.5 $ 15,195.9
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See accompanying condensed Notes to Consolidated Financial Statements.
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2
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PART I.
Item 1.
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Millions, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1996 1995 1996 1995
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
<S> <C> <C> <C> <C>
Net operating revenues $ 3,506.4 $ 3,142.1 $ 6,878.3 $ 6,221.2
Operating expenses
Costs of services and products 1,765.8 1,606.7 3,437.0 3,188.3
Selling, general and administrative 762.9 714.1 1,497.5 1,408.8
Depreciation and amortization 396.8 359.5 788.0 719.5
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total operating expenses 2,925.5 2,680.3 5,722.5 5,316.6
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Operating income 580.9 461.8 1,155.8 904.6
Interest expense (49.5) (69.0) (97.2) (137.2)
Other expense, net (23.0) (13.9) (43.9) (34.4)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Income from continuing operations before
income taxes 508.4 378.9 1,014.7 733.0
Income tax provision (191.9) (135.7) (386.0) (265.1)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Income from continuing operations 316.5 243.2 628.7 467.9
Discontinued operations, net 0.3 2.5 (2.6) 2.1
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Net income 316.8 245.7 626.1 470.0
Preferred stock dividends (0.3) (0.6) (0.8) (1.3)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings applicable to common stock $ 316.5 $ 245.1 $ 625.3 $ 468.7
--- ------------- -- ------------- --- ------------- -- -------------
Earnings per common share
Continuing operations $ 0.73 $ 0.69 $ 1.51 $ 1.33
Discontinued operations -- 0.01 (0.01) 0.01
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total $ 0.73 $ 0.70 $ 1.50 $ 1.34
--- ------------- -- ------------- --- ------------- -- -------------
Weighted average number of common shares
434.1 350.2 417.2 349.6
--- ------------- -- ------------- --- ------------- -- -------------
Dividends per common share $ 0.25 $ 0.25 $ 0.50 $ 0.50
--- ------------- -- ------------- --- ------------- -- -------------
See accompanying condensed Notes to Consolidated Financial Statements.
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3
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PART I.
Item 1.
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Millions)
Six Months Ended
June 30,
------------------------------
1996 1995
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Operating activities
<S> <C> <C>
Net income $ 626.1 $ 470.0
Adjustments to reconcile net income to net cash provided by operating
activities
Discontinued operations, net 2.6 (2.1)
Equity in net loss of affiliates 93.4 2.1
Depreciation and amortization 788.0 719.5
Deferred income taxes and investment tax credits (32.4) (30.8)
Changes in operating assets and liabilities
Accounts receivable, net (816.4) (35.3)
Inventories and other current assets 45.0 (5.7)
Accounts payable and other current liabilities (15.1) (130.8)
Noncurrent assets and liabilities, net (27.8) 109.0
Other, net (26.3) 6.4
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Net cash provided by continuing operations 637.1 1,102.3
Net cash provided (used) by cellular division (0.2) 82.7
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash provided by operating activities 636.9 1,185.0
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Investing activities
Capital expenditures (1,001.1) (889.8)
Investments in affiliates (243.1) (890.1)
Other, net 4.4 7.8
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash used by continuing operations (1,239.8) (1,772.1)
Repayment of intercompany advances by cellular division 1,400.0 --
Net investing activities of cellular division (140.7) (182.3)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash provided (used) by investing activities 19.5 (1,954.4)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Financing activities
Proceeds from long-term debt 6.3 209.8
Retirements of long-term debt (256.3) (226.2)
Net increase (decrease) in notes payable and commercial paper (1,986.8) 1,144.6
Proceeds from Class A common stock issued 3,661.3 --
Proceeds from common stock issued 27.2 3.2
Redemption of preferred stock (18.4) (2.5)
Dividends paid (195.7) (175.6)
Purchase of treasury stock (278.6) --
Other, net 17.0 (12.4)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Net cash provided by financing activities 976.0 940.9
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Increase in cash and equivalents 1,632.4 171.5
Cash and equivalents at beginning of period 124.2 113.7
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Cash and equivalents at end of period $ 1,756.6 $ 285.2
--- ------------- -- -------------
See accompanying condensed Notes to Consolidated Financial Statements.
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4
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PART I.
Item 1.
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (UNAUDITED)
(In Millions)
Six Months Ended June 30, 1996
- ---------------------------------------------------------------------------------------------------------------------
Capital in
Excess of
Par or Class A
Common Stated Common Retained Treasury
Stock Value Stock Earnings Stock Other Total
- ---------------------------------------------------------------------------------------------------------------------
Balance as of
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996 $ 872.9 $ 956.5 $ -- $ 2,766.5 $ -- $ 46.7 $ 4,642.6
Net income -- -- -- 626.1 -- -- 626.1
Common stock dividends -- -- -- (173.9) -- -- (173.9)
Preference stock dividends -- -- -- (31.8) -- -- (31.8)
Preferred stock dividends -- -- -- (0.8) -- -- (0.8)
Common stock issued 2.6 16.9 -- -- -- -- 19.5
Class A common stock issued -- -- 3,652.3 -- -- -- 3,652.3
Change in unrealized
holding gains, net -- -- -- -- -- (6.4) (6.4)
Spin-off of cellular
division -- -- -- (259.1) -- -- (259.1)
Purchase of treasury stock -- -- -- -- (281.2) -- (281.2)
Treasury stock issued -- (12.5) -- -- 32.1 -- 19.6
Other, net 0.3 8.7 -- (0.7) -- 1.8 10.1
- ---------------------------------------------------------------------------------------------------------------------
Balance as of
June 30, 1996 $ 875.8 $ 969.6 $ 3,652.3 $ 2,926.3 $ (249.1) $ 42.1 $ 8,217.0
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See accompanying condensed Notes to Consolidated Financial Statements.
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5
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PART I.
Item 1.
SPRINT CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1996 and 1995
The information contained in this Form 10-Q for the three and six-month interim
periods ended June 30, 1996 and 1995 has been prepared in accordance with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of
management, all adjustments considered necessary, consisting only of normal
recurring accruals, to present fairly the consolidated financial position,
results of operations, and cash flows for such interim periods have been made.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The results of operations for the six
months ended June 30, 1996 are not necessarily indicative of the operating
results that may be expected for the year ended December 31, 1996.
1. Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Sprint Corporation and its wholly-owned and majority-owned subsidiaries
(Sprint). Investments in affiliates in which Sprint does not have a controlling
interest are accounted for using the equity method.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The prior periods' financial statements have been restated to reflect Sprint's
spin-off of its cellular and wireless communications services division
(Cellular) (see Note 2). The operating results, net assets and cash flows of
Cellular are separately classified as discontinued operations and are excluded
from amounts reported for the continuing operations of Sprint. Intercompany
transactions with Cellular and its subsidiaries, which were previously
eliminated in consolidation, are now reflected in Sprint's consolidated
financial statements.
Certain other amounts previously reported for the prior periods have been
reclassified to conform to the current periods' presentation in the accompanying
consolidated financial statements. Such reclassifications had no effect on the
results of operations or shareholders' equity as previously reported.
During 1995, Sprint determined that its local communications services division
no longer met the criteria necessary for the continued application of the
accounting prescribed by Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation." Accordingly,
effective December 31, 1995, Sprint adopted accounting principles for a
competitive marketplace for its local division. In accordance with SFAS No. 71,
revenues and related net income of nonregulated operations attributable to
intercompany transactions with Sprint's regulated telephone companies were not
eliminated in the prior periods' consolidated financial statements. Intercompany
revenues of such entities amounted to $74 million and $145 million for the three
and six months ended June 30, 1995, respectively. In conjunction with the
adoption of accounting principles for a competitive marketplace, such
intercompany amounts are eliminated beginning in 1996. All other significant
intercompany transactions in 1996 and 1995 have been eliminated.
6
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2. Spin-off of Cellular Division
In March 1996, Sprint completed the tax-free spin-off of Cellular to the holders
of Sprint common stock. The spin-off was effected by distributing to all holders
of Sprint common stock all shares of Cellular common stock at a rate of 1 share
of Cellular common stock for every 3 shares of Sprint common stock held. In
connection with the spin-off, Cellular repaid $1.4 billion of intercompany debt
owed by Cellular to Sprint and its subsidiaries, and Sprint contributed to the
equity capital of Cellular approximately $185 million of debt owed by Cellular
in excess of the amount repaid. This equity contribution, together with Sprint's
previous investments in Cellular, resulted in Sprint's net investment in
Cellular aggregating approximately $259 million as of the date of the spin-off.
The prior periods' financial statements have been restated to reflect the
spin-off of Cellular (see Note 1).
3. Investments in Equity Securities
Investments in equity securities are classified as available for sale and
reported at fair value (estimated based on quoted market prices). As of June 30,
1996 and December 31, 1995, the cost of such investments was $109 million, with
gross unrealized holding gains of $164 million and $154 million, respectively,
reflected as additions to other shareholders' equity, net of related income
taxes.
4. Income Taxes
The differences which cause the effective income tax rate to vary from the
statutory federal income tax rate of 35 percent for the six months ended June
30, 1996 and 1995, respectively, are as follows (in millions):
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Six Months Ended
June 30,
------------------------------
1996 1995
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<S> <C> <C>
Income tax provision at the statutory rate $ 355.1 $ 256.6
Effect of:
State income taxes, net of federal income tax effect 34.7 22.9
Investment tax credits included in income (3.8) (7.6)
Other, net -- (6.8)
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Income tax provision $ 386.0 $ 265.1
--- ------------- -- -------------
Effective income tax rate 38.0% 36.2%
--- ------------- -- -------------
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5. Commitments and Contingencies
Litigation, Claims and Assessments
Following announcement in 1992 of Sprint's merger agreement with Centel
Corporation (Centel), class action suits were filed against Centel and certain
of its officers and directors in federal and state courts. The state suits were
dismissed. On June 27, 1996, Centel and the other defendants were granted
summary judgement in the federal action. The plaintiffs have appealed the
court's order. On October 12, 1995, the New York trial court granted the motion
of Centel's financial advisors to dismiss a purported class action suit filed
against them in connection with their representation of Centel in the merger.
The plaintiffs have appealed the order dismissing their claims. Sprint may have
indemnification obligations to the financial advisors in connection with this
suit. Various other suits arising in the ordinary course of business are pending
against Sprint. Management cannot predict the ultimate outcome of these actions
but believes they will not result in a material effect on Sprint's consolidated
financial statements.
7
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Commitments
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a discussion of cash
commitments associated with Sprint Spectrum.
6. Supplemental Cash Flows Information (in millions)
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Six Months Ended
June 30,
--- ------------------------------
1996 1995
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Cash paid for:
<S> <C> <C>
Interest - continuing operations $ 109.4 $ 139.1
--- ------------- -- -------------
Interest - cellular division $ 22.8 $ 62.8
--- ------------- -- -------------
Income taxes $ 418.6 $ 284.6
--- ------------- -- -------------
</TABLE>
During the six months ended June 30, 1996, in conjunction with the consummation
of its joint venture with Deutsche Telekom AG (DT) and France Telecom (FT),
Sprint contributed cash, property, plant and equipment, and other assets and
liabilities of certain international operations to Global One. The net book
value of the noncash assets and liabilities contributed to the venture totaled
$72 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Strategic Developments - Global One" for further
discussion.
Also during the six months ended June 30, 1996, as discussed in Note 2, Sprint
completed the tax-free spin-off of Cellular to the holders of Sprint common
stock. Other than the effect of the repayment by Cellular to Sprint and its
subsidiaries of $1.4 billion in intercompany debt, the spin-off had no immediate
effect on cash flows.
7. Subsequent Events
In August 1996, Sprint's Board of Directors declared dividends of $0.25 per
share on both Sprint's common stock and Sprint's Class A common stock payable on
September 30, 1996.
8. Supplemental Earnings per Share Information
During the six months ended June 30, 1996, DT and FT invested a total of
approximately $3.7 billion in Sprint resulting in each holding 43.1 million
shares of Class A common stock with approximately 10 percent of Sprint's voting
power. Assuming these shares had been issued as of January 1, 1996 and that the
related proceeds were used to repay debt or were invested on a temporary basis,
Sprint's earnings per share from continuing operations for the three months
ended June 30, 1996 would have been unchanged and for the six months ended June
30, 1996 would have decreased from $1.51 per share to $1.47 per share.
8
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PART I.
Item 2.
SPRINT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Sprint Corporation (Sprint), incorporated in 1938 under the laws of Kansas, is
primarily a holding company. Sprint's principal subsidiaries provide domestic
and international long distance and local exchange telecommunications services.
Other subsidiaries are engaged in the wholesale distribution of
telecommunications products and the publishing and marketing of white and yellow
page telephone directories.
Sprint includes certain estimates, projections and other forward-looking
statements in its reports as well as in presentations to analysts and others and
in other material disseminated to the public. There can be no assurances of
future performance and actual results may differ materially from those in the
forward-looking statements. Factors which could cause actual results to differ
materially from estimates or projections contained in forward-looking statements
include:
the effects of vigorous competition in the markets in which Sprint
operates;
the cost of entering new markets necessary to provide seamless
services;
the risks associated with Sprint's investment in Sprint Spectrum and
Global One which are presently in early stages of development;
the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
requirements imposed on Sprint and its competitors by the Federal
Communications Commission (FCC) and state regulatory commissions
under the Telecommunications Act of 1996;
the possibility of one or more of the markets in which Sprint competes
being impacted by variations in political, economic or other factors
such as monetary policy, legal and regulatory changes or other
external factors over which Sprint has no control; and
unexpected results in litigation filed against Sprint or its
subsidiaries.
Long Distance Communications Services. The long distance division is the
nation's third largest long distance telephone company, operating a nationwide
all-digital long distance communications network utilizing state-of-the-art
fiber-optic and electronic technology. The division primarily provides domestic
and international voice, video and data communications services. The terms under
which the division offers its services to the public are subject to different
levels of state and federal regulation, but rates are not subject to rate-base
regulation except nominally in some states.
Local Communications Services. The local division is comprised of regulated
local exchange carriers (LECs) which serve more than 6.9 million access lines in
19 states. In addition to furnishing local exchange services, the division
provides intraLATA toll service and interLATA access by telephone customers and
other carriers to Sprint's local exchange facilities.
9
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Product Distribution and Directory Publishing. North Supply Company (North
Supply), a wholesale distributor of telecommunications and security and alarm
products, distributes products of more than 1,200 manufacturers to approximately
9,500 customers. Products range from basics, such as wire and cable, telephones
and repair parts, to complete private branch exchange (PBX) systems,
transmission systems and security and alarm equipment. North Supply also
provides material management services to several of its affiliates and to
several subsidiaries of the Bell Operating Companies.
Sprint Publishing & Advertising along with Centel Directory Company publish and
market white and yellow page telephone directories in certain of Sprint's local
exchange territories, as well as in the greater metropolitan areas of Milwaukee,
Wisconsin and Chicago, Illinois. The companies publish approximately 325
directories in 20 states with a circulation of 17.6 million copies.
Joint Ventures. Sprint is a 40 percent partner in Sprint Spectrum L.P., a
partnership with Tele-Communications Inc., Comcast Corporation and Cox
Communications, Inc. to provide wireless personal communications services (PCS)
on a broad geographic basis within the United States. Sprint Spectrum continues
to make progress towards its objective of offering Sprint-branded wireless
personal communications service in 15 to 20 markets by December 1996.
Sprint is also a partner in Global One, a joint venture with Deutsche Telekom AG
(DT) and France Telecom (FT) to provide seamless global telecommunications
services to business, consumer and carrier markets worldwide. The interests of
DT and FT in the venture are held by their own joint venture, referred to as
Atlas. The operating group serving Europe (excluding France and Germany) is
owned one-third by Sprint and two-thirds by Atlas. The operating group for the
worldwide activities outside the United States and Europe is owned 50 percent by
Sprint and 50 percent by Atlas. Home country markets are served by DT in
Germany, FT in France and Sprint in the United States.
Telecommunications Law
The Telecommunications Act of 1996, which was signed into law in February 1996,
promotes competition in all aspects of telecommunications. In particular, the
new law removes barriers to competition that will enable local and long distance
companies and cable TV companies to enter each others' markets. The regional
Bell Operating Companies (RBOCs) were allowed to provide out-of-region and
incidental long distance service upon enactment. The RBOCs will be allowed to
provide in-region long distance service once they obtain state certification of
compliance with a competitive "checklist" and a FCC ruling that it is in the
public interest and that a facilities-based competitor exists in each market.
The new law directs the FCC to adopt rules which will significantly influence
the amount and shape of competition in both local and long distance markets in
the future.
The new law eliminates regulatory barriers to entry into local telephone markets
and imposes several obligations upon incumbent LECs. They must allow local
resale without unreasonable restrictions, provide number portability (to the
extent technically feasible) and dialing parity, afford access to rights-of-way,
establish reciprocal compensation arrangements, negotiate interconnection
agreements, provide nondiscriminatory access to unbundled network elements and
allow collocation of interconnection equipment by competitors. The FCC adopted
regulations to implement these requirements on August 1, 1996. Many states,
including most of the states in which Sprint's LECs operate, allow some
competitive entry into the intraLATA long-distance and local service markets.
The federal law preempts inconsistent state laws.
The impact of the Act on Sprint is unknown because a number of important
implementation issues (such as the nature and extent of continued subsidies for
local rates) still need to be decided by state or federal regulators. However,
the Act offers opportunities as well as risks. Sprint should benefit from the
opportunity to enter additional local telephone markets. The new competitive
environment should lead to a reduction in local access fees, the largest single
cost in providing long distance service today. The risk aspect of local
competition is that market shares of Sprint's LECs in their current operating
regions (approximately 4 percent of the nation's local phone lines) are likely
to decline.
10
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The removal of the long distance restrictions on the RBOCs is not anticipated to
have an immediate significant adverse impact on Sprint because of the
substantial preconditions that must be met before RBOCs can provide most
in-region long distance services. In addition, Sprint has been selected to be
the underlying carrier of long distance service for four of the RBOCs, which
could offset losses of long distance customers at the retail level at the time
the RBOCs are allowed to provide in-region long distance services.
Strategic Developments
Global One
On January 31, 1996, Sprint, along with DT and FT, consummated their joint
venture, operating as Global One. Upon closing of the agreement, DT and FT
acquired shares of a new class of convertible preference stock for a total of
$3.0 billion, which resulted in DT and FT each holding approximately 7.5 percent
of the Sprint voting power. In April 1996, following the spin-off of Sprint's
cellular and wireless communications services division (Cellular), the
preference stock was converted into shares of Class A common stock, and DT and
FT acquired additional shares of Class A common stock. Following their aggregate
investment of approximately $3.7 billion, DT and FT each own shares of Class A
common stock with approximately 10 percent of Sprint's voting power.
DT and FT, as the holders of the Class A common stock, have the right in most
circumstances to proportionate representation on Sprint's board of directors and
to purchase additional shares of Class A common stock from Sprint to enable them
to maintain their aggregate ownership level at 20 percent. In addition, the
holders of Class A common stock have disapproval rights with respect to Sprint's
undertaking certain types of transactions. DT and FT have also entered into a
standstill agreement with Sprint that contains restrictions on their ability to
acquire voting securities of Sprint other than as contemplated by their
investment agreement with Sprint and related agreements, as well as customary
provisions restricting DT and FT from initiating or participating in any
proposal with respect to the control of Sprint.
In connection with the formation of the Global One joint venture, the long
distance division contributed certain assets and the related operations of its
international business unit to Global One.
On July 17, 1996, Global One received final regulatory approval from the
European Union. This announcement also marked the clearance of the remaining
regulatory hurdle for Atlas. As part of the approval, the European Commission
set forth certain conditions on DT and FT. In particular, DT and FT are
prohibited from cross-subsidizing their joint venture and discriminating against
other market participants.
Sprint Spectrum
Effective January 31, 1996, Sprint and its partners in Sprint Spectrum L.P.
entered into a series of agreements amending their approach to providing
competitive local services. Previously, the four partners had agreed that Sprint
Spectrum would provide local telecommunications services on a national basis
using the facilities of the cable partners. Under the revised agreements, local
offerings in each market would be subject to individual joint ventures to be
negotiated between Sprint and the applicable cable company; however, no joint
ventures have been formed to date and no active negotiations are underway.
As part of an overall strategy to increase Sprint Spectrum's coverage, Sprint
Spectrum or Sprint may elect to bid on, or affiliate with or invest in other
entities who are bidding on, PCS licenses to be awarded in the FCC auction of
licenses scheduled to begin in late August 1996. To the extent that Sprint
acquires PCS licenses or invests in any other entity that acquires licenses, it
is expected that affiliation arrangements will be entered into with Sprint
Spectrum.
11
<PAGE>
Results Of Operations
Consolidated
Sprint's two primary divisions -- long distance and local exchange -- generated
improved net operating revenues and operating income in the second quarter of
1996 as compared to the second quarter of 1995. The long distance division
generated a 19 percent growth in traffic volumes over the second quarter of 1995
while the number of access lines served by the local division grew 5.3 percent
during the past 12 months.
Consolidated net operating revenues for the quarter ended June 30, 1996 were
$3.51 billion, a nearly 12 percent increase over net operating revenues of $3.14
billion for the second quarter of 1995. For the quarter ended June 30, 1996,
income from continuing operations was $317 million, or $0.73 per share, compared
with $243 million, or $0.69 per share, for the second quarter of 1995. For the
six months ended June 30, 1996, consolidated net operating revenues were $6.88
billion, a nearly 11 percent increase over net operating revenues of $6.22
billion for the comparable period in 1995. Income from continuing operations for
the six months ended June 30, 1996 was $629 million, or $1.51 per share,
compared with $468 million, or $1.33 per share, for the six months ended June
30, 1995. The second quarter and first half 1996 results include $44 million
($0.10 per share) and $66 million ($0.16 per share), respectively, in after tax
losses associated with the start up of Sprint Spectrum and Global One compared
with $6 million ($0.02 per share) and $8 million ($0.02 per share),
respectively, of losses for the same periods in 1995.
Long Distance Communications Services
<TABLE>
<CAPTION>
Selected Operating Results
(In Millions)
----------------------------------------------------------------------
Three Months Ended
June 30, Variance
---------------------------------- -------------------------------
1996 1995 Dollar Percent
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -----------------
<S> <C> <C> <C> <C>
Net operating revenues $ 2,053.0 $ 1,771.8 $ 281.2 15.9%
Operating expenses
Interconnection 907.2 756.2 151.0 20.0%
Operations 268.1 250.2 17.9 7.2%
Selling, general and administrative 488.4 457.0 31.4 6.9%
Depreciation and amortization 154.0 139.8 14.2 10.2%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 1,817.7 1,603.2 214.5 13.4%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 235.3 $ 168.6 $ 66.7 39.6%
--- ------------- -- ------------- --- -------------
Operating margin 11.5% 9.5%
--- ------------- -- -------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Selected Operating Results
(In Millions)
---------------------------------------------------------------------
Six Months Ended
June 30, Variance
--- ------------------------------ ------------------------------
1996 1995 Dollar Percent
- -------------------------------------------- --- ------------- -- ------------- --- ------------- ----------------
<S> <C> <C> <C> <C>
Net operating revenues $ 4,054.5 $ 3,524.3 $ 530.2 15.0%
Operating expenses
Interconnection 1,799.9 1,518.4 281.5 18.5%
Operations 527.4 494.9 32.5 6.6%
Selling, general and administrative 958.9 908.0 50.9 5.6%
Depreciation and amortization 306.7 280.8 25.9 9.2%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 3,592.9 3,202.1 390.8 12.2%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 461.6 $ 322.2 $ 139.4 43.3%
--- ------------- -- ------------- --- -------------
Operating margin 11.4% 9.1%
--- ------------- -- -------------
</TABLE>
On January 31, 1996, the long distance division contributed certain
international assets and related operations of its international business unit
to Global One. Accordingly, the operating results of such international
operations are reflected in the long distance division's operating results only
through the date of contribution. Assuming the contribution of these
international operations to Global One had occurred on January 1, 1995, it is
estimated that operating income for the three and six months ended June 30,
1996, would have increased approximately 31 percent and 34 percent,
respectively, from the comparable 1995 periods, and that related operating
margins for the same periods would have increased to 11.5 percent and 11.6
percent, respectively, in 1996 as compared to 10.4 percent and 10.2 percent in
1995.
Net operating revenues for the three and six months ended June 30, 1996
increased 16 percent and 15 percent, respectively, over the comparable 1995
periods and traffic volume increased 19 percent and 18 percent over the same
periods. Revenue growth for the three and six months ended June 30, 1996 was
primarily driven by strong performance in the international, residential, data
services and business markets. The international market experienced strong
growth, primarily due to marketing initiatives and the related extension of
various simplified calling plans to the international market. Growth in the
residential market reflects the continuing success of Sprint Sense (sm), a flat
rate calling plan, while growth in the data services market, which includes
sales to consumer on-line services, reflects continued growth in demand and
expanded service offerings. The large business market continued to experience
growth in "800" services. The small-to-medium business market, which had
experienced revenue declines during 1995, produced increased net operating
revenues in the three and six months ended June 30, 1996, relative to the
comparable 1995 periods, generally reflecting the introduction and continued
success of the Fridays Free (sm) calling plan. The contribution of international
operations to Global One resulted in a reduction of revenue, as customers of
such operations became Global One customers, and Global One traffic carried by
the division is now priced on a wholesale, rather than retail, basis. Assuming
the contribution of the international operations to Global One had occurred as
of January 1, 1995, it is estimated that the division's net operating revenues
for the second quarter and first half of 1996 would have increased approximately
19 percent and 17 percent, respectively, over the comparable 1995 periods.
13
<PAGE>
Interconnection costs consist of amounts paid to local exchange carriers, other
domestic service providers, and foreign telephone companies for the completion
of calls made by the division's domestic customers. Interconnection costs
increased during the three and six months ended June 30, 1996 relative to the
comparable 1995 periods primarily as a result of strong growth in international
outbound traffic volumes. As a percentage of net operating revenues,
interconnection costs were 44.2 percent and 44.4 percent for the three and six
months ended June 30, 1996, respectively, compared to 42.7 percent and 43.1
percent for the three and six months ended June 30, 1995, respectively. These
increases reflect changes in revenue mix, particularly the growth in
international traffic, as well as the impact of the revenue reduction associated
with the contribution of international operations to Global One, as discussed
above. These factors were partially offset by reduced costs of connecting to
networks both domestically and internationally. Interconnection costs for the
1996 periods were nominally impacted by the contribution of certain
international operations to Global One. Assuming the contribution had occurred
as of January 1, 1995, it is estimated that interconnection costs as a
percentage of net operating revenues would have been approximately 43.8 percent
and 44.2 percent, respectively, for the second quarter and first half of 1995.
Operations expense consists of costs related to operating and maintaining the
long distance network; costs of providing various services such as operator
services, public payphones, telecommunications services for the hearing
impaired, and video teleconferencing; and costs of data system sales. Operations
expense for the three and six months ended June 30, 1996 increased $18 million
and $33 million, respectively, from the comparable 1995 periods, primarily due
to increased costs associated with growth within the data services market. Such
increases were partially offset by the impact of contributing certain
international operations to Global One. Assuming the contribution had occurred
as of January 1, 1995, it is estimated that the division's operations expense
for the three and six months ended June 30, 1996 would have increased
approximately 23 percent and 19 percent, respectively, over the comparable 1995
periods.
Selling, general and administrative (SG&A) expense for the three and six months
ended June 30, 1996 increased $31 million and $51 million, respectively, over
the comparable 1995 periods, generally reflecting the overall growth in the
division's operating activities. The increases in SG&A expense were generally
due to costs associated with advertising and marketing efforts, which continue
to be important in the intensely competitive long distance marketplace. Such
increases were partially offset by the impact of contributing certain
international operations to Global One. Assuming this contribution had occurred
as of January 1, 1995, it is estimated that, as a percentage of net operating
revenues, SG&A expenses would have been 23.8 percent and 23.6 percent,
respectively, for the second quarter and first half of 1996 and 25.3 percent for
both comparable 1995 periods. These decreases in the relative pro forma SG&A
expense levels reflect the division's continued focus on cost containment and
sales productivity. These decreases also reflect $6 million of expenses incurred
in the 1995 first quarter associated with a reduction in the division's work
force.
The increase in depreciation and amortization expense for the second quarter and
first half of 1996 relative to the comparable 1995 periods was generally due to
an increase in the asset base in support of data revenue growth and improved
transport capacity resulting from the deployment of the synchronous optical
network (SONET). Depreciation and amortization expense was minimally affected by
the contribution to Global One of depreciable assets of certain international
operations with an aggregate net book value of approximately $116 million.
14
<PAGE>
<TABLE>
<CAPTION>
Local Communications Services
Selected Operating Results
(In Millions)
---------------------------------------------------------------------
Three Months Ended
June 30, Variance
------------------------------ ------------------------------
1996 1995 Dollar Percent
- -------------------------------------------- --- ------------- -- ------------- --- ------------- ----------------
Net operating revenues
<S> <C> <C> <C> <C>
Local service $ 511.9 $ 464.7 $ 47.2 10.2%
Network access 461.3 418.2 43.1 10.3%
Toll service 106.4 121.5 (15.1) (12.4)%
Other 202.9 163.4 39.5 24.2%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total net operating revenues 1,282.5 1,167.8 114.7 9.8%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating expenses
Plant operations 344.2 342.1 2.1 0.6%
Depreciation and amortization 230.5 207.3 23.2 11.2%
Customer operations 162.2 146.8 15.4 10.5%
Other 217.4 201.1 16.3 8.1%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 954.3 897.3 57.0 6.4%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 328.2 $ 270.5 $ 57.7 21.3%
--- ------------- -- ------------- --- -------------
Operating margin 25.6% 23.2%
--- ------------- -- -------------
Selected Operating Results
(In Millions)
---------------------------------------------------------------------
Six Months Ended
June 30, Variance
--- ------------------------------ ------------------------------
1996 1995 Dollar Percent
- -------------------------------------------- --- ------------- -- ------------- --- ------------- ----------------
Net operating revenues
Local service $ 1,008.8 $ 918.3 $ 90.5 9.9%
Network access 921.3 829.5 91.8 11.1%
Toll service 219.9 244.1 (24.2) (9.9)%
Other 373.1 316.8 56.3 17.8%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total net operating revenues 2,523.1 2,308.7 214.4 9.3%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating expenses
Plant operations 675.1 675.8 (0.7) (0.1)%
Depreciation and amortization 456.6 414.5 42.1 10.2%
Customer operations 315.6 288.0 27.6 9.6%
Other 415.2 389.4 25.8 6.6%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 1,862.5 1,767.7 94.8 5.4%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 660.6 $ 541.0 $ 119.6 22.1%
--- ------------- -- ------------- --- -------------
Operating margin 26.2% 23.4%
--- ------------- -- -------------
</TABLE>
15
<PAGE>
Sprint adopted accounting principles for a competitive marketplace effective
December 31, 1995 and discontinued applying Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," to its local division. The primary effects of Sprint's discontinued
application of SFAS No. 71 were that certain accumulated depreciation balances
were increased, plant asset lives were shortened from regulator-prescribed lives
to estimated economic lives, switch software costs which had previously been
expensed as incurred are now being capitalized and amortized, and the effects of
any actions of regulators that had been recognized as assets and liabilities
pursuant to SFAS No. 71 but which would not have been recognized as such by
enterprises in general were eliminated from the consolidated balance sheet.
Sprint does not expect the discontinued application of SFAS No. 71 to have a
significant impact on 1996 operating results.
Alternative regulation now exists in seven states in which the division
operates, impacting approximately 65 percent of its access lines. Effective
January 1, 1996, Sprint's operations in Florida, which represent approximately
25 percent of its access lines, changed from rate of return regulation to price
regulation. At the same time, the Florida local markets were opened to
competition. Effective in June 1996, North Carolina, which represents 18 percent
of the division's access lines, adopted alternative regulation. It is
anticipated that approximately 70 percent of the division's access lines will be
under some form of price regulation by the end of 1996. This shift from rate of
return regulation to various forms of alternative regulation is resulting in the
recognition of seasonal trends in the division's revenues.
The division's net operating revenues for the three and six months ended June
30, 1996 increased 10 percent and 9 percent, respectively, over the comparable
1995 periods. Growth in local service revenues reflects continued increases in
the number of access lines served and growth in add-on services, such as custom
calling features. The number of access lines served grew 5.3 percent during the
past twelve months. This increase was driven by strong economic growth in the
division's service areas as well as by multiple access lines being added by both
business and residential customers.
Network access revenues, derived from interexchange long distance carriers' use
of the local network to complete calls, increased as a result of increased
traffic volumes, a portion of which is due to a migration of traffic related to
toll service revenues as described below. The increased traffic volume was also
affected by strong economic conditions in many of Sprint's operating territories
coupled with the harsh 1996 winter season experienced on the east coast. The
increased revenues also reflect the impact of the FCC's interim interstate price
caps plan which became effective August 1, 1995. Under the new plan, the local
division adopted a rate formula based on the maximum productivity factors that
will effectively remove the earnings cap on the division's interstate access
revenues. Interstate access revenues currently comprise approximately 60 percent
of the division's network access revenues.
Toll service revenues, related to the provision of long distance services within
specified geographical areas and the reselling of interexchange long distance
services, decreased 12 percent and 10 percent for the three and six months ended
June 30, 1996, respectively. The decreases primarily reflect increased
competition in the intrastate long distance market as interexchange long
distance carriers are now offering intralata long distance service in certain
states. While toll service revenues have declined as a result of this increased
competition, this reduction is partially recovered through an increase in
network access revenues resulting from additional use of the local network by
interexchange long distance carriers.
Other revenues, including revenues from sales of telecommunications equipment,
directory publishing fees, and billing and collection services, increased 24
percent and 18 percent for the three and six months ended June 30, 1996,
respectively, over the comparable 1995 periods. The increases were generally due
to growth in equipment sales.
Plant operations expense includes network operations, repair and maintenance
costs of property, plant and equipment, and other costs associated with the
provision of local exchange services. Plant operations expense increased $2
million for the three months ended June 30, 1996 and decreased $1 million for
the six months ended June 30, 1996 over the comparable 1995 periods. In
conjunction with the adoption of accounting principles for a competitive
marketplace, switch software costs, which had previously been expensed as
incurred, are now being capitalized and amortized, resulting in a reduction to
plant operations expense for the three and six months ended June 30, 1996.
Offsetting this reduction was an increase in the costs of providing services
resulting from access line growth.
16
<PAGE>
The increase in depreciation and amortization expense for the three and six
months ended June 30, 1996 relative to the comparable 1995 periods was generally
due to plant additions as well as the amortization of switch software costs
which are now being capitalized. Throughout 1996, this amortization is expected
to substantially offset the related decrease in plant operations expense
discussed above. Accordingly, the annual impact on operations resulting from the
capitalization of switch software is not expected to be significant.
Additionally, the impact of shortened asset lives resulting from the
discontinued application of SFAS No. 71 is not expected to have a significant
effect on 1996 operating results.
Customer operations expense includes costs associated with business office
operations and billing services, marketing costs, and expenses related to
providing operator and directory assistance and other customer services.
Customer operations expense increased $15 million and $28 million in the three
and six months ended June 30, 1996, respectively, over the comparable 1995
periods primarily due to increased marketing costs to promote new products and
services and the overall growth in access lines.
Other operating expenses increased $16 million and $26 million in the three and
six months ended June 30, 1996 over the comparable 1995 periods primarily due to
the growth in equipment sales.
Product Distribution and Directory Publishing Businesses
<TABLE>
<CAPTION>
Selected Operating Results
(In Millions)
---------------------------------------------------------------------
Three Months Ended
June 30, Variance
------------------------------ ------------------------------
1996 1995 Dollar Percent
- -------------------------------------------- --- ------------- -- ------------- --- ------------- ----------------
Net operating revenues
<S> <C> <C> <C> <C>
Non-affiliated $ 223.6 $ 205.9 $ 17.7 8.6%
Affiliated 91.0 92.1 (1.1) (1.2)%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total net operating revenues 314.6 298.0 16.6 5.6%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating expenses
Costs of services and products 264.0 251.7 12.3 4.9%
Selling, general and administrative 23.4 21.8 1.6 7.3%
Depreciation and amortization 1.9 1.8 0.1 5.6%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 289.3 275.3 14.0 5.1%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 25.3 $ 22.7 $ 2.6 11.5%
--- ------------- -- ------------- --- -------------
Operating margin 8.0% 7.6%
--- ------------- -- -------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Selected Operating Results
(In Millions)
---------------------------------------------------------------------
Six Months Ended
June 30, Variance
--- ------------------------------ ------------------------------
1996 1995 Dollar Percent
- -------------------------------------------- --- ------------- -- ------------- --- ------------- ----------------
Net operating revenues
<S> <C> <C> <C> <C>
Non-affiliated $ 428.6 $ 396.7 $ 31.9 8.0%
Affiliated 175.7 178.6 (2.9) (1.6)%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total net operating revenues 604.3 575.3 29.0 5.0%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating expenses
Costs of services and products 505.8 486.7 19.1 3.9%
Selling, general and administrative 45.4 43.6 1.8 4.1%
Depreciation and amortization 3.7 3.6 0.1 2.8%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Total operating expenses 554.9 533.9 21.0 3.9%
- -------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 49.4 $ 41.4 $ 8.0 19.3%
--- ------------- -- ------------- --- -------------
Operating margin 8.2% 7.2%
--- ------------- -- -------------
</TABLE>
North Supply, Sprint's product distribution subsidiary, had net operating
revenues of $235 million and $445 million for the three and six months ended
June 30, 1996, respectively, increasing $9 million and $12 million from the
comparable 1995 periods due to growth in sales to non-affiliates. North Supply's
costs of services and products increased to $201 million for the three months
ended June 30, 1996 from $194 million for the three months ended June 30, 1995,
and to $379 million for the six months ended June 30, 1996 from $371 million for
the comparable period in 1995. These increases are due to the growth in sales.
Sprint Publishing & Advertising, Sprint's directory publishing subsidiary, had
net operating revenues of $80 million and $160 million for the three and six
months ended June 30, 1996, respectively, compared to $72 million and $143
million for the same periods in 1995. Sprint Publishing & Advertising
experienced an increase in costs of services and products to $63 million and
$127 million, respectively, for the three and six months ended June 30, 1996
from $58 million and $116 million for the comparable periods in 1995.
18
<PAGE>
<TABLE>
<CAPTION>
Non-Operating Items
Interest Expense
Interest costs consist of the following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
--- ------------------------------ --- ------------------------------
1996 1995 1996 1995
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
<S> <C> <C> <C> <C>
Interest expense from continuing operations $ 49.5 $ 69.0 $ 97.2 $ 137.2
Interest costs related to Cellular
operations -- 30.6 21.3 61.5
Capitalized interest costs 28.8 7.9 53.2 12.3
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total interest cost $ 78.3 $ 107.5 $ 171.7 $ 211.0
--- ------------- -- ------------- --- ------------- -- -------------
Average debt outstanding $ 3,471.8 $ 5,688.5 $ 3,527.2 $ 5,326.6
--- ------------- -- ------------- --- ------------- -- -------------
Effective interest rate 9.02% 7.56% 9.74% 7.92%
--- ------------- -- ------------- --- ------------- -- -------------
</TABLE>
Interest expense related to the operations of Cellular is included in
discontinued operations in the accompanying Consolidated Statements of Income.
Sprint's average debt outstanding, including the debt incurred to fund
intercompany advances to Cellular prior to the spin-off, decreased over the
comparable 1995 periods primarily due to repayments funded by the cash received
from DT and FT for their equity investment in Sprint as well as the cash
received from Cellular for repayment of intercompany debt in connection with
Sprint's spin-off of Cellular. Sprint's effective interest rate increased
primarily due to the significant decrease in short-term borrowings as a percent
of total borrowings. Had all of the proceeds from the repayment of intercompany
debt been used to retire outstanding external debt, interest expense from
continuing operations would have been lower than reported; however, the proceeds
have been invested on a short-term basis resulting in a corresponding increase
in interest income (see "Other Expense, Net").
Other Expense, Net
The components of other expense, net are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--- ------------------------------ --- ------------------------------
1996 1995 1996 1995
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
<S> <C> <C> <C> <C>
Equity in loss of Sprint Spectrum $ (55.5) $ (4.0) $ (72.8) $ (5.3)
Equity in loss of Global One and related
venture costs (12.1) (4.1) (27.3) (6.2)
Loss on sales of accounts receivable (0.1) (9.8) (4.3) (19.6)
Dividend and interest income 31.3 3.6 43.7 6.6
Other 13.4 0.4 16.8 (9.9)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total other expense, net $ (23.0) $ (13.9) $ (43.9) $ (34.4)
--- ------------- -- ------------- --- ------------- -- -------------
</TABLE>
19
<PAGE>
Income Tax Provision
See Note 4 of condensed Notes to Consolidated Financial Statements for
information regarding the differences which cause the effective income tax rate
to vary from the statutory federal income tax rate.
Financial Condition
Sprint's financial condition at June 30, 1996 compared to December 31, 1995
generally reflects the completion of strategic initiatives during the first half
of 1996. Cash received from the investment in Sprint by DT and FT and the
repayment of intercompany debt by Cellular was used to reduce short-term and
long-term debt and to terminate an accounts receivable agreement, with remaining
proceeds being invested on a temporary basis. As a result, Sprint's
debt-to-capital ratio improved to 29.6 percent at June 30, 1996 compared to 54.8
percent at December 31, 1995.
Liquidity and Capital Resources
Cash Flows - Operating Activities
Cash flows from the operating activities of Sprint's continuing operations were
$637 million during the first six months of 1996, compared to $1.10 billion
during the first six months of 1995. During the first half of 1996, Sprint
terminated an accounts receivable sales agreement, resulting in a $600 million
increase in accounts receivable. Excluding the effect of this termination, cash
flows from continuing operations increased $135 million for the first half of
1996 compared to the first half of 1995, generally reflecting improved operating
results in all divisions.
Cash Flows - Investing Activities
Investing activities of Sprint's continuing operations used cash of $1.24
billion and $1.77 billion during the first six months of 1996 and 1995,
respectively. Capital expenditures were $1 billion and $890 million during the
first six months of 1996 and 1995, respectively. Long distance capital
expenditures totaled $348 million for the first six months of 1996 compared to
$366 million for the same period in 1995. The 1996 expenditures were incurred
primarily to enhance network reliability, to upgrade capabilities for providing
new products and services and to meet increased demand for data-related
services. Capital expenditures for the local division totaled $627 million for
the first six months of 1996 compared to $508 million for the same period in
1995. In conjunction with the December 31, 1995 adoption of accounting
principles for a competitive marketplace, the local division is now capitalizing
switch software costs which had previously been expensed as incurred. Such
software costs totalled $50 million for the first six months of 1996. The
remainder of the 1996 capital expenditures were made to accommodate access line
growth and to expand the division's capabilities for providing enhanced
telecommunications services.
During the first half of 1996 and 1995, Sprint contributed $185 million and $880
million, respectively, to Sprint Spectrum. The 1996 contribution was used to
fund Sprint's portion of Sprint Spectrum's capital and operating requirements.
The 1995 contribution was used to fund Sprint's portion of payments to the FCC
for licenses acquired in the PCS auction as well as for capital and operating
requirements. Investments in affiliates for the first half of 1996 also includes
$39 million of cash held by Sprint's international operations at the time Sprint
contributed such operations to Global One.
In connection with the spin-off of Cellular in March 1996, Sprint received $1.4
billion from Cellular for repayment of intercompany advances. Prior to the
spin-off, Cellular's 1996 investing activities required net cash of $141
million, primarily for the acquisition of additional cellular properties and for
capital expenditures.
20
<PAGE>
Cash Flows - Financing Activities
Financing activities provided cash of $976 million in the first six months of
1996 compared to $941 million in the comparable 1995 period. At the time of the
closing of the Global One Joint Venture Agreement in January 1996, DT and FT
acquired shares of a new class of convertible preference stock for a total of
$3.0 billion. In April 1996, Sprint received approximately $660 million from the
additional investment in Class A common stock by DT and FT. These proceeds,
together with the $1.4 billion received from Cellular as discussed above, were
used to reduce outstanding debt and to terminate an accounts receivable sales
agreement, with remaining proceeds being invested on a temporary basis.
Financing activities during 1995 generally reflect debt issued in order to fund
commitments associated with Sprint Spectrum.
Capital Requirements
During 1996, Sprint anticipates funding annual capital expenditures of
approximately $2.2 billion and annual dividends of approximately $430 million
with cash flows from operating activities (excluding the impact of the
termination of the accounts receivable sales agreement).
Sprint will fund an estimated $115 million to $215 million of remaining 1996
commitments associated with Sprint Spectrum and continue to reduce outstanding
debt with available cash. Additionally, the Sprint Board of Directors has
authorized the repurchase of up to 10 million shares of Sprint common stock, of
which approximately 6.7 million shares were repurchased during the second
quarter. Additional shares may be repurchased on the open market from time to
time at management's discretion. Repurchased shares will be held as treasury
stock and will be used primarily for employee benefit programs and other general
corporate purposes.
Liquidity
As of June 30, 1996, Sprint had the ability to borrow $1.5 billion under a
revolving credit agreement with a syndicate of domestic and international banks
and other bank commitments. Other available financing sources include a
Medium-Term Note program, under which Sprint may offer for sale up to $175
million of unsecured senior debt securities. In addition, Sprint may offer for
sale approximately $1.0 billion of debt securities pursuant to shelf
registration statements filed with the Securities and Exchange Commission.
The aggregate amount of additional borrowings which can be incurred is
ultimately limited by certain covenants contained in existing debt agreements.
As of June 30, 1996, Sprint had borrowing capacity of approximately $12.5
billion under the most restrictive of its debt covenants.
The most restrictive covenant applicable to dividends results from Sprint's
revolving credit agreement. Among other restrictions, the agreement requires
Sprint to maintain specified levels of consolidated net worth, as defined. As a
result of this requirement, $2.34 billion of Sprint's $2.93 billion consolidated
retained earnings were effectively restricted from the payment of dividends as
of June 30, 1996.
21
<PAGE>
General Hedging Policies
Sprint utilizes certain derivative instruments in an effort to manage exposure
to interest rate risk and foreign exchange risk. Sprint's utilization of such
derivative instruments related to hedging activities is limited to interest rate
swap agreements, interest rate caps and forward contracts and options in foreign
currencies. As is customary for these types of derivative instruments, Sprint
does not require collateral or other security from the counterparties to such
agreements. However, because Sprint controls its exposure to credit risk through
credit approvals, credit limits, and internal monitoring procedures, Sprint
believes that its credit risk exposure is limited.
Sprint will in no circumstance take speculative positions and create an exposure
to benefit from market fluctuations. All hedging activity is in accordance with
board-approved policies. Any exposure related to Sprint's use of derivative
instruments is immaterial to its overall operations, financial condition and
liquidity.
Interest Rate Risk Management
Sprint's interest rate risk management program focuses on minimizing
vulnerability to movements in interest rates, setting an optimal mixture of
floating-rate and fixed-rate debt in the liability portfolio and preventing
liquidity risk. Sprint primarily employs a gap methodology to measure interest
rate exposure and utilizes simulation analysis to manage interest rate risk.
Sprint takes an active stance in modifying hedge positions to benefit from the
value of timing flexibility and fixed-rate/floating-rate adjustments.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on optimizing
consolidated cash flows and stabilizing accounting results. Sprint does not
hedge translation exposure because it believes that optimizing consolidated cash
flows will, over time, maintain shareholder value. Sprint's primary transaction
exposure in foreign currencies results from changes in foreign exchange rates
between the dates Sprint incurs and settles liabilities (payable in a foreign
currency) to overseas telephone companies for the costs of terminating
international calls made by Sprint's domestic customers.
22
<PAGE>
PART II.
Other Information
Item 1. Legal Proceedings
On June 27, 1996, the defendants in the class action suit (reported in
Sprint's Annual Report on Form 10-K for the year ended December 31,
1995) filed against Centel and certain of its officers and directors in
connection with the Sprint/Centel merger were granted summary judgment
by the United States District Court for the Northern District of
Illinois. Plaintiffs have appealed the court's order.
Item 2. Changes in Securities
There were no reportable events during the quarter ended June 30, 1996.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended June 30, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting
On April 16, 1996, Sprint held its Annual Meeting of Shareholders. In
addition to the election of three Class I Directors to serve for a term
of three years, the shareholders approved the appointment of Ernst &
Young LLP as independent auditors for Sprint and did not approve two
shareholder proposals.
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
For Withheld
------------------------- ---------------------- ------------------
DuBose Ausley 278,163,741 6,633,138
Warren L. Batts 277,676,488 7,120,391
Donald J. Hall 278,190,319 6,606,560
The following votes were cast with respect to the proposal to approve
the appointment of Ernst & Young LLP as independent auditors of Sprint
for 1996:
For 343,507,092
Against 1,717,581
Abstain 1,168,789
The following votes were cast with respect to a shareholder proposal
requesting that the Board of Directors of Sprint refrain from providing
retirement benefits to non-employee directors unless such benefits are
submitted to the shareholders for approval:
For 109,533,746
Against 205,206,736
Abstain 3,883,625
Broker non-votes 27,769,355
23
<PAGE>
The following votes were cast with respect to a shareholder proposal
regarding the adoption of a bylaw establishing a Stockholder Advisory
Committee to review the business and affairs of the corporation:
For 20,597,772
Against 292,413,720
Abstain 5,632,668
Broker non-votes 27,749,302
Item 5. Other Information
Sprint's ratios of earnings to fixed charges were 6.08 and 4.49 for the
three months ended June 30, 1996 and 1995, respectively, and 5.99 and
4.46 for the six months ended June 30, 1996 and 1995, respectively.
These ratios have been computed by dividing fixed charges into the sum
of (a) income from continuing operations before taxes, less capitalized
interest and equity losses of less than 50 percent owned entities
included in income, and (b) fixed charges. Fixed charges consist of
interest on all indebtedness of continuing operations (including
amortization of debt issuance expenses), the interest component of
operating rents and the pre-tax cost of preferred stock dividends of
subsidiaries.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(11) Computation of Earnings Per Common Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedules:
(a) June 30, 1996 Financial Data Schedule.
(b) June 30, 1995 Restated Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPRINT CORPORATION
(Registrant)
By /s/ John P. Meyer
John P. Meyer
Senior Vice President -- Controller
Principal Accounting Officer
Dated: August 13, 1996
25
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
(11) Computation of Earnings Per Common Share.
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedules:
(a) June 30, 1996 Financial Data Schedule.
(b) June 30, 1995 Restated Financial Data Schedule.
<TABLE>
<CAPTION>
EXHIBIT (11)
SPRINT CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED)
(In Millions, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
--- --------------------------- -- ---------------------------
1996 1995 1996 1995
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Primary earnings per share
<S> <C> <C> <C> <C>
Net income from continuing operations $ 316.5 $ 243.2 $ 628.7 $ 467.9
Preferred stock dividends (0.3) (0.6) (0.8) (1.3)
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
316.2 242.6 627.9 466.6
Discontinued operations, net 0.3 2.5 (2.6) 2.1
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Earnings applicable to common stock $ 316.5 $ 245.1 $ 625.3 $ 468.7
--- ----------- -- ------------ -- ------------ -- -----------
Weighted average number of common shares (1)
434.1 350.2 417.2 349.6
--- ----------- -- ------------ -- ------------ -- -----------
Primary earnings per share
Continuing operations $ 0.73 $ 0.69 $ 1.51 $ 1.33
Discontinued operations -- 0.01 (0.01) 0.01
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Total $ 0.73 $ 0.70 $ 1.50 $ 1.34
--- ----------- -- ------------ -- ------------ -- -----------
Fully diluted earnings per share
Income from continuing operations, net of
preferred stock dividends $ 316.2 $ 242.6 $ 627.9 $ 466.6
Convertible preferred stock dividends 0.1 0.2 0.3 0.3
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
316.3 242.8 628.2 466.9
Discontinued operations, net 0.3 2.5 (2.6) 2.1
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Earnings as adjusted for purposes of computing
fully diluted earnings per share $ 316.6 $ 245.3 $ 625.6 $ 469.0
--- ----------- -- ------------ -- ------------ -- -----------
Weighted average number of common shares
434.1 350.2 417.2 349.6
Additional dilution for common stock equivalents
and dilutive securities 1.3 1.4 2.1 1.9
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Total 435.4 351.6 419.3 351.5
--- ----------- -- ------------ -- ------------ -- -----------
Fully diluted earnings per share
Continuing operations $ 0.73 $ 0.69 $ 1.50 $ 1.33
Discontinued operations -- 0.01 (0.01) --
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Total $ 0.73 $ 0.70 $ 1.49 $ 1.33
--- ----------- -- ------------ -- ------------ -- -----------
(1) Weighted average number of common shares have been adjusted for the assumed
conversion of convertible preference stock and for dilutive common stock
equivalents using the treasury stock method.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT (12)
SPRINT CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--- ------------------------------ --- ------------------------------
1996 1995 1996 1995
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings
<S> <C> <C> <C> <C>
Income from continuing operations
before taxes $ 508.4 $ 378.9 $ 1,014.7 $ 733.0
Capitalized interest (28.8) (7.9) (53.2) (12.3)
Equity in losses of less than 50
percent owned entities 67.5 4.0 86.4 5.3
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Subtotal 547.1 375.0 1,047.9 726.0
Fixed charges
Interest charges of continuing
operations 78.3 76.9 150.4 149.5
Interest factor of operating rents 29.2 30.3 59.4 59.7
Pre-tax cost of preferred stock
dividends of subsidiaries 0.1 0.2 0.3 0.4
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total fixed charges 107.6 107.4 210.1 209.6
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Earnings, as adjusted $ 654.7 $ 482.4 $ 1,258.0 $ 935.6
--- ------------- -- ------------- --- ------------- -- -------------
Ratio of earnings to fixed charges 6.08 4.49 5.99 4.46
--- ------------- -- ------------- --- ------------- -- -------------
Note: The above ratios have been computed by dividing fixed charges into the
sum of (a) income from continuing operations before taxes, less
capitalized interest and equity losses of less than 50 percent owned
entities included in income, and (b) fixed charges. Fixed charges
consist of interest on all indebtedness of continuing operations
(including amortization of debt issuance expenses), the interest
component of operating rents and the pre-tax cost of preferred stock
dividends of subsidiaries.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,756,600
<SECURITIES> 0
<RECEIVABLES> 2,421,200
<ALLOWANCES> 123,400
<INVENTORY> 197,200
<CURRENT-ASSETS> 4,646,300
<PP&E> 20,567,300
<DEPRECIATION> 10,771,200
<TOTAL-ASSETS> 16,456,500
<CURRENT-LIABILITIES> 2,988,100
<BONDS> 3,159,000
14,100
0
<COMMON> 4,528,100
<OTHER-SE> 3,688,900
<TOTAL-LIABILITY-AND-EQUITY> 16,456,500
<SALES> 0
<TOTAL-REVENUES> 6,878,300
<CGS> 0
<TOTAL-COSTS> 4,225,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,200
<INCOME-PRETAX> 1,014,700
<INCOME-TAX> 386,000
<INCOME-CONTINUING> 628,700
<DISCONTINUED> (2,600)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 626,100
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 286,900
<SECURITIES> 0
<RECEIVABLES> 1,695,300
<ALLOWANCES> 178,200
<INVENTORY> 191,200
<CURRENT-ASSETS> 2,405,000
<PP&E> 20,089,400
<DEPRECIATION> 8,927,000
<TOTAL-ASSETS> 16,324,600
<CURRENT-LIABILITIES> 2,844,800
<BONDS> 5,791,800
34,700
0
<COMMON> 871,600
<OTHER-SE> 3,974,800
<TOTAL-LIABILITY-AND-EQUITY> 16,324,600
<SALES> 0
<TOTAL-REVENUES> 6,221,200
<CGS> 0
<TOTAL-COSTS> 3,907,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,200
<INCOME-PRETAX> 733,000
<INCOME-TAX> 265,100
<INCOME-CONTINUING> 467,900
<DISCONTINUED> 2,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 470,000
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.33
</TABLE>
