Sprint - Nextel 2006 Annual Report Download

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Â¥ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
or
nTRANSITION 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 48-0457967
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2001 Edmund Halley Drive, Reston, Virginia
(Address of principal executive offices)
20191
(Zip Code)
Registrant’s telephone number, including area code:
(703) 433-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Series 1, $2.00
par value, and Rights New York Stock Exchange
Guarantees of Sprint Capital Corporation
6.875% Notes due 2028 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¥No n
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes nNo ¥
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 ¥No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer ¥Accelerated filer nNon-accelerated filer n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes nNo ≤
Aggregate market value of voting and non-voting common stock equity held by non-affiliates at June 30, 2006 was $59,636,113,799.
COMMON SHARES OUTSTANDING AT FEBRUARY 21, 2007:
VOTING COMMON STOCK
Series 1 .............................. 2,822,686,527
Series 2 .............................. 79,831,333
Documents incorporated by reference
Portions of the registrant’s definitive proxy statement filed under Regulation 14A promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, which definitive proxy statement is to be filed within 120 days after the end of Registrant’s fiscal
year ended December 31, 2006, are incorporated by reference in Part III hereof.

Table of contents

  • Page 1
    ...'s telephone number, including area code: (703) 433-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, Series 1, $2.00 par value, and Rights Guarantees of Sprint Capital Corporation 6.875% Notes due 2028 New...

  • Page 2
    ... Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security...

  • Page 3
    ... high-speed evolution data optimized, or EV-DO, technology. We also offer digital wireless services under our Nextel» and Boost Mobile» brands using integrated Digital Enhanced Network, or iDEN», technology. Both brands feature our industry-leading walkie-talkie services, which give subscribers...

  • Page 4
    ... Sprint Nextel stock in exchange for each then-outstanding share of Nextel stock. We merged with Nextel to secure a number of potential strategic and financial benefits. These benefits include those arising from the combination of our networks, spectrum assets and diverse customer bases and services...

  • Page 5
    ... of licenses in the 900 MHz spectrum band. Access to Public Filings and Board Committee Charters Our website address is www.sprint.com. Information contained on our website is not part of this annual report. We provide public access to our annual reports on Form 10-K, quarterly reports on Form 10...

  • Page 6
    ...high-speed EV-DO technology across our CDMA network. The services supported by this technology, marketed as Power Vision, give our subscribers with EVDO-capable devices access to the Internet and numerous sophisticated high-speed data messaging, imaging, entertainment and location-based applications...

  • Page 7
    ... offer subscribers instant communications in a variety of 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 new line of combined CDMA-iDEN devices...

  • Page 8
    ..., wireless voice and data services, high speed Internet and cable phone service, to the participating cable MSO's customers. During 2007, we expect to develop new products and services and introduce service in additional markets. We offer customized design, development, implementation and support...

  • Page 9
    ... Sprint PCS Connection CardsTM. The services supported by this technology, marketed as Power Vision, give consumer and business customers access to numerous sophisticated applications using EV-DO-capable devices, including mobile desktop, data messaging, imaging, entertainment and location-based...

  • Page 10
    ... video and high performance walkie-talkie applications for our CDMA network. The cell site equipment used in the CDMA network often resides on communications towers. In May 2005, we closed a transaction whereby we provided Global Signal Inc. with the exclusive rights to lease or operate about 6,500...

  • Page 11
    ...on our differentiated service offerings and products, including our Power Vision applications and push-to-talk walkie-talkie feature. Several of our competitors offer high-speed data, imaging, entertainment and location-based services and walkie-talkie-type features that are designed to compete with...

  • Page 12
    ... data communications using various protocols such as MPLS technologies, as well as IP, ATM, frame relay and managed network services and voice services. We also provide services to cable MSOs that resell our long distance service and/or use our back office systems and network assets in support...

  • Page 13
    ... GHz PCS licenses utilized in our CDMA network, and 800 MHz and 900 MHz licenses utilized in our iDEN network. We also hold 2.1 GHz BRS licenses, 2.5 GHz BRS licenses, and we lease use of 2.5 GHz BRS and EBS licenses held by others, for our first generation fixed wireless Internet access service. We...

  • Page 14
    ... wireless Internet access services to homes and small businesses using "first generation" line-of-sight technology. This service operates across the country in 14 markets with approximately 16,500 subscribers. We operate our network and a third party provides customer care. In 2004, the FCC ordered...

  • Page 15
    ... problems. In 2004, following a rulemaking to consider proposals to solve the public safety interference issue, the FCC adopted a Report and Order that included new rules regarding interference in the 800 MHz band and a comprehensive plan to reconfigure the 800 MHz band. In February 2005, Nextel...

  • Page 16
    ...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 being made. Phase II requires the transmission of more accurate location information using latitude...

  • Page 17
    ... our billing and customer service costs could increase. Homeland Security Homeland security issues are receiving attention at the FCC, from the states and in Congress. The FCC chairman has created a new FCC bureau devoted to this area. We expect that increased scrutiny of wireless carriers' networks...

  • Page 18
    ... interconnected VoIP providers to offer E911 emergency calling capabilities to their subscribers. High-speed Internet Access Services Following a June 2005 U.S. Supreme Court decision affirming the FCC's classification of cable modem Internet access service as an "information service" and declining...

  • Page 19
    ... services provided in high-cost areas, reduced-rate services to low-income consumers, and discounted communications and Internet services for schools, libraries and rural health care facilities. The USF is funded from assessments on communications providers, including our Wireless and Long Distance...

  • Page 20
    ... program to file applications for trademarks, service marks and patents where we believe this protection is appropriate. "Sprint," "Power Vision," "Sprint PCS," "Nextel" and "Boost Mobile" are among our trademarks. Our services often use the intellectual property of others, such as licensed software...

  • Page 21
    ...; and addressing differences in business cultures, preserving employee morale and retaining key employees, while maintaining focus on providing consistent, high quality customer service and meeting our operational and financial goals. k k k k k The process of integrating Nextel's operations with...

  • Page 22
    ...the distribution fails to qualify for tax-free treatment, it will be treated as a taxable distribution to our shareholders in an amount equal to the fair market value of Embarq's equity securities (i.e., Embarq's common stock issued to our common shareholders) received by them. In addition, we would...

  • Page 23
    ... our average revenue per user, subscriber churn, ability to attract new subscribers, and operating costs. For example, AT&T and Verizon now offer competitively-priced wireless services packaged with local and long distance voice and high-speed Internet services, and our Boost Mobile-branded prepaid...

  • Page 24
    ... 3 Communications, and cable operators, as well as a host of smaller competitors, in the provision of wireline services. Some of 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...

  • Page 25
    ...to both CDMA and iDEN network equipment and handsets may continue to be higher than the comparable costs incurred by our competitors who use GSM technology, which places us at a competitive disadvantage. The blurring of the traditional dividing lines between long distance, local, wireless, video and...

  • Page 26
    ... to new and existing customers. These increased costs and handset subsidy expenses may reduce our growth and profitability. Also, we must rely on Motorola to develop handsets and equipment capable of supporting the features and services we plan to offer to subscribers of services on our iDEN network...

  • Page 27
    ... about health risks associated with wireless equipment may reduce the demand for our services. Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. Purported class actions and other lawsuits have been filed...

  • Page 28
    ...other assets. Additional information regarding our commitments related to operating leases can be found in note 13 of the Notes to Consolidated Financial Statements appearing at the end of this annual report on Form 10-K. Item 3. Legal Proceedings In March 2004, eight purported class action lawsuits...

  • Page 29
    ... officers and directors. Office Name Age Chairman, Chief Executive Officer and President ...Chief Financial Officer ...General Counsel ...Chief Information Officer ...Chief Network Officer ...Chief Technology Officer ...President - Sales & Distribution ...President - Customer Management ...Senior...

  • Page 30
    ...-Network Operations of the Long Distance segment from 2002 to October 2003. She served as a Vice President in the Long Distance segment from 1998 to 2002. (6) Mr. West was appointed Chief Technology Officer at the time of the Sprint-Nextel merger in August 2005. He was appointed President, 4G Mobile...

  • Page 31
    ... per outstanding share on our common stock, Series 1 and the common stock, Series 2 in each of the first two quarters of 2005. Sale of Unregistered Equity Securities In December 2006, we issued to certain of our directors and executive officers an aggregate of 995 restricted stock units relating to...

  • Page 32
    ... of equity securities during the fourth quarter 2006 were pursuant to our share repurchase program and the terms of our equity compensation plans: the Management Incentive Stock Option Plan, the 1997 Long-Term Stock Incentive Program, and the Nextel Incentive Equity Plan; and the terms of the equity...

  • Page 33
    ... Leap Wireless International Inc., Leucadia National Corp., Level 3 Communications Inc., NII Holdings Inc., Qwest Communications International Inc., RCN Corp., Sprint Nextel, Telephone & Data Systems Inc., Time Warner Telecom, Inc., U.S. Cellular Corp., Verizon Communications Inc., Virgin Media Inc...

  • Page 34
    ... ...Financial Position Total assets ...Property, plant and equipment, net ...Intangible assets ...Total debt and capital lease obligations (including equity unit notes) ...Seventh series redeemable preferred shares ...Shareholders' equity ...Cash flow data Net cash provided by continuing operations...

  • Page 35
    ... 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. (4) In 2005, we recorded a charge of $16 million due to the adoption of Financial Accounting...

  • Page 36
    ... related to our business operations, including a significant adverse change in Motorola, Inc.'s ability or willingness to provide handsets and related equipment and software applications, or to develop new technologies or features for our integrated Digital Enhanced Network, or iDEN», network...

  • Page 37
    ... services to meet their specific needs. We are one 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. Nextel Merger and Local Communications Business...

  • Page 38
    ... of wireless mobile telephone and wireless data transmission services on networks that utilize CDMA and iDEN technologies to meet the needs of individual consumers, businesses and government customers. Through our Wireless segment, we, together with the four remaining PCS Affiliates, offer digital...

  • Page 39
    ...-art technology to provide differentiated wireless services and applications in order to acquire and retain high-quality wireless subscribers. We offer numerous sophisticated data messaging, imaging, entertainment and location-based applications, marketed as Power VisionSM, across our CDMA network...

  • Page 40
    ... data transport speeds using our spectrum holdings in the 2.5 gigahertz, or GHz, band and technology based on the Worldwide Inter-Operability for Microwave Access, or WiMAX, standard. We are designing this network to support a wide range of high-speed IP-based wireless services. Our initial plans...

  • Page 41
    ... business from merger-related cost savings and other synergies. In February 2005, Nextel accepted the terms and conditions of the Report and Order, which implemented a spectrum reconfiguration plan designed to eliminate interference with public safety operators in the 800 MHz band. Under the terms...

  • Page 42
    ...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 MSOs and Internet service providers...

  • Page 43
    ... on the accounts receivable reported on our balance sheet and our results of operations could be material to our financial condition. Inventories Inventories of handsets and accessories in the Wireless segment and inventories in the Long Distance segment are stated at the lower of cost or market. We...

  • Page 44
    ... date of the Sprint-Nextel merger on a straight-line basis. We continually assess whether any indicators of impairment exist that would trigger a test of any of these definite lived intangible assets, including, but not limited to, a significant decrease in the market price of the asset, cash flows...

  • Page 45
    ... difference. When required, we test other indefinite lived intangibles for impairment by comparing the asset's respective carrying value to estimates of fair value, determined using the direct value method. Our FCC licenses are combined as a single unit of accounting following the unit of accounting...

  • Page 46
    ...process of evaluating the impact of this statement on our consolidated financial statements. In September 2006, the EITF reached a consensus on Issue No. 06-1, Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive...

  • Page 47
    ... "- Long Distance" below. We generally account for transactions between segments based on fully distributed costs, which we believe approximate fair value. In certain transactions, pricing is set using market rates. Consolidated Our operating results for 2006 include the results of Nextel Partners...

  • Page 48
    ... asset impairment charge related to our long distance network. In addition, income (loss) from continuing operations increased due to revenue growth as a result of the business combinations discussed above, partially offset by increases to cost of service primarily due to higher volume in roaming...

  • Page 49
    ...activation fees, directory assistance, operator-assisted calling, equipment protection, late payment charges and certain regulatory related fees. Service revenues increased 61% in 2006 as compared to 2005 primarily due to the Sprint-Nextel merger and other acquisitions and the increase in the number...

  • Page 50
    ... particularly data-related services, including those available under our Sprint Power Vision service plans, and other non-voice services, such as instant messaging and emails, sending and receiving pictures, playing on-line games and browsing the Internet wirelessly; and • selected handset pricing...

  • Page 51
    ... of Nextel Partners and the PCS Affiliates. We expect the aggregate amount of cost of service to increase as customer usage of our networks increases and we add more sites and other equipment to expand the coverage and capacity of our CDMA and iDEN networks. See " - Forward-Looking Statements...

  • Page 52
    ... outstanding accounts receivable was 9% in 2006 and 7% in 2005; • an increase in our customer care expenses related to call volume increases due to a larger subscriber base and to increases in customer retention efforts; and • an increase in information technology and billing expenses to support...

  • Page 53
    .... Voice revenues related to our wholesale business increased about 25% from 2005 to 2006. Minute volume increases drove about 86% of this increase, primarily as a result of our relationship with Embarq and several large cable MSOs, to which we provide local and long distance communications services...

  • Page 54
    ... the provision of services to Wireless subscribers represented 17% of total voice revenues in 2006 compared to 14% in 2005. Data Revenues Data revenues reflect sales of legacy data services, including ATM, frame relay and managed network services. Data revenues decreased 12% in 2006 as compared to...

  • Page 55
    ... of the common customer interfacing systems, processes and other integration planning and execution costs, and costs related to employee retention. These merger and integration costs primarily relate to the Sprint-Nextel merger and have been included with unallocated corporate selling, general and...

  • Page 56
    ... the value of customer relationships and other definite lived intangible assets acquired in connection with the Sprint-Nextel merger and the PCS Affiliate and Nextel Partners acquisitions. See note 7 to the Notes to Consolidated Financial Statements appearing at the end of this annual report on Form...

  • Page 57
    ..., net of cash used to purchase the acquired entities. Additional information regarding the impact of the spin-off and the business combinations on consolidated assets can be found in notes 2 and 3 of the Notes to Consolidated Financial Statements at the end of this annual report on Form 10-K. See...

  • Page 58
    ... and dividing the exercise price by the same number in order to account for the impact of the spin-off on the value of our shares at the time the spin-off was completed. Generally, restricted stock units awarded pursuant to our equity incentive plans and held by our employees at the time of the spin...

  • Page 59
    ...in part related to spending on our iDEN network acquired in the Sprint-Nextel merger. We invested in our Wireless segment primarily to enhance network reliability, meet capacity demands and upgrade capabilities for providing new products and services, including the deployment of EV-DO technology, as...

  • Page 60
    ... and marketable securities, our working capital consists of accounts receivable, handset and accessory inventory, prepaid expenses, deferred tax assets and other current assets, net of accounts payable, accrued expenses and the current portion of long-term debt and capital lease obligations...

  • Page 61
    ... based on management's expectations for future interest rates. (2) Represents capital lease payments including interest. (3) Includes future lease costs related to sites, switches, offices, retail stores, circuits, towers and spectrum. (4) Excludes $3.6 billion of blanket purchase orders. See below...

  • Page 62
    ... wireless network; anticipated payments under the Report and Order; declared and anticipated dividend payments, scheduled debt service requirements and purchases of our common shares pursuant to our share repurchase program; merger and integration costs associated with the Sprint-Nextel merger...

  • Page 63
    ... on the underlying senior notes. On December 31, 2006, the rate we would pay averaged 8.3% and the rate we would receive was 7.2%. Assuming a one percentage point increase in the prevailing forward yield curve, the fair value of the interest rate swaps and the underlying senior notes would change by...

  • Page 64
    ... information regarding our derivative instruments can be found in note 10 of the Notes to Consolidated Financial Statements appearing at the end of this annual report on Form 10-K. In certain business transactions, we are granted warrants to purchase the securities of other companies at fixed rates...

  • Page 65
    ... assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006. The accounts of Nextel Partners represent about 2% of our $97.2 billion in total assets and 2% of our $41.0 billion in net operating revenues included in our consolidated financial statements...

  • Page 66
    ... Plan Information We have several equity compensation plans under which we may issue awards of shares of our common stock, or grant securities exercisable for or convertible into shares of our common stock, to employees and directors. These plans consist of the 1997 Long-Term Stock Incentive Program...

  • Page 67
    ...into account the shares of common stock issuable upon vesting of deferred shares issued under the Nextel Equity Plan. These deferred shares have no exercise price. (9) Under NYSE rules, awards of these shares may not be granted to employees who were employed by Sprint before the Sprint-Nextel merger...

  • Page 68
    ... Transactions" and "Election of Directors - Independence of Directors" in our proxy statement relating to our 2007 annual meeting of shareholders, which will be filed with the SEC. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to...

  • Page 69
    ... Financial Statement Schedules The consolidated financial statements of Sprint Nextel filed as part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule. The financial statement schedule of Sprint Nextel filed as part of this report is listed...

  • Page 70
    ... of 2007 Short-Term Incentive Plan. Sprint Nextel 2006-2007 Integration Overachievement Plan (filed as Exhibit 10.1 to Sprint Nextel's Current Report on Form 8-K filed February 22, 2006 and incorporated herein by reference). Sprint Nextel 1997 Long-Term Stock Incentive Program, as amended (filed...

  • Page 71
    ... Stock Units Award under the 1997 LongTerm Stock Incentive Program for retention awards made to certain executive officers (filed as Exhibit 10.2 to Sprint Nextel's Current Report on Form 8-K filed July 27, 2006 and incorporated herein by reference). Summary of 2007 Long-Term Incentive Plan...

  • Page 72
    ... stock options and restricted stock units) under the 1997 Long-Term Stock Incentive Program for 2007 for other executive officers. Nextel Amended and Restated Incentive Equity Plan (filed as Annex J to the joint proxy statement/prospectus included as part of Sprint Nextel's Registration Statement...

  • Page 73
    ... Nextel, Sprint/ United Management Company, and Len Lauer (filed as Exhibit 10(bb) to Sprint Nextel Annual Report on Form 10-K/A for the year ended December 31, 2001 and incorporated herein by reference). 10.34.2 First Amendment to the Employment Agreement of Len Lauer, dated October 26, 2006 (filed...

  • Page 74
    ... Bonus and Severance Pay Plan (filed as Exhibit 99.6 to Sprint Nextel's Current Report on Form 8-K filed August 18, 2005 and incorporated herein by reference). 10.51 Sprint Supplemental Executive Retirement Plan, as amended (filed as Exhibit 10(l) to Sprint Nextel's Annual Report on Form 10-K/A for...

  • Page 75
    ... have been omitted and filed separately with the SEC pursuant to a request for confidential treatment. Sprint Nextel will furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of long-term debt that do not exceed 10% of the total assets of Sprint Nextel. 73

  • Page 76
    ...duly authorized. SPRINT NEXTEL CORPORATION (Registrant) By /s/ GARY D. FORSEE Gary D. Forsee Chairman, Chief Executive Officer and President Date: March 1, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 77
    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 1st day of March, 2007. /s/ GARY D. FORSEE Gary D. ...

  • Page 78
    SPRINT NEXTEL CORPORATION Index to Consolidated Financial Statements and Financial Statement Schedule Page Reference Consolidated Financial Statements Management Report ...Reports of KPMG LLP, Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2006 and ...

  • Page 79
    ... 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 Sprint Nextel's internal auditors and independent registered public accounting firm...

  • Page 80
    ... Accounting for Conditional Asset Retirement Obligations, in the fourth quarter of 2005. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sprint Nextel Corporation's internal control over financial reporting...

  • Page 81
    ...assessment of the effectiveness of Sprint Nextel Corporation's internal control over financial reporting as of December 31, 2006, Nextel Partners, Inc.'s internal control over financial reporting. The accounts of Nextel Partners, Inc. represent about 2% of the total assets and net operating revenues...

  • Page 82
    SPRINT NEXTEL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2006 2005 (in millions, except share data) ASSETS Current assets Cash and cash equivalents ...Marketable securities ...Accounts receivable, net ...Inventories ...Deferred tax assets ...Prepaid expenses and other current assets ......

  • Page 83
    SPRINT NEXTEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2006 2005 2004 (in millions, except per share amounts) Net operating revenues ...Operating expenses Costs of services and products (exclusive of depreciation included below) ...Selling, general and ...

  • Page 84
    ... cash provided by operating activities ...Cash flows from investing activities Capital expenditures ...Expenditures relating to FCC licenses and other intangibles ...Proceeds from spin-off of local communications business, net ...Proceeds from sale of Embarq notes ...Cash acquired in Nextel merger...

  • Page 85
    ...of PCS common shares into voting common shares. (2) In 2004, voting common shares dividends were charged against paid-in capital in the quarterly period in which retained earnings were in a deficit position. (3) See note 17 for details of adoption of SAB No. 108. See Notes to Consolidated Financial...

  • Page 86
    ...sophisticated data messaging, imaging, entertainment and location-based applications, marketed as Power VisionSM, across our CDMA network that utilize high-speed evolution data optimized, or EV-DO, technology. We also offer digital wireless services under our Nextel» and Boost Mobile» brands using...

  • Page 87
    ... common shares...Employee benefit stock plans ...Earthlink common stock used to extinguish debt ...Investments $ - - 623 44 - $35,645 639 - 90 90 $ - - - 53 48 We record our investments in marketable equity securities at fair value as we consider them available-for-sale securities. Accordingly...

  • Page 88
    ...company data, the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the individual company and our intent and ability to hold the investment. We account for our 47% interest in Virgin Mobile USA using the equity method...

  • Page 89
    ... of capital assets totaled $113 million in 2006, $53 million in 2005 and $56 million in 2004. Repair and maintenance costs are expensed as incurred. We capitalize costs for network and non-network software developed or obtained for internal use during the application development stage. These costs...

  • Page 90
    ... difference. When required, we test other indefinite lived intangibles for impairment by comparing an asset's respective carrying value to estimates of fair value, determined using the direct value method. Our FCC licenses are combined as a single unit of accounting following the unit of accounting...

  • Page 91
    ... price is included in paid-in capital or retained earnings. Revenue Recognition Operating revenues primarily consist of wireless service revenues, revenues generated from handset and accessory sales and revenues from wholesale operators and PCS Affiliates, as well as long distance voice, data...

  • Page 92
    ..., media and other promotional and sponsorship costs. Advertising expenses totaled $1.6 billion in 2006, $1.4 billion in 2005, and $923 million in 2004. Share-Based Compensation We measure the cost of employee services received in exchange for an award of equity-based securities using the fair value...

  • Page 93
    ... calculation of diluted earnings per common share in 2004 as the exercise prices exceeded the average market price during this period. Significant New Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value and establishes...

  • Page 94
    .... Embarq provides a suite of communications services, consisting of local and long distance voice and data services, including high-speed Internet access. As required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and as permitted by SFAS No. 95, Statement of Cash...

  • Page 95
    ... and dividing the exercise price by the same number in order to account for the impact of the spin-off on the value of our shares at the time the spin-off was completed. Generally, restricted stock units awarded pursuant to our equity incentive plans and held by our employees at the time of the spin...

  • Page 96
    ...services under our Sprint and Nextel brands, and would provide us with the strategic and financial benefits associated with a larger customer base and expanded network coverage. During the same period, we also acquired Velocita Wireless Holdings Corporation, primarily to increase our licenses to use...

  • Page 97
    ... we also assumed $1.2 billion in long-term debt and capital lease obligations. As a result of this acquisition, our investments were reduced by $2.4 billion. Velocita Wireless Holding Corporation On February 21, 2006, we acquired 94% of the voting shares of Velocita Wireless for $157 million in cash...

  • Page 98
    ... information regarding intangible assets. Sprint-Nextel Merger On August 12, 2005, a subsidiary of ours merged with Nextel and, as a result, we acquired 100% of the outstanding common shares of Nextel. Nextel, now a wholly owned subsidiary of Sprint Nextel, provides wireless voice and data services...

  • Page 99
    ... purchase accounting adjustments related to this acquisition, except when required by certain accounting rules. See note 7 for information regarding the useful lives of acquired definite lived intangible assets as well as other information regarding intangible assets. 2005 PCS Affiliate Acquisitions...

  • Page 100
    ... and in the aggregate. Note 4. Share-Based Compensation Share-Based Payment Plans Under the 1997 Long-Term Stock Incentive Program, or the 1997 Program, we can grant options, restricted shares and restricted stock units and other equity-based awards to directors and employees for up to about 180...

  • Page 101
    ... shares and options granted prior to the Sprint-Nextel merger as a result of the Sprint-Nextel merger. We do not intend to grant any more awards under this plan. Under the Management Incentive Stock Option Plan, or MISOP, before 2003 we granted stock options to employees eligible to receive annual...

  • Page 102
    ... of Financial Accounting Standards No. 123R Effective January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment, which revises SFAS No. 123. SFAS No. 123R requires us to measure the cost of employee services received in exchange for an award of equity-based securities using the fair value of...

  • Page 103
    ...and the contractual term. Our options include options granted under the 1997 Program, the MISOP and the Nextel Incentive Equity Plan, as discussed above. 2006(1) 2005 FON(2) Common Stock 2004 PCS(2) Common Stock Weighted average grant date fair value ...$ 6.97 Risk free interest rate...4.53% - 5.21...

  • Page 104
    ... period of 1.72 years. The total intrinsic value of options exercised was $264 million during 2006, $267 million during 2005 and $64 million during 2004. Restricted Stock Units The fair value of each restricted stock unit award is calculated using the share price at the date of grant. A summary...

  • Page 105
    ... under the 1997 Program and deferred shares granted under the Nextel Incentive Equity Plan, as discussed above. The fair value of each nonvested share award is calculated using the share price at the date of grant. A summary of the status of nonvested share awards as of December 31, 2006 and changes...

  • Page 106
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 2006 2005 (in millions) Prepaid expenses and other current assets Receivable under securities loan agreements (see note 10) ...Prepaid expenses ...Deferred charges ...Other ... $ 866 407 74 202 $ - ...

  • Page 107
    ...market data information and valuation methodologies Available market prices and estimates using 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, 2006 and 2005. Pursuant to the terms of the Report...

  • Page 108
    ... protect the use of our brands. We hold several kinds of FCC licenses to deploy our services: 1.9 GHz PCS licenses utilized in our CDMA network, 800 MHz and 900 MHz licenses utilized in our iDEN network, and 2.5 GHz licenses that we use for first generation wireless Internet access services. We also...

  • Page 109
    ... reconfiguration plan designed to eliminate interference with public safety operators in the 800 MHz band. Under the terms of the Report and Order, Nextel surrendered certain spectrum rights and received certain other spectrum rights, and undertook to pay the costs incurred by Nextel and third...

  • Page 110
    ... and equipment or as additions to the FCC licenses intangible asset, consistent with our accounting policies. The following table represents expenditures incurred directly attributable to our performance under the Report and Order from the inception of the program: Through December 31, 2005 2006...

  • Page 111
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Severance and Lease Exit Costs Activity In connection with the ongoing merger and integration cost rationalization projects, which began in the second half of 2005, we continue to align our internal resources to ...

  • Page 112
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Exit Costs Associated with Business Combinations We continue to finalize our plans for rationalizing certain redundant assets and activities, such as facilities, software and infrastructure assets related to certain ...

  • Page 113
    ... ...Long-term debt and capital lease obligations ... (5,045) $19,969 (1) Includes debt acquired in connection with the PCS Affiliate and Nextel Partners acquisitions as discussed in note 3. Sprint Nextel, the parent corporation, has about $2.7 billion of debt outstanding, including commercial paper...

  • Page 114
    ... rate related to our senior notes was 7.1% in 2006 and 2005. The effective interest rate includes the effect of interest rate swap agreements accounted for as fair value hedges. See note 10 for more details regarding interest rate swaps. Equity Unit Notes In 2001, we completed a registered offering...

  • Page 115
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Bank Credit Facilities Our bank credit facility provides for total unsecured financing capacity of $6.0 billion. As of December 31, 2006, we had $2.6 billion of outstanding letters of credit, including a $2.5 billion ...

  • Page 116
    ... NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Capital Lease Obligations and Other As of December 31, 2006, we had $106 million in capital lease obligations, primarily for the use of communication switches. In December 2005, we terminated two accounts receivable asset...

  • Page 117
    ...results from net payments made to and received from overseas communications companies for completing international calls made by our domestic customers and the operations of our international subsidiaries. Interest Rate Derivatives As of December 31, 2006, we held fair value interest rate swaps with...

  • Page 118
    ... benefits on a shared-cost basis. We also provide postretirement life insurance to employees who retired before certain dates. We fund the accrued costs as benefits are paid. At the time of the Sprint-Nextel merger, we did not extend plan participation in the retiree medical plan to Nextel employees...

  • Page 119
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As of May 17, 2006, in connection with the spin-off of Embarq, the accrued postretirement benefit obligation for participants designated to work for Embarq and the related plan assets were transferred to Embarq. This ...

  • Page 120
    ... statements of operations. In 2006, all pension service costs are attributable to the Local segment as our pension benefits for continuing Sprint Nextel employees were frozen as of December 31, 2005. Benefit Obligations The actuarial assumptions used to compute the funded status for the plans...

  • Page 121
    ...2005. Plan Assets The plan assets of the pension plan are currently used for the payment of pension benefits. The plan assets exceed the actuarial present value of pension benefits to be paid over the next fiscal year. Therefore, the entire liability for pension benefits is classified as a long-term...

  • Page 122
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table summarizes the change in the fair value of plan assets for the pension and postretirement benefit plans for the years ended December 31, 2006 and 2005: Postretirement Pension Plan Benefit Plan Year...

  • Page 123
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table illustrates the effect of applying SFAS No. 158 on individual line items in our consolidated balance sheet as of December 31, 2006: Pension Plan Prior to Adoption of SFAS No. 158 Adjustments As of ...

  • Page 124
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Year Ended December 31, 2005 The funded status and amounts recognized on the accompanying consolidated balance sheet for the plans were as follows: Postretirement Pension Plan Benefit Plan (in millions) Projected ...

  • Page 125
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Expected Cash Flows The following pension and postretirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions): Pension Plan Postretirement Benefit Plan ...

  • Page 126
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Note 12. Income Taxes Year Ended December 31, 2006 2005 2004 (in millions) Income tax expense (benefit) allocated to continuing operations consists of the following: Current income tax expense (benefit) Federal ......

  • Page 127
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Income tax expense (benefit) allocated to other items was as follows: Year Ended December 31, 2006 2005 2004 (in millions) Discontinued operations ...Cumulative effect of change in accounting principle ......

  • Page 128
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) deferred income tax assets and liabilities at December 31, 2006 and 2005, along with the income tax effect of each, were as follows: December 31, 2006, December 31, 2005, Current Long-Term Current Long-Term (in ...

  • Page 129
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As of December 31, 2006, we had federal operating loss carryforwards of $4.0 billion and state operating loss carryforwards of $11.2 billion. Related to these loss carryforwards are federal tax benefits of $1.4 ...

  • Page 130
    ... On February 7, 2005, Nextel accepted the terms 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, Nextel surrendered its...

  • Page 131
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As of December 31, 2006, our rental commitments for operating leases, including lease renewals that are reasonably assured, consisted mainly of leases for cell and switch sites, real estate, data processing equipment ...

  • Page 132
    ...revenue from domestic and international wireline voice and data communication services and services to the cable multiple systems operators, or MSOs, that resell our long distance service and/or use our back office systems and network assets in support of their telephone services provided over cable...

  • Page 133
    ...value. In certain transactions, pricing is set using market rates. Segment financial information is as follows: Statement of Operations Information Wireless Long Distance Corporate and Eliminations(1) (in millions) Consolidated 2006 Net operating external revenues ...Inter-segment revenues ...Total...

  • Page 134
    ... FINANCIAL STATEMENTS - (Continued) Long Distance Corporate and Eliminations(1) (in millions) Wireless Consolidated 2004 Net operating external revenues ...Inter-segment revenues ...Total segment operating expenses ...Segment earnings ...Less: Depreciation ...Amortization ...Severance, lease...

  • Page 135
    ... Wireless Long Distance Corporate and Eliminations(1) (in millions) Consolidated 2006 Wireless services ...$31,059 Wireless equipment ...3,197 Voice ...Data ...Internet...Other ...859 Total net operating revenues ...$35,115 2005 Wireless services ...$19,289 Wireless equipment ...2,147 Voice ...Data...

  • Page 136
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Quarter 2nd 3rd(1) 4th (in millions, except per share data) 1st 2006 Net operating revenues ...Operating income ...Income from continuing operations ...Net income ...Basic earnings per common share from continuing ...

  • Page 137
    ... stock outstanding of 518.5 million shares as of April 23, 2004. As of April 23, 2004, the FON Group and the PCS Group ceased to exist. Our common stock now represents all of our operations and assets, including our Wireless and Long Distance segments. The consolidated financial statements reflect...

  • Page 138
    SPRINT NEXTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) or group announces a tender or exchange offer for 15% or more of the voting power. These rights expire on June 25, 2007 unless extended or earlier redeemed. Accumulated Other Comprehensive Loss The components of ...

  • Page 139
    ...31, 2006. Severance In 2007, we expect to substantially complete the transition to unified customer care, financial systems, device activation, billing and service platforms as a further step to completing our integration initiatives associated with the Sprint-Nextel merger and the PCS Affiliate and...

  • Page 140
    ... accounts consist of receivable reserves for billing and collection services we provide for certain PCS Affiliates. Uncollectible accounts are recovered from affiliates. In 2005 and 2006, the amounts include the allowance recorded in the merger of Nextel and the PCS Affiliate and Nextel Partners...