Sprint - Nextel 2005 Annual Report Download

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Sprint Nextel Annual Report | 2005
All
Together
Now.

Table of contents

  • Page 1
    Sprint Nextel Annual Report | 2005 All Together Now.

  • Page 2
    ...mobile data services, instant national and international walkie-talkie capabilities and an award-winning and global Tier 1 Internet backbone. Customers may find these offerings in targeted channels including a nationwide direct sales force, Sprint.com online sales, telesales and conveniently located...

  • Page 3
    ... Sprint PCS affiliates in the first quarter of 2006. In 2005, the price per share that we will pay to acquire Nextel Partners was determined, and the completion of this purchase, expected in second quarter 2006, will increase our direct subscriber base. At year-end, our wireless networks reached...

  • Page 4
    ... to integrity, personal accountability and judgment are reinforced through operational policies, training and objective evaluation. And our Corporate Governance and Ethics organization is functionally independent and provides an enhanced level of visibility Sprint Nextel Annual Report | 2005 2

  • Page 5
    ... of capital in support of new and innovative services. We expanded our high-speed Sprint Power Vision Network in 2005, providing access to entertainment, information and communications services with full-motion video, high-quality sound and broadbandlike speeds-all on wireless phones. This network...

  • Page 6
    .... Then computers revolutionized productivity. In 2005, Sprint Nextel combined the two with wireless communications converged into a third screen, giving customers the mobility and flexibility to do everything they want-at home, at work or on the go. Sprint Nextel Annual Report | 2005 4

  • Page 7
    ...public undersea cable system. Greater network power and devices that meet your needs. For customers with more to do and no time to wait, the new Sprint Power Vision SM Network brings near-broadband speed, a TV-like viewing experience and highquality sound to their wireless devices. Providing access...

  • Page 8
    ... largest cable companies, we expect to initiate service in 2006. It's not just about bundling video, wireless, Internet and cable phone services into one bill. It's about integrating technologies and services on one device, more simply, to do more than you ever imagined. Sprint Nextel Annual Report...

  • Page 9
    ...network. Our merger brought together spectrum holdings that we believe will support an even more powerful wireless broadband network. In 2006, we plan to test and further develop technology for an even higher speed network that will be designed to allow customers to download a movie in seconds, work...

  • Page 10
    ... Sprint Nextel Corporation Keith J. Bane Retired Executive Vice President and President, Global Strategy and Corporate Development Motorola, Inc. Gordon M. Bethune Retired Chairman and Chief Executive Officer Continental Airlines, Inc. William E. Conway, Jr. Founding Partner and Managing Director...

  • Page 11
    ... year ended December 31, 2005 OR ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-04721 SPRINT NEXTEL CORPORATION (Exact name of registrant as specified in its charter) KANSAS (State or other...

  • Page 12
    ... of the three largest wireless companies in the United States based on the number of wireless subscribers. We own extensive wireless networks and a global long distance, Tier 1 Internet backbone. We also provide regulated local exchange telephone services to approximately 7.4 million access lines in...

  • Page 13
    ... markets in Canada, Latin America and Mexico, as well as a variety of digital wireless mobile telephone and wireless data transmission services. We are one of the nation's largest providers of long distance services and one of the largest carriers of Internet traffic. We operate an all-digital long...

  • Page 14
    ... co-location of cell sites, process efficiencies and migration of Nextel backhaul and other telecommunications traffic to our long distance network; reduced selling, general and administrative expenses primarily arising out of consolidation of customer care, billing and other information technology...

  • Page 15
    ... Partners and the PCS Affiliates we have acquired to date will give us control of the distribution of services under our Sprint and Nextel brands, and provide us with the strategic and financial benefits associated with a larger customer base and expanded network coverage, which include a number...

  • Page 16
    ...other ways, including push-to-email applications that allow a user to send a streaming voice message to an email recipient, and off-network walkie-talkie communications available on certain handsets. Our services are provided using a wide variety of handsets and personal computer wireless data cards...

  • Page 17
    ... video, wireless voice and data services, high speed Internet and cable phone service. Sales and Marketing We focus the marketing and sales of wireless services on two targeted groups of customers: individuals, and businesses and government agencies. We offer a variety of pricing options and plans...

  • Page 18
    ... handsets and laptops equipped with EV-DO-enabled Sprint PCS Connection Cardsâ„¢. The services supported by this technology, marketed as PowerVision, give consumer and business customers access to numerous sophisticated applications using EV-DO-enabled devices, including data messaging, imaging...

  • Page 19
    ... of our CDMA network. The acquisition of Nextel has given us access to cell site communications towers erected for use in connection with the Nextel iDEN network, which in many cases will enable us to co-locate CDMA cell site equipment on these towers, instead of requiring us to erect new towers or...

  • Page 20
    ... and data communications services targeted to domestic business and residential customers, multinational corporations and other communications companies. As one of the nation's largest providers of long distance services, we operate all-digital long distance and Tier 1 IP networks. The financial...

  • Page 21
    ... long distance service and/or use our back office systems and network assets in support of their telephone service provided over cable facilities. Although we continue to provide voice services to consumers, we no longer actively market those services. In 2004, we sold our Dial IP business, a data...

  • Page 22
    ...equipment in our central offices. We offer high-speed Internet access, primarily using a DSL service delivery platform. We also offer large businesses, long distance carriers, wireless carriers and CLECs dedicated circuits to connect their sites or networks to our network, their customers' locations...

  • Page 23
    ... acquisition, assignment or transfer of radio licenses. The FCC also imposes mandates on CMRS providers, such as those that require CMRS providers to transmit the telephone number and certain location information of someone calling 911 to the appropriate 911 dispatch center, and to allow customers...

  • Page 24
    ...for the rates charged for special access services provided by ILECs to long distance, wireless and other carriers. These services typically connect large business customers to long distance carriers' networks and are used by wireless carriers to connect their switches to their cell sites. The FCC is...

  • Page 25
    ... Broadband Service, or EBS, bands, and license renewals, rule on assignments and transfers of control of FCC licenses, and leases covering our use of FCC licensees held by other persons and organizations, govern the interconnection of our iDEN and CDMA networks with other wireless and wireline...

  • Page 26
    ... requirements that are similar to those for our 1.9 GHz licenses. BRS-EBS License Conditions We hold and lease FCC BRS and EBS licenses. We currently use this spectrum to provide fixed wireless Internet access services to homes and small businesses using "first generation" line-of-sight technology...

  • Page 27
    ...a number of public safety communications systems operating on high-site systems in the 800 MHz block of spectrum have experienced interference that is believed to be a result of the low-site operations of CMRS providers operating on adjacent frequencies in the same geographic area. In 2001, we filed...

  • Page 28
    ..., CMRS providers, including us, are required to provide E911 services in a two-tiered manner. Phase I requires wireless carriers to transmit to a requesting public safety answering point, or PSAP, both (a) the 911 caller's telephone number and (b) the location of the cell site from which the call is...

  • Page 29
    ... to look at issues of consumer protection and the appropriate state and federal roles. If states gain such authority, or there are other changes in the Truth in Billing rules, our billing and customer service costs could increase. CALEA Requirements The Communications Assistance for Law Enforcement...

  • Page 30
    ..., which could result in additional costs to us, including administrative or operational burdens on our customer care, sales, marketing and IT systems. Tower Siting Wireless systems must comply with various federal, state and local regulations that govern the siting, lighting and construction of...

  • Page 31
    ... bands, and developing wireless devices and other products and services that operate seamlessly on both technology platforms; developing and deploying next generation wireless technologies; combining and simplifying diverse product and service offerings, subscriber plans and sales and marketing...

  • Page 32
    ... that need to be addressed in order to separate the assets and operations of Embarq from the rest of our business in connection with the planned spin-off of Embarq to our shareholders. The spin-off will require the creation of a new publicly traded company with a capital structure appropriate for...

  • Page 33
    ... for tax-free treatment if 50% or more (by vote or value) of our stock, or the stock of Embarq, is acquired or issued as part of a plan, or series of related transactions, that includes the contemplated spin-off. Because the Nextel merger generally is treated as involving the acquisition of 49...

  • Page 34
    ... of Nextel and Nextel Partners, following its expected acquisition, in the areas served by those PCS Affiliates. We could incur significant costs to resolve these issues. Risks Related to our Business and Operations We face intense competition that may reduce our market share and harm our financial...

  • Page 35
    ... wireless communications providers has increased, we have created pricing plans that have resulted in declining average revenue per minute of use for voice services, a trend which we expect will continue. Competition in pricing and service and product offerings may also adversely impact customer...

  • Page 36
    ...these companies have built high-capacity, IP-based fiber-optic networks capable of supporting large amounts of voice and data traffic. These companies claim certain cost structure advantages which, among other factors, may allow them to maintain profitability while offering services at a price below...

  • Page 37
    ... to provide customer service and related support to our wireless subscribers and outsourced many aspects of our customer care and billing functions to third parties. We also have entered into an agreement whereby a third party has leased or operates a significant number of our communications towers...

  • Page 38
    ... than other wireless technologies and because we expect that over time more of our customers will utilize service offered on our CDMA network, it is less likely that manufacturers other than Motorola will be willing to make the significant financial commitment required to license, develop and...

  • Page 39
    ...spectrum bands. The Communications Act preempts state and local regulation of market entry by, and the rates charged by, CMRS providers, except that states may exercise authority over such things as certain billing practices and consumer-related issues. The California PUC has imposed rules designed...

  • Page 40
    ... extensions related to the exercise of renewal options. Our operational headquarters campus is located in Overland Park, Kansas and consists of about 4 million square feet, which is carried on our consolidated balance sheets. Our gross property, plant and equipment at December 31, 2005 totaled $55...

  • Page 41
    ... and equipment. Additional information regarding our commitments related to operating leases can be found in note 15 of the Notes to the Consolidated Financial Statements appearing at the end of this annual report on Form 10-K. Item 3. Legal Proceedings In 2005, several PCS Affiliates filed lawsuits...

  • Page 42
    ... between any of our executive officers and directors. Office Name Age (1) Chairman Chief Executive Officer and President Chief Operating Officer Chief Financial Officer General Counsel Chief Information Officer Chief Network Officer Chief Technology Officer President-Business Solutions President...

  • Page 43
    ...been our Chief Operating Officer since September 2003. He also served as President from September 2003 until the Sprint-Nextel merger in August 2005, and as President-Sprint PCS from October 2002 until October 2004. He had served as President-Long Distance (formerly called Global Markets Group) from...

  • Page 44
    ...- Human Resources in April 2003. He served as Vice President-HR Operations for Sprint/United Management Company from 1996 until April 2003. (15) Mr. Lindahl was elected Vice President & Treasurer at the time of the Sprint-Nextel merger in August 2005. He served as Vice President and Treasurer of...

  • Page 45
    ...voting common stock are not publicly traded. Dividends We paid a dividend of $0.025 per share on the common stock, Series 1, the common stock, Series 2, and the non-voting common stock in the third and fourth quarters 2005. The non-voting common stock was issued in the Sprint-Nextel merger in August...

  • Page 46
    ... on the exemption provided by Section 4(2) of the Securities Act because the restricted stock units were issued in transactions not involving a public offering. Issuer Purchases of Equity Securities Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or...

  • Page 47
    ... Property, plant and equipment, net ...31,133 Intangible assets, net ...49,334 Total debt and capital lease obligations (including equity unit notes) ...25,679 Redeemable preferred stock ...247 Shareholders' equity ...51,937 Cash Flow Data Net cash from operating activities ...$ Capital expenditures...

  • Page 48
    ... to dilutive PCS securities (mainly stock options, employees stock purchase plan shares, convertible preferred stock, and restricted stock units) to determine diluted weighted average shares on a consolidated basis. (5) In the first and second quarter 2005, a dividend of $0.125 per share was paid...

  • Page 49
    ... filed against us; a significant adverse change in Motorola's ability or willingness to provide handsets and related equipment and software applications or to develop new technologies or features for our iDEN network; the impact of adverse network performance, including any performance issues...

  • Page 50
    ... of the three largest wireless companies in the United States based on the number of wireless subscribers. We own extensive wireless networks and a global long distance, Tier 1 Internet backbone. We also provide regulated local exchange telephone services to approximately 7.4 million access lines in...

  • Page 51
    ... integrate our networks, business operations, back-office functions and other support systems and infrastructure. Business We offer a comprehensive suite of wireless and wireline communications products and services that are designed to meet the needs of our two targeted customer groups: individuals...

  • Page 52
    ... in this annual report relating to business strategies, operating plans, planned expenditures, expected capital requirements and other forward-looking statements regarding our business generally do not take into account the contemplated spin-off of Embarq. Management Overview Wireless Through our...

  • Page 53
    ...cable companies to develop converged next generation products for consumers designed to combine many of cable's core products and interactive features with wireless technology to deliver a broad range of services, including video, wireless voice and data services, high speed Internet and cable phone...

  • Page 54
    ... operate all-digital long distance and Tier 1 IP networks. For several years, our long distance voice services have experienced an industry-wide trend of lower revenue from lower prices and competition from other wireline and wireless communications companies, as well as cable companies and Internet...

  • Page 55
    ...-assisted calling, equipment protection and late payment charges, and certain regulatory fees. We recognize operating revenues as services are rendered or as products are delivered to customers in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force...

  • Page 56
    ... ...Network equipment and software ...Non-network internal use software, office equipment and other ... 3 to 31 years 3 to 31 years 3 to 30 years The accounting estimate related to the establishment of depreciable lives requires us to make assumptions about technology evolution and competitive uses...

  • Page 57
    ... internal studies of the assets acquired in the Sprint-Nextel merger and the acquisitions of US Unwired, Gulf Coast Wireless, and IWO Holdings, including investments, property, plant and equipment, intangible assets, and certain liabilities relevant to the allocation of the purchase price. The fair...

  • Page 58
    ... in late 2003 when we revised our target asset allocation policy, and is validated each year against estimates provided by our third party actuaries. If the expected return on assets assumption was 25 basis points lower, it would generate a $9 million increase in current year benefit costs. This...

  • Page 59
    ... the Financial Accounting Standards Board, or FASB, issued SFAS No. 123R, Share-Based Payment. This statement requires an entity to recognize the cost of employee services received in share-based payment transactions, through the use of fair-value-based methods of recognizing cost. This statement is...

  • Page 60
    ... customer care and information technology costs for the Wireless and Long Distance segments. Wireless Through our Wireless segment, we, together with the remaining PCS Affiliates and Nextel Partners, offer digital wireless service in all 50 states, Puerto Rico and the U.S. Virgin Islands and provide...

  • Page 61
    ... iDEN-based wireless service providers that operate in Latin America and Canada. We are continuing to execute our plans that will enable us to offer faster wireless data speeds by deploying EV-DO technology across the CDMA network. With peak rates of up to 2.4 megabits per second for downloads, EV...

  • Page 62
    ... wholesale operators and PCS Affiliates. Service revenues consist of fixed monthly recurring charges, variable usage charges, charges related to the use of specified features and miscellaneous fees such as directory assistance, operator-assisted calling, equipment protection, late payment charges...

  • Page 63
    ... to share minutes among a group of related customers, or a combination of these features. • • • We expect that service revenues will increase in absolute terms in the future as a result of an increasing subscriber base. As competition among wireless communications providers has increased...

  • Page 64
    ... at each site; and the variable component of which generally consists of per-minute use fees charged by wireline and wireless providers for calls terminating on their networks, which fluctuates in relation to the level and duration of those terminating calls; and costs to activate service for new...

  • Page 65
    ... with our direct sales force, retail stores and marketing employees, telemarketing, advertising, media programs and sponsorships, including costs related to branding. General and administrative costs primarily consist of fees paid for billing, customer care and information technology operations, bad...

  • Page 66
    ... information technology and billing expenses to support a larger subscriber base in addition to an increase in credit card fees as more subscribers submit invoice payments through credit cards; partially offset by a decrease in our customer care costs as we outsourced more of our customer care calls...

  • Page 67
    ...2005 due primarily to amortization expense related to the customer contracts acquired with the Sprint-Nextel merger and acquisition of five PCS Affiliates. Depreciation expense increased 4% in 2004 mainly reflecting depreciation of the network assets placed in service during that year. Long Distance...

  • Page 68
    ...pricing on commercial contracts and continued pressures in the consumer long distance market. Increased competition and the significant increase in capacity resulting from new technologies and networks may drive already low prices down further. See "-Forward Looking Statements." Voice Revenues Voice...

  • Page 69
    ...providers and foreign phone companies to complete calls made by our domestic customers, costs to operate and maintain our networks, and costs of equipment. Costs of services and products increased 3% in 2005 and 2% in 2004. The 2005 increase was driven by access volume and international access costs...

  • Page 70
    ... mainly of regulated incumbent local phone companies serving approximately 7.4 million access lines in 18 states. We provide local and long distance voice and data services, including DSL, access by customers and other carriers to the local network, sales of telecommunications equipment and other...

  • Page 71
    ...to wireless and cable providers, along with broadband substitution. Voice Revenues Voice revenues, consisting of revenue from local exchange services, long distance revenue and switched access revenue, decreased 4% in 2005 and 3% in 2004 due to the decreases in access lines and access minutes of use...

  • Page 72
    ... and asset impairments can be found in note 8 of the Notes to the Consolidated Financial Statements appearing at the end of this annual report on Form 10-K. Depreciation Expense Depreciation expense was flat in 2005 as well as in 2004. Depreciation expense was 17% of net operating revenues in 2005...

  • Page 73
    ... Statements appearing at the end of this annual report on Form 10-K. Although interest expense increased $69 million in 2005 compared to 2004 due to the additional indebtedness assumed in connection with the Nextel merger and the PCS Affiliate acquisitions, the effective interest rate on long...

  • Page 74
    ... securities and interest earned on marketable debt securities. The $177 million increase in interest income from 2004 to 2005 is primarily due to the increase in the average cash and cash equivalents balances due to the Sprint-Nextel merger. Interest income also benefited from a 200 - basis point...

  • Page 75
    ...reflects the fair value of IWO Holding's assets, net of cash paid, both of which were acquired in fourth quarter 2005. Additional information regarding the impact of business combinations on consolidated assets can be found in note 2 of the Notes to the Consolidated Financial Statements appearing at...

  • Page 76
    ... continued growth in the Wireless customer base, partially offset by merger-related costs. Additionally, cash flows provided by operating activities for 2005 include the receipt of $1.2 billion in prepaid tower rentals from Global Signal in exchange for granting Global Signal the exclusive rights to...

  • Page 77
    ... the Report and Order. We invested in our Local segment primarily to accommodate voice grade equivalent growth, convert the network from circuit to packet switching and continue the build-out of high-speed DSL services, and to meet regulatory requirements. We invested in our Long Distance segment...

  • Page 78
    ... payments to differ significantly from these amounts. See "- Forward-Looking Statements." Future Contractual Obligations Total 2006 2007 2008 (in millions) 2009 2010 2011 and Thereafter Long-term debt(1) (2) ...$ Redeemable preferred stock(3) ...Capital leases ...Operating leases ...Acquisitions...

  • Page 79
    ... in the "Purchase obligations and other" caption are minimum amounts due under some of our service contracts, including agreements for telecommunications and customer billing services, advertising services and contracts related to information technology and customer care outsourcing arrangements...

  • Page 80
    ...including the outstanding shares of common stock of Nextel Partners that we do not own for about $6.5 billion; anticipated payments under the FCC's Report and Order; declared and anticipated dividend payments and scheduled debt service requirements; costs associated with the Sprint-Nextel merger and...

  • Page 81
    ... and other cautionary and qualifying factors set forth under "-Forward-Looking Statements" and Part I, Item 1A. "Risk Factors." Financial Strategies General Risk Management Policies We use derivative instruments only for hedging and risk management purposes. Hedging activity may be done for purposes...

  • Page 82
    ...do not qualify for hedge accounting treatment in our consolidated financial statements, and so any changes in the fair value of these instruments are recognized in earnings during the period of change. Based on market prices on December 31, 2005, a one percentage point change in interest rates would...

  • Page 83
    ... the design and operation of the disclosure controls and procedures were effective as of December 31, 2005 in providing reasonable assurance that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management...

  • Page 84
    .... Based on this assessment, management believes that, as of December 31, 2005, our internal control over financial reporting was effective. Our independent registered public accounting firm has issued a report on management's assessment of our internal control over financial reporting. This report...

  • Page 85
    ... Ownership Reporting Compliance" in the proxy statement relating to our 2006 annual meeting of shareholders, which will be filed with the SEC. We have adopted the Sprint Nextel Code of Conduct, which applies to all of our directors, officers and employees. The Code of Conduct is publicly available...

  • Page 86
    ... table provides information about the shares of common stock, Series 1, that may be issued upon exercise of awards as of December 31, 2005. Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) Weighted-average Exercise Price of Outstanding Options, Warrants...

  • Page 87
    .... Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated by reference to the information set forth under the caption "Ratification of Independent Registered Public Accounting Firm for 2006" in the proxy statement relating to our 2006 annual meeting of...

  • Page 88
    ... this report: (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.1.1 Agreement and Plan of Merger, dated as of December 15, 2004, by and among Sprint Corporation, Nextel Communications, Inc. and S-N Merger Corp. (filed as Exhibit 2 to Sprint Nextel's Current Report on...

  • Page 89
    ..., dated as of December 19, 2005, among Sprint Nextel Corporation, Sprint Capital Corporation and, Nextel Communications, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. as Administrative Agent (filed as Exhibit 10.1 to Sprint Nextel's Current Report on Form 8-K filed December 21, 2005...

  • Page 90
    ...(filed as Exhibit 10.2 to Sprint Nextel's Current Report on Form 8-K filed February 14, 2005 and incorporated herein by reference). Form of 2005 Award Agreement (awarding stock options and restricted stock units) with Messrs. Forsee and Lauer (filed as exhibit 10(dd) to Sprint Nextel's Annual Report...

  • Page 91
    ...Exhibit 10.1 to Nextel's Current Report of Form 8-K filed March 15, 2005 and incorporated herein by reference). Executive Agreement dated as of July 30, 2001 by and among Sprint Nextel, Sprint/United Management Company, and Len Lauer (filed as Exhibit 10(bb) to Sprint Nextel Annual Report on Form 10...

  • Page 92
    ....2 to Nextel's Current Report on Form 8-K filed March 15, 2005 and incorporated herein by reference). Employment Agreement dated as of June 2, 2005, by and among Sprint Corporation, Sprint/United Management Company and Daniel R. Hesse (filed as exhibit 10.1 to Sprint Nextel's Current Report on Form...

  • Page 93
    ... 30, 2005 and incorporated herein by reference). Retirement Plan for Directors, as amended (filed as Exhibit 10(u) to Sprint Nextel's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). Summary of Executive Officer Benefits and Board of Directors...

  • Page 94
    ..., thereunto duly authorized. SPRINT NEXTEL CORPORATION (Registrant) By /s/ Gary D. Forsee Gary D. Forsee Chief Executive Officer Date: March 7, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the...

  • Page 95
    SIGNATURES SPRINT NEXTEL CORPORATION (Registrant) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 7th day of March, 2006. /s/ Timothy M. Donahue Timothy...

  • Page 96
    SPRINT NEXTEL CORPORATION Index to Financial Statements, Financial Statement Schedule and Exhibits Sprint Nextel Corporation Page Reference Consolidated Financial Statements Management Report ...Reports of KPMG LLP, Independent Registered Public Accounting Firm ...Report of Ernst & Young LLP, ...

  • Page 97
    ...for these consolidated financial statements is pursued mainly through its Audit Committee. The Audit Committee, composed entirely of directors who are not officers or employees of Sprint Nextel, meets periodically with the Company's internal auditors and independent registered public accounting firm...

  • Page 98
    ... with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sprint Nextel Corporation's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of...

  • Page 99
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sprint Nextel Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income (loss), cash flows...

  • Page 100
    ... of Sprint Nextel Corporation. Our responsibility is to express an opinion on these financial statements and the schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan...

  • Page 101
    SPRINT NEXTEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2005, 2004 and 2003 2004 2003 2005 (in millions, except per share amounts) Net operating revenues ...Operating expenses Costs of services and products (exclusive of depreciation included below) ......

  • Page 102
    SPRINT NEXTEL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Years Ended December 31, 2005, 2004 and 2003 2005 2004 (in millions) 2003 Net income (loss) ...Other comprehensive income (loss) Unrealized holding gains on available-for-sale securities ...Income tax expense ...

  • Page 103
    SPRINT NEXTEL CORPORATION CONSOLIDATED BALANCE SHEETS As of December 31, 2005 and 2004 2005 2004 (in millions, except share data) ASSETS Current assets Cash and cash equivalents ...$ Marketable securities ...Accounts receivable, net ...Inventories ...Deferred tax asset ...Prepaid expenses and other...

  • Page 104
    ... towers lease transaction ...1,195 - Noncurrent assets and liabilities, net ...(136) 17 Net cash provided by operating activities ...10,678 6,625 Cash flows from investing activities Capital expenditures ...(5,057) (3,980) Cash acquired in Nextel merger, net of cash paid ...1,183 - Purchase of PCS...

  • Page 105
    ... ...Net income ...Common stock dividends ...Preferred stock dividends ...Common stock issued to Nextel shareholders ...Common stock issued ...Conversion of Nextel vested stock-based awards upon merger ...Stock-based compensation expense ...Tax benefit from stock compensation ...Additional minimum...

  • Page 106
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Operations and Significant Accounting Policies Operations We are a global communications company offering a comprehensive suite of wireless and wireline communications products and services that are designed...

  • Page 107
    ... handset and accessory sales and revenues from wholesale operators and PCS Affiliates, as well as long distance and local voice, data and internet revenues. We recognize operating revenues as services are rendered or as products are delivered to customers in accordance with Securities and Exchange...

  • Page 108
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Advertising Expense We recognize advertising expense as incurred. These expenses include production, media and other promotional and sponsorship costs. Advertising expenses totaled $1.4 billion in 2005, $989 ...

  • Page 109
    ...in 2005, 2004 and 2003 related to stock-based grants issued after December 31, 2002. In 2005, we recognized pre-tax charges of $32 million of non-cash compensation expense in connection with Sprint employee separations as a result of the Nextel merger. The charges were associated with accounting for...

  • Page 110
    ... suit ...Earthlink common stock used to extinguish debt ...Investments in Debt Securities $ 35,645 639 90 - 90 $ - - 53 5 48 $ - - 51 - - We classify our investments in marketable debt securities as available-for-sale and, therefore, report them at fair value, based on quoted market prices...

  • Page 111
    ... recognized. We capitalize costs for network and non-network software developed or obtained for internal use during the application development stage. These costs are included in property, plant and equipment, and when the software is placed in service, are amortized over estimated useful lives of...

  • Page 112
    ... expense in Long Distance by approximately $74 million. Network equipment and software includes switching equipment and cell site towers, base transceiver stations, other radio frequency equipment, internal use software, metallic cable and wire facilities, digital fiber-optic cable, conduit, poles...

  • Page 113
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Financial Accounting Standards Board, or FASB, Interpretation No. 47, or FIN 47, Accounting for Conditional Asset Retirement Obligations was issued in 2005, interpreting the application of SFAS No. 143. FIN 47 ...

  • Page 114
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Definite Life Intangibles Definite life intangibles include the value associated with acquired Wireless subscriber bases, or customer relationships, the Nextel and Direct ConnectSM trade names and the value of our...

  • Page 115
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Note 2. Business Combinations In 2005, we acquired Nextel Communications, US Unwired, Gulf Coast Wireless and IWO Holdings in transactions accounted for under the purchase method as required by SFAS No. 141, ...

  • Page 116
    ... fair value was calculated on the stock-based awards outstanding on the date of completion of the merger, which include options to purchase our shares and deferred shares. We incurred approximately $78 million of direct acquisition costs associated with financial advisory, legal and other services...

  • Page 117
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) may result. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date. The amounts reported as...

  • Page 118
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Property, Plant and Equipment Acquired The fair values preliminarily allocated to property, plant and equipment acquired in the merger are as follows: Preliminary Fair Value (in millions) Network equipment and ...

  • Page 119
    ... Partners and the PCS Affiliates we have acquired to date will give us control of the distribution of services under our Sprint and Nextel brands, and provide us with the strategic and financial benefits associated with a larger customer base and expanded network coverage, which include a number...

  • Page 120
    ... price allocation for the acquired assets and assumed liabilities of IWO Holdings. The results of operations of these 2005 affiliate purchase acquisitions are included in our consolidated financial statements from the respective dates of acquisition. Pro forma information has not been provided...

  • Page 121
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Following is previously reported earnings per common share information for the FON Group and the PCS Group: 2003 FON PCS Group Group (in millions, except earnings and dividends per common share) Income (loss) ...

  • Page 122
    ... Trade ...Other ...Less allowance for doubtful accounts ...Prepaid expenses and other current assets Prepaid expenses ...Deferred charges ...Other ...Property, plant and equipment, net Land ...Network equipment and software ...Buildings and improvements ...Non-network internal use software, office...

  • Page 123
    ... FINANCIAL STATEMENTS - (Continued) Note 5. Investments Specific investment types and the related carrying amounts include: December 31, 2005 2004 (in millions) Investments in debt securities ...Investments in equity securities ...Equity method investments Nextel Partners ...Virgin Mobile USA...

  • Page 124
    ... Nextel Partners in October 2005, exercised their right to require us to purchase, at fair market value, the 70% of the outstanding shares of Nextel Partners stock that we do not already own. In December 2005, we and Nextel Partners announced that the purchase price for each share of Nextel Partners...

  • Page 125
    ... in net assets by $2.1 billion due to purchase price accounting applied at the time of the Sprint-Nextel merger. This difference is principally related to customer relationships, spectrum licenses and goodwill. The customer relationship portion is being amortized over seven years, using the sum...

  • Page 126
    ...the fair value of these securities by using available market data to value a debt instrument with embedded optionality. Letters of Credit Outstanding letters of credit totaled $2.6 billion as of December 31, 2005 and $123 million as of December 31, 2004. Pursuant to the terms of the Report and Order...

  • Page 127
    ... 2005. The letter of credit reflects fair value as a condition of its underlying purpose and is subject to fees competitively determined in the market place. We also use letters of credit to provide credit support for various financial obligations. Concentrations of Risk Our accounts receivable...

  • Page 128
    ...and conditions of the Report and Order of the FCC, which implemented a spectrum reconfiguration plan designed to eliminate interference with public safety operators in the 800 MHz band. Under the terms of the Report and Order, prior to the August 12, 2005 merger date, Nextel surrendered its spectrum...

  • Page 129
    ...as other current liabilities. Web Hosting Wind-down In 2003, we announced the wind-down of web hosting services offered by Long Distance. This decision resulted in a $316 million pre-tax charge for asset impairments. This wind-down, along with related restructurings in other Long Distance operations...

  • Page 130
    ... Liability Balance 2004 Activity Total Restructuring Cash Charge Payments (in millions) December 31, 2004 Liability Balance Restructuring Events Organizational Realignment Severance ...Other exit costs ...Web Hosting Wind-down Severance ...Other exit costs ...Wireless Billing Platform Termination...

  • Page 131
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Other Asset Impairments In 2005, we incurred a $77 million asset impairment related to the write-off and removal from service of certain internal-use software systems that are no longer being utilized by Local. We...

  • Page 132
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Note 9. Long-term Debt and Capital Lease Obligations Our long-term debt and capital lease obligations at year-end were as follows: Retirements and Acquired Debt Repayments of and Principal Borrowings and Other ...

  • Page 133
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Bank Credit Facilities As of December 31, 2005, our bank credit facilities provide for total unsecured financing capacity of $10.2 billion, of which we have borrowed $3.2 billion and have $2.5 billion of ...

  • Page 134
    ... 31, 2005, we have $163 million in capital lease obligations primarily for the use of communication switches, which are secured by $415 million of gross property, plant and equipment. Other In December 2005, we terminated two accounts receivable asset securitization facilities that provided us with...

  • Page 135
    ... 17, 2004, a variable number of newly issued shares of PCS common stock, which became FON common stock as a result of the recombination. These forward purchase contracts included a provision permitting the equity unit holders to benefit from or "participate" in any dividends declared on the common...

  • Page 136
    ..., stock warrants, option contracts, and foreign currency forward and option contracts. We primarily use our derivative transactions to hedge our exposure to the market risks associated with unfavorable movements in interest rates, equity prices, and foreign currencies. Our board of directors has...

  • Page 137
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Our foreign exchange risk management program focuses on reducing transaction exposure to optimize consolidated cash flow. We enter into forward and option contracts in foreign currencies to reduce the impact of ...

  • Page 138
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) instruments in accumulated other comprehensive loss on the Consolidated Balance Sheets, with no impact on earnings during the life of the hedging relationship. Changes in fair value of these instruments resulted ...

  • Page 139
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Income tax expense (benefit) allocated to other items was as follows: Year Ended December 31, 2005 2004 2003 (in millions) Discontinued operations ...Cumulative effect of change in accounting principle ......

  • Page 140
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In 2005, we acquired approximately $2.8 billion of potential income tax benefits related to net operating loss carryforwards, capital loss carryforwards and tax credit carryforwards in the Nextel and PCS ...

  • Page 141
    ... Savings Plan and the Sprint Nextel and Centel Retirement Savings Plans for Bargaining Unit Employees filed suit in the U.S. District Court for the District of Kansas against us, the committees that administer the plans, the plan trustee, and various current and former directors and officers. The...

  • Page 142
    ... and conditions of the Report and Order of the FCC which implemented a spectrum reconfiguration plan designed to eliminate interference with public safety operators in the 800 MHz band. Under the terms of the Report and Order, prior to the August 12, 2005 merger date, Nextel surrendered its spectrum...

  • Page 143
    ..., 2005. These outstanding commitments consist primarily of network equipment and maintenance, access commitments, advertising and marketing, information technology services and customer support provided by third parties, handset purchases and other expenses related to normal business operations. We...

  • Page 144
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) working to assess the scope and nature of these sites and our potential responsibility. Other environmental compliance and remediation expenditures result mainly from the operation of standby power generators for ...

  • Page 145
    ... prices equal to the market price of the underlying common stock on the grant date. No new options may be granted under this plan after April 2005. As of December 31, 2005, options to buy approximately 40.0 million common shares were outstanding. Long-Term Stock Incentive Program Under the 1997 Long...

  • Page 146
    ... Equity Plan As a result of the Sprint-Nextel merger, outstanding Nextel deferred shares, which constitute an agreement to transfer shares upon the performance of service over a defined period of time, and grants of options to purchase shares of Nextel common stock were converted into Sprint Nextel...

  • Page 147
    ... based. The weighted average fair value per unit was $24.76. Employees Stock Purchase Plan Prior to the Sprint-Nextel merger, Nextel employees elected, under the Nextel Associate Stock Purchase Plan, to purchase approximately 244,000 shares of common stock. As a result of the Sprint-Nextel merger...

  • Page 148
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Stock Options Activity under our stock option plans was as follows: Weighted Average per Share Exercise Price Shares Under Option (in millions) Outstanding December 31, 2002 ...Granted ...Exercised ...Forfeited/...

  • Page 149
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) At the time of the merger with Nextel, we did not extend plan participation to former Nextel employees. Additionally, as of December 31, 2005, the pension plan was amended to freeze benefit accruals for plan ...

  • Page 150
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Amounts recognized on the accompanying consolidated balance sheets consist of: As of December 31, 2005 2004 (in millions) Pension benefit obligations ...Intangible asset ...Accumulated other comprehensive loss ...

  • Page 151
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Weighted-average assumptions used to determine net periodic pension costs: Year Ended December 31, 2005 2004 2003 Discount rate ...Expected long-term rate of return on plan assets ...Expected blended rate of ...

  • Page 152
    ... merger, we did not extend plan participation in the retiree medical plan to former Nextel employees and we amended the plan to only include employees designated to work for Embarq and legacy Sprint employees born prior to 1956. Because the attribution period used to accrue retiree medical benefits...

  • Page 153
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table shows the changes in the accumulated postretirement benefit obligation: Year Ended December 31, 2005 2004 (in millions) Beginning balance ...Service cost ...Interest cost ...Plan amendments ...

  • Page 154
    ...-point change in assumed health care cost trend rates would have the following effects (in millions): One-percentage-point Increase One-percentage-point Decrease Effect on total of service and interest cost ...Effect on postretirement benefit obligation ... $ 2 37 $ (2) (32) Plan assets totaled...

  • Page 155
    ...costs, which we believe approximate fair value. In certain transactions, pricing is set using market rates. Segment financial information was as follows: Long Distance Corporate and Eliminations(2) Wireless Local(1) (in millions) Consolidated 2005 Net operating revenues ...Inter-company revenues...

  • Page 156
    SPRINT NEXTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (2) Revenues eliminated in consolidation consist primarily of local access charged to Long Distance by Local, Long Distance services provided to Wireless for resale to Wireless customers and for internal business...

  • Page 157
    ...business use, caller ID services provided by Local to Wireless, handset purchases from Wireless and access to the Wireless network. Recently Issued Accounting Pronouncements (2) Note 21. SFAS No. 123R In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This statement requires an...

  • Page 158
    ...separate company financial statements. We are currently in the process of identifying the assets and liabilities that will be transferred to the new company, for which we expect to receive approximately $6.6 billion in the form of cash and senior notes. We will present Embarq's results of operations...

  • Page 159
    ... 2005, the amount includes the allowance recorded in the merger of Nextel and the PCS Affiliate acquisitions. Accounts written off, net of recoveries. Amount represents increases in valuation allowance for deferred income tax assets related primarily to the purchase price allocations for the Nextel...

  • Page 160
    ... the address listed below, or by calling (800) 259-3755. Stock Transfer Agent, Registrar, Dividend Paying Agent and Dividend Reinvestment Agent UMB Bank, n.a. P.O. Box 419064 Kansas City, MO 64141-6064 (800) 259-3755 Independent Registered Public Accounting Firm KPMG LLP Investor Relations Investor...

  • Page 161
    Sprint Nextel Corporation 2001 Edmund Halley Drive Reston, VA 20191 Sprint.com