Sprint - Nextel 2005 Annual Report Download - page 109

SPRINT NEXTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-based Compensation
Effective January 1, 2003, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation – Transition and Disclosure, using the prospective method. Upon adoption we began expensing
the fair value of stock-based compensation of all grants, modifications or settlements made on or after January 1,
2003 using a Black-Scholes option-pricing model. The following table illustrates the effect on net income (loss)
and earnings per common share of stock-based compensation included in net income (loss) and the effect on net
income (loss) and earnings (loss) per common share for grants issued on or before December 31, 2002, had we
applied the fair value recognition provisions of SFAS No. 123.
Compensation costs are expensed over the vesting period of the award using the straight-line method. The
amount of compensation cost recognized at any date is at least equal to the vested portion of the award.
Year Ended December 31,
2005 2004 2003
(in millions, except per share data)
Net income (loss), as reported ....................................... $ 1,785 $ (1,012) $ 1,290
Add: stock-based compensation expense included in reported net income
(loss), net of income tax of $111, $47 and $19 ........................ 192 82 33
Deduct: total stock-based compensation expense determined under fair value
based method for all awards, net of income tax of $117, $64 and $61 ...... (204) (111) (106)
Pro forma net income (loss) ........................................ $ 1,773 $ (1,041) $ 1,217
Earnings (loss) per common share:
Basic – as reported ............................................. $ 0.87 $ (0.71) $ 0.91
Basic – pro forma .............................................. $ 0.87 $ (0.73) $ 0.85
Diluted – as reported ............................................ $ 0.87 $ (0.71) $ 0.91
Diluted – pro forma ............................................. $ 0.86 $ (0.73) $ 0.85
We recognized pre-tax charges of $234 million, $81 million, and $37 million 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
modifications, which accelerated vesting and extended exercise periods of stock options granted in prior periods,
as required by SFAS No. 123.
Prior to April 23, 2004, we had two tracking stocks. The FON tracking stock represented all of the operations and
assets of our Long Distance and Local operations. The PCS tracking stock represented the operations and assets
of our Wireless operations. On April 23, 2004, we recombined these two tracking stocks. As a result, in 2004, we
recognized pre-tax charges of $48 million of non-cash compensation expense related to the recombination of
FON common stock and PCS common stock. As required by SFAS No. 123, we accounted for the conversion of
PCS stock options to FON stock options as a modification and accordingly applied stock option expensing to
FON stock options resulting from the conversion of PCS stock options granted before January 1, 2003. In
connection with this, we recognized pre-tax charges of $37 million in 2005.
In 2003, we recognized pre-tax charges of $15 million for non-cash expense in connection with separation
agreements between us and former executives. The charges were associated with accounting for modifications,
which accelerated vesting and extended vesting and exercise periods of stock options granted in prior periods, as
required by SFAS No. 123.
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