e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
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
|
o
|
|
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
|
|
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)
|
Registrants 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 þ No o
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 o No
þ
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 þ
No o
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
registrants 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.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer.
|
|
|
|
|
Large accelerated
filer þ
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act.) Yes o No
x
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 registrants 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 Registrants fiscal year
ended December 31, 2006, are incorporated by reference in
Part III hereof.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Item
|
|
|
|
Page
|
|
PART I
|
1.
|
|
Business
|
|
|
1
|
|
1A.
|
|
Risk Factors
|
|
|
19
|
|
1B.
|
|
Unresolved Staff Comments
|
|
|
26
|
|
2.
|
|
Properties
|
|
|
26
|
|
3.
|
|
Legal Proceedings
|
|
|
26
|
|
4.
|
|
Submission of Matters to a Vote of
Security Holders
|
|
|
27
|
|
|
PART II
|
5.
|
|
Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
|
|
|
29
|
|
6.
|
|
Selected Financial Data
|
|
|
32
|
|
7.
|
|
Managements Discussion and
Analysis of Financial Condition and Results of Operations
|
|
|
33
|
|
7A.
|
|
Quantitative and Qualitative
Disclosures about Market Risk
|
|
|
61
|
|
8.
|
|
Financial Statements and
Supplementary Data
|
|
|
62
|
|
9.
|
|
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
|
|
|
63
|
|
9A.
|
|
Controls and Procedures
|
|
|
63
|
|
9B.
|
|
Other Information
|
|
|
64
|
|
|
PART III
|
10.
|
|
Directors, Executive Officers and
Corporate Governance
|
|
|
64
|
|
11.
|
|
Executive Compensation
|
|
|
64
|
|
12.
|
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
|
|
|
64
|
|
13.
|
|
Certain Relationships and Related
Transactions, and Director Independence
|
|
|
66
|
|
14.
|
|
Principal Accountant Fees and
Services
|
|
|
66
|
|
|
PART IV
|
15.
|
|
Exhibits and Financial Statement
Schedules
|
|
|
67
|
|
See pages 27 and 28 for Executive Officers of the
Registrant
SPRINT
NEXTEL CORPORATION
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM
10-K
Part I
Item 1. Business
Overview
The
Corporation
Sprint Nextel Corporation, incorporated in 1938 under the laws
of Kansas, is mainly a holding company, with its operations
primarily conducted by its subsidiaries. Unless the context
otherwise requires, references to Sprint Nextel,
we, us and our mean Sprint
Nextel Corporation and its subsidiaries. On May 17, 2006,
we spun-off to our shareholders our local communications
business, which is now known as Embarq Corporation and is
comprised primarily of what was our Local segment prior to the
spin-off. The results of Embarq for periods before the spin-off
are presented as discontinued operations and we have recast
information for our Wireless and Long Distance segments for the
periods presented. For information regarding our segments, see
note 14 of the Notes to Consolidated Financial Statements
at the end of this annual report on
Form 10-K.
On August 12, 2005, a subsidiary of our company merged with
Nextel Communications, Inc. and, as a result, we acquired Nextel.
We are a global communications company offering a comprehensive
range of wireless and wireline communications products and
services that are designed to meet the needs of individual
consumers, businesses and government customers. We have
organized our operations to meet the needs of our targeted
customer groups through focused communications solutions that
can incorporate the capabilities of our wireless and wireline
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.
We offer digital wireless service in all 50 states, Puerto Rico
and the U.S. Virgin Islands, in part through commercial
affiliation arrangements between us and third-party affiliates,
each referred to as a PCS Affiliate. We, together with the four
remaining PCS Affiliates and resellers of our wholesale wireless
services, served about 53.1 million wireless subscribers at
the end of 2006.
We, together with the PCS Affiliates, provide wireless code
division multiple access, or CDMA, based personal communications
services, or PCS, under the
Sprint®
brand name. The PCS Affiliates offer digital wireless service
mainly in and around smaller U.S. metropolitan areas on wireless
networks built and operated at their expense, in most instances
using spectrum licensed to and controlled by us. We also offer
numerous sophisticated data messaging, imaging, entertainment
and location-based applications, marketed as Power
VisionSM,
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 integrated Digital Enhanced Network, or
iDEN®,
technology. Both brands feature our industry-leading
walkie-talkie services, which give subscribers the ability to
communicate instantly, as well as a variety of digital wireless
mobile telephone and wireless data transmission services.
We are one of the nations largest providers of long
distance services and one of the largest carriers of Internet
traffic. We operate an all-digital long distance and
Tier 1, Internet Protocol, or IP, network, over which we
provide a broad suite of wireline communications services
targeted to domestic business customers, multinational
corporations and other communications companies. These services
include domestic and international data communications using
various protocols such as multi-protocol label switching, or
MPLS, technologies, IP, asynchronous transfer mode, or ATM,
frame relay, managed network services and voice services. We
also provide switching and back office services to cable
companies, which enable them to provide local and long distance
telephone service over their cable facilities.
1
Our Series 1 voting common stock trades on the New York
Stock Exchange, or NYSE, under the symbol S.
Local
Communications Business Spin-off
On May 17, 2006, we completed the spin-off of
Embarq. In the spin-off, we distributed pro rata to
our shareholders one share of Embarq common stock for every
20 shares of our voting and non-voting common stock, or
about 149 million shares of Embarq common stock. Cash was
paid for fractional shares. The distribution of Embarq common
stock is considered a tax free transaction for us and for our
shareholders, except for cash payments made in lieu of
fractional shares which are generally taxable.
In connection with the spin-off, Embarq transferred to our
parent company $2.1 billion in cash and about
$4.5 billion of Embarq senior notes in partial
consideration for, and as a condition to, our transfer to Embarq
of the local communications business. Embarq also retained about
$665 million in debt obligations of its subsidiaries. Our
parent company transferred the cash and senior notes to our
finance subsidiary, Sprint Capital Corporation, in satisfaction
of indebtedness owed by our parent company to Sprint Capital. On
May 19, 2006, Sprint Capital sold the Embarq senior notes
to the public, and received about $4.4 billion in net
proceeds.
In connection with the spin-off, we entered into a separation
and distribution agreement and related agreements with Embarq,
which provide that generally each party will be responsible for
its respective assets, liabilities and businesses following the
spin-off and that we and Embarq will provide each other with
certain transition services relating to our respective
businesses for specified periods at cost-based prices. We also
entered into agreements pursuant to which we and Embarq will
provide each other with specified services at commercial rates.
Further, the agreements provide for a settlement process
surrounding the transfer of certain assets and liabilities. It
is possible that adjustments will occur in future periods as
these matters are settled.
Business
Combinations
On August 12, 2005, a subsidiary of ours merged with Nextel
and, as a result, we acquired Nextel. The aggregate
consideration paid for the merger was about $37.8 billion,
which consisted of $969 million in cash and
1.452 billion shares of Sprint Nextel voting and non-voting
common stock, or $0.84629198 in cash and 1.26750218 shares
of 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, the size and scale of the
combined company and the opportunity to focus on the fastest
growing areas of the communications industry. We also believe
that the merger provides significant opportunities to achieve
operating efficiencies by realizing revenue, operating cost and
capital spending synergies.
We have begun to realize cost savings as a result of the merger
and, over a number of years, expect to continue to realize
significant cost savings and other synergies associated with the
merger. However, we believe that our operating results for at
least the next several quarters will be impacted negatively by
costs that will be incurred to achieve these benefits and other
synergies. Such costs generally are not expected to be recurring
in nature, and include costs associated with integrating back
office systems, severance costs associated with the termination
of the employment of certain employees, and lease and other
contract termination costs. The ability to achieve these cost
savings and other synergies, and the timing in which the
benefits can be realized, will depend in large part on the
ability to integrate our networks, business operations,
back-office functions and other support systems and
infrastructure.
In 2005 and 2006, we acquired six entities, each of which had
been a PCS Affiliate until the time of its acquisition:
|
|
|
|
|
US Unwired, Inc., which, at the time of acquisition, provided
wireless service to more than 500,000 direct subscribers in nine
Southeast region states;
|
|
|
|
Gulf Coast Wireless Limited Partnership, which, at the time of
acquisition, provided wireless service to more than 95,000
direct subscribers in southern Louisiana and Mississippi;
|
2
|
|
|
|
|
IWO Holdings, Inc., which, at the time of acquisition, provided
wireless service to more than 240,000 direct subscribers in five
Northeast region states;
|
|
|
|
Enterprise Communications Partnership, which, at the time of
acquisition, provided wireless service to more than 50,000
direct subscribers in Alabama and Georgia;
|
|
|
|
Alamosa Holdings, Inc., which, at the time of acquisition,
provided wireless service to more than 1.5 million direct
subscribers in 19 states; and
|
|
|
|
UbiquiTel Inc., which, at the time of acquisition, provided
wireless service to more than 450,000 direct subscribers in nine
states.
|
Also, in 2006 we acquired:
|
|
|
|
|
Nextel Partners, Inc., which at the time of acquisition,
provided Nextel-branded wireless service to more than
2.0 million subscribers in certain mid-sized and tertiary
U.S. markets; and
|
|
|
|
Velocita Wireless Holding Corporation, which owns and operates a
nationwide digital packet-switched wireless data network and
holds licenses to use wireless spectrum in the 900 megahertz, or
MHz, band.
|
The acquisitions of the PCS Affiliates and Nextel Partners gave
us more 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. We believe that the acquisitions also
will facilitate the integration relating to the Sprint-Nextel
merger by allowing us to provide consistent service offerings
and customer experiences across a wider geographic area. We
acquired Velocita Wireless primarily to increase our holdings 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-Q,
current reports on
Form 8-K,
and amendments to these reports filed with the Securities and
Exchange Commission, or SEC, under the Securities Exchange Act
of 1934. These documents may be accessed free of charge on our
website at the following address: www.sprint.com/sprint/ir.
These documents are provided promptly after filing with the SEC.
These documents also may be found at the SECs website at
www.sec.gov.
We also provide public access to our Code of Ethics, entitled
the Sprint Nextel Code of Conduct, our Corporate Governance
Guidelines and the charters of the following committees of our
board of directors: the Audit Committee, the Human Capital and
Compensation Committee, the Executive Committee, the Finance
Committee, and the Nominating and Corporate Governance
Committee. The Code of Conduct, corporate governance guidelines
and committee charters may be viewed free of charge on our
website at the following address: www.sprint.com/governance. You
may obtain copies of any of these documents free of charge by
writing to: Sprint Nextel Investor Relations, 2001 Edmund Halley
Drive, Reston, Virginia 20191. If a provision of the Code of
Conduct required under the NYSE corporate governance standards
is materially modified, or if a waiver of the Code of Conduct is
granted to a director or executive officer, we will post a
notice of such action on our website at the following address:
www.sprint.com/governance. Only the Audit Committee may consider
a waiver of the Code of Conduct for an executive officer or
director.
Certifications
The certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 are attached as Exhibits 31.1,
31.2, 32.1 and 32.2 to this annual report. We also filed with
the NYSE in 2006 the required certificate of our Chief Executive
Officer certifying that he was not aware of any violation by
Sprint Nextel of the NYSE corporate governance listing standards.
3
Our
Business Segments
Wireless
We offer a wide array of wireless mobile telephone and wireless
data transmission services on networks that utilize CDMA and
iDEN technologies.
Our strategy for the Wireless segment is to utilize
state-of-the-art
technology to provide differentiated wireless services and
applications in order to acquire and retain high-quality
wireless subscribers. To enable us to offer innovative
applications and services, we are deploying high-speed EV-DO
technology across our CDMA network. The services supported by
this technology, marketed as Power Vision, give our subscribers
with EV-DO-capable devices access to the Internet and numerous
sophisticated high-speed data messaging, imaging, entertainment
and location-based applications. Currently, EV-DO technology
covers nearly 209 million people and serves customers in
over 219 communities with populations of at least 100,000. We
also have begun to incorporate the next version of EV-DO
technology into our network, with plans for coverage across the
majority of the footprint of our CDMA network by the end of
2007. This version of EV-DO, known as EV-DO Rev. A, is designed
to support a variety of IP and video and high performance
walkie-talkie applications for our CDMA network.
In recent periods, we have experienced declines in the number of
new subscribers for our wireless services and increases in our
rate of subscriber churn. Customer satisfaction and churn have
been adversely impacted by capacity constraints on our iDEN
network as a result of a number of factors, including the
addition to the network in recent years of many high-call-volume
subscribers, limited effectiveness of the 6:1 voice coder
upgrade in the iDEN technology that was designed to increase
network capacity, and the impact of the reconfiguration process
under the Report and Order. In certain of our most capacity
constrained markets, we have had to take actions to limit the
acquisition of new subscribers of Nextel and Boost Mobile
branded services. Also, churn of subscribers of our CDMA
services remains high relative to our competitors, in large part
due to credit-related deactivations. In 2006, we reorganized our
sales and distribution and customer management operations to
improve customer satisfaction, adopted a regional sales,
service, and distribution structure to streamline operations,
increase productivity and move decision-making closer to the
customer, and tightened our credit policies for new subscribers
of both CDMA and iDEN services. In 2007, we:
|
|
|
|
|
are adding cell sites to improve network performance and expand
the coverage and capacity of our networks;
|
|
|
|
are increasing media expenditures to improve brand awareness;
|
|
|
|
have enhanced incentives to improve third-party sales
distribution and accelerate growth, and are implementing
customer retention programs that focus on our high-value
customers;
|
|
|
|
are adjusting our credit policies on a
market-by-market
basis in an effort to optimize the balance between new
subscribers who are of a prime and sub-prime quality;
|
|
|
|
are improving our handset portfolio across both our CDMA and
iDEN network platforms;
|
|
|
|
are helping to relieve capacity constraints on the iDEN network
and to offer subscribers of our iDEN services all of the
benefits of our applications on our CDMA network and our
walkie-talkie applications, by offering a new line of combined
CDMA-iDEN devices, marketed as PowerSourceTM, that feature voice
and data applications over our CDMA network and walkie-talkie
applications over our iDEN network, and we are expecting to
introduce PowerSource devices that also feature our Power Vision
data applications over our CDMA network; and
|
|
|
|
expect to substantially complete the integration of a number of
other systems, including human resources, general ledger, sales
commissions and billing. We believe that integration of these
systems onto single platforms will create efficiencies in the
way we do business, and, in the case of our billing
|
4
|
|
|
|
|
system, will increase functionality for our customer care
representatives and produce more reliable information, which
should enhance the customer experience.
|
In the future, we plan to utilize QUALCOMM Incorporateds
QChat®technology,
which is designed to provide high performance walkie-talkie
services on our CDMA network, and we are designing interfaces to
provide for interoperability of walkie-talkie services on our
CDMA and iDEN networks.
We also plan to deploy a next generation broadband wireless
network that will be designed to provide significantly higher
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 contemplate
deploying the new network in larger metropolitan areas with a
goal of launching the related service offerings in some of those
markets beginning in 2008.
Products
and Services
We offer a wide array of wireless mobile telephone and data
transmission services and features in a variety of pricing
plans, including prepaid service plans. Our wireless mobile
voice communications services include basic local and long
distance wireless voice services, as well as voicemail, call
waiting, three way calling, caller identification, directory
assistance, call forwarding, speakerphone and voice-activated
dialing features. Through a variety of roaming arrangements, we
provide roaming services to areas in numerous countries outside
the United States, including areas of Asia, New Zealand, Canada,
Central and South America and most major Caribbean islands.
Our data communications services include:
|
|
|
|
|
wireless imaging, including the ability to shoot and send
digital still pictures and video clips from a wireless handset;
|
|
|
|
wireless data communications, including Internet access and
messaging and email services;
|
|
|
|
on our CDMA network, wireless entertainment, including the
ability to view live television; listen to
Sirius®
satellite radio; download and listen to music from our Sprint
Music Store, a music catalog with thousands of songs from
virtually every music genre; and play games with full-color
graphics and polyphonic sounds all from a wireless handset; and
|
|
|
|
location-based capabilities, including asset and fleet
management, dispatch services and navigation tools.
|
We offer walkie-talkie services, which give subscribers with
iDEN-based devices the ability to communicate instantly across
the continental United States and to and from Hawaii. Also,
through agreements with third parties, subscribers with iDEN
devices can communicate instantly with our walkie-talkie feature
to and from selected areas in Canada, Latin America and Mexico.
Our walkie-talkie features 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, marketed as PowerSource, feature
voice services over our CDMA network and our walkie-talkie
applications over our iDEN network, giving users the benefits of
instant communications coupled with high quality voice services.
We expect to introduce PowerSource devices that feature our
Power Vision data applications over our CDMA network, giving
these users access to numerous sophisticated data applications.
Our services are provided using a wide variety of handsets and
personal computer wireless data cards manufactured by various
suppliers for use with our voice and data services. We generally
sell these devices at prices below our cost in response to
competition, to attract new customers and as retention
inducements for existing customers.
We sell accessories, such as carrying cases, hands-free devices,
batteries, battery chargers and other items to consumers, and we
sell handsets and accessories to agents and other third-party
distributors for resale.
5
We offer wholesale services on our CDMA network to resellers,
commonly known as mobile virtual network operators, or MVNOs.
MVNOs purchase wireless services from us at wholesale rates and
resell the services to their customers under their own brand
names. Under these MVNO arrangements, the operators bear the
costs of acquisition, billing and customer service. We currently
provide wholesale services, through multi-year, wholesale
agreements, to a number of MVNOs, including Embarq, Movida
Communications, Inc., Helio Inc., Qwest Communications
International, Inc., The Walt Disney Company and Virgin Mobile
USA. Virgin Mobile USA offers prepaid wireless service targeted
to the youth and prepaid markets and is a joint venture between
us and Virgin Group.
We provide wireless services that are marketed and sold by
several cable multiple systems operators, or MSOs, in four
markets. We entered into an agreement with several cable MSOs to
jointly develop converged services designed to combine many of
cables 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 service, to the participating cable
MSOs 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 services for wireless services provided to large
companies and government agencies.
|
|
|
Sales,
Marketing and Customer Care
|
We focus the marketing and sales of wireless services on
targeted groups of customers: individual consumers, businesses
and government customers. We offer a variety of pricing options
and plans, including plans designed specifically for business
customers, individuals and families. We use a variety of sales
channels to attract new subscribers of wireless services,
including:
|
|
|
|
|
direct sales representatives whose efforts are focused on
marketing and selling CDMA- and iDEN-based wireless services
primarily to mid-sized to large businesses and government
agencies that value our industry and technical expertise and
extensive product and service portfolio, as well as our ability
to develop custom communications capabilities that meet the
specific needs of these larger customers;
|
|
|
|
retail outlets that focus on sales to the consumer market,
including Sprint Nextel retail stores owned and operated by us,
as well as third-party retailers such as Radio Shack, Best Buy,
Target and Wal-Mart;
|
|
|
|
indirect sales agents that primarily consist of local and
national non-affiliated dealers and independent contractors that
market and sell services to small businesses and the consumer
market, and are generally paid through commissions; and
|
|
|
|
customer-convenient channels, including web sales and telesales.
|
We market our post-paid services under the Sprint and Nextel
brands. We offer these services on a contract basis typically
for one or two year periods, with services billed on a monthly
basis according to the applicable pricing plan. We market our
prepaid services under the Boost Mobile brand, as a means to
directly target the youth and prepaid wireless service markets.
Although we market our services using traditional print and
television advertising, we also provide exposure to our brand
names and wireless services through various sponsorships. We are
the title sponsor of the NASCAR NEXTEL Cup
Seriestm,
the premier national championship series of the National
Association for Stock Car Auto Racing, or
NASCAR®.
We are NASCARs official telecommunications sponsor, which
entitles us to a variety of branding, advertising, merchandising
and technology-related opportunities, many of which are
exclusive with NASCAR, its drivers and teams, and the racetrack
facilities. We also are the official telecommunications service
provider of the National Football League, or NFL, and the
provider of exclusive and original NFL-related content as part
of our Sprint-branded wireless service. The goal of these
initiatives, together with our other marketing initiatives,
which include affiliations with most major sports leagues, is to
increase brand awareness in our targeted customer base and
expand the use of our customer-convenient distribution channels:
web sales, telesales and retail stores.
6
Our customer management organization works to improve our
customers experience, with the goal of retaining
subscribers of our wireless services. Call centers, some of
which are operated by us and some of which are operated by
independent contractors, receive and respond to inquiries from
customers. Our goal is to improve the quality of our customer
care. We have implemented initiatives that are designed to
improve call center processes and procedures, including those
related to customer satisfaction ratings with respect to
customer care and first call resolution. In 2007, we expect to
convert the majority of our post-paid subscriber base to a
unified billing platform, which we believe will increase
functionality for our customer care representatives and produce
more reliable information, which should enhance the customer
experience.
|
|
|
Wireless
Network Technologies
|
We provide our Sprint-branded and wholesale wireless services
over our CDMA network, an all-digital wireless network with
spectrum licenses that allow us to provide service in all 50
states, Puerto Rico and the U.S. Virgin Islands. The CDMA
network uses a single frequency band and a digital
spread-spectrum wireless technology that allows a large number
of users to access the band by assigning a code to all voice and
data bits, sending a scrambled transmission of the encoded bits
over the air and reassembling the voice and data into its
original format.
We, together with the four remaining PCS Affiliates, operate
CDMA networks in over 300 metropolitan markets, including 297 of
the 300 largest U.S. metropolitan areas, where more than
262 million people live or work. We provide nationwide
service through a combination of:
|
|
|
|
|
operating our own digital network in both major and smaller U.S.
metropolitan areas and rural connecting routes using CDMA
technology;
|
|
|
|
affiliations under commercial arrangements with the PCS
Affiliates;
|
|
|
|
roaming on other providers analog cellular networks using
multi-mode and multi-band handsets; and
|
|
|
|
roaming on other providers digital networks that use CDMA.
|
Under the terms of the commercial arrangements with the PCS
Affiliates, our wireless services are offered under the Sprint
brand on CDMA networks built and operated at the expense of the
PCS Affiliates. In most instances, the PCS Affiliates use
spectrum licensed to, and controlled by, us. The PCS Affiliates
operate mainly in and around smaller U.S. metropolitan areas.
CDMA subscribers can use their phones through roaming agreements
in countries other than the United States, including areas of
Asia, New Zealand, Canada, Central and South America and most
major Caribbean islands. Our digital quad band devices can
utilize global system for mobile communications, or GSM,
technology, the network technology utilized by many wireless
providers throughout Europe and other parts of the world, which
enables subscribers to roam in numerous countries outside the
U.S., including countries in Europe.
We are deploying the high-speed EV-DO technology across our CDMA
network. EV-DO increases average mobile-device data speeds up to
10 times faster when compared to the prior generation
technology. In addition, this technology delivers applications
and services available only on EV-DO-capable handsets and
laptops equipped with EV-DO-capable 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 applications. Currently, EV-DO technology
covers nearly 209 million people and serves customers in
over 219 communities with populations of at least 100,000, and
we plan to have coverage across the majority of the footprint of
our CDMA network by the end of 2007. EV-DO data roaming is
available in selected markets in Canada and Mexico.
We also have begun to incorporate EV-DO Rev. A, the next version
of EV-DO technology, into our network, with plans for coverage
across the majority of the footprint of our CDMA network by the
end of 2007.
7
EV-DO Rev.
A is designed to support a variety of IP and 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 of our communication towers for
a negotiated lease term that is the greater of the remaining
terms of the underlying ground leases or up to 32 years,
assuming successful re-negotiation of the underlying ground
leases at the end of their current lease terms. We have
committed to sublease space from Global Signal on about 6,400 of
these towers for a minimum of ten years. We have built
additional sites to enhance and expand the coverage 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 enables us to
co-locate CDMA cell site equipment on these towers, instead of
requiring us to erect new towers or co-locate the equipment on
towers owned by third parties, which we expect will reduce our
costs. Similarly, we are able to co-locate iDEN cell site
equipment on the CDMA communications towers. We also deploy
in-building systems and outdoor distributed antenna systems
where cell site solutions are not feasible.
iDEN
Network
We provide our Nextel-branded post-paid and Boost Mobile-branded
prepaid wireless services over our iDEN network. Our iDEN
network is an all-digital packet data network based on iDEN
wireless technology provided by Motorola, Inc. We are the only
national wireless service provider in the United States that
utilizes iDEN technology, and, generally, the iDEN handsets that
we currently offer are not enabled to roam onto wireless
networks that do not utilize iDEN technology. We operate iDEN
networks in over 300 metropolitan markets, including 293 of the
top 300 U.S. markets, where about 274 million people live
or work.
We have roaming or interoperability agreements with iDEN-based
wireless service providers that operate in selected areas of
Canada, Latin America and Mexico, which gives subscribers of
iDEN-based services the ability to utilize our walkie-talkie
services to communicate to and from these markets. With an i930
or i920 iDEN handset, subscribers are able to roam in numerous
countries outside the U.S., including countries in Europe. These
handsets utilize GSM technology. In addition, any iDEN
subscriber can remove the subscriber identity module card found
in each iDEN handset and place it in a Motorola handset that
utilizes GSM technology when traveling outside of the U.S.
Although the iDEN technology offers a number of advantages over
other technology platforms, including the ability to offer our
walkie-talkie features, unlike other wireless technologies, it
is a proprietary technology that relies principally on our and
Motorolas efforts for further research, and product
development and innovation. We rely on Motorola to provide us
with technology improvements designed to expand our iDEN-based
wireless services, including improvements designed to increase
voice capacity and improve our iDEN-based services. Motorola
provides substantially all of the iDEN infrastructure equipment
used in our iDEN network, and substantially all iDEN handset
devices. We have agreements with Motorola that set the prices we
must pay to purchase and license this equipment, as well as a
structure to develop new features and make long-term
improvements to our network. Motorola also provides integration
services in connection with the deployment of iDEN network
elements. We have also agreed to warranty and maintenance
programs and specified indemnity arrangements with Motorola.
Motorola is, and is expected to continue to be, our sole source
supplier of iDEN infrastructure and iDEN handsets, except
primarily for
BlackBerry®
devices, which are manufactured by Research In Motion. Further,
our ability to timely and efficiently implement the Report and
Order of the Federal Communications Commission, or FCC, which
implemented a spectrum reconfiguration plan designed to
eliminate interference with public safety operators in the 800
MHz band, is dependent, in part, on Motorola. See
Item 1A. Risk Factors If
Motorola is unable or unwilling to provide us with equipment and
handsets in support of our Nextel branded services, as well as
anticipated handset and infrastructure improvements for those
services, our operations will be adversely affected.
8
We believe that the market for wireless services has been and
will continue to be characterized by intense competition on the
basis of price, the types of services offered and quality of
service. We compete with a number of wireless carriers,
including three other national wireless companies: AT&T
(formerly known as Cingular Wireless), Verizon Wireless and
T-Mobile. AT&T and Verizon also offer competitively-priced
wireless services packaged with local and long distance voice
and high-speed Internet services. We also compete with regional
providers of mobile wireless services, such as Alltel
Corporation. Our Boost Mobile-branded prepaid service competes
with a number of regional carriers, including Metro PCS
Communications, Inc. and Leap Wireless International, Inc.,
which offer competitively-priced calling plans that include
unlimited local calling. Competition will increase to the extent
that new firms enter the market as additional radio spectrum is
made available for commercial wireless services. We also expect
competition to increase as a result of other technologies and
services that are developed and introduced in the future,
including potentially those using unlicensed spectrum, including
wireless fidelity, or WiFi. The continued addition of MVNOs also
contributes to increased competition.
Pricing competition has led to declining average voice revenue
per subscriber as we and our competitors have offered more
competitive service pricing plans, including lower priced plans,
plans that allow users to add additional units to their plans at
attractive rates, plans with a higher number of bundled minutes
included in the fixed monthly charge for the plan, plans that
offer the ability to share minutes among a group of related
customers, or a combination of these features.
In addition to pricing, we believe that our targeted customers
are also likely to base their purchase decisions on quality of
service and the availability of differentiated features and
services that make it easier for them to get things done quickly
and efficiently. We believe we compete based 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 our differentiated products and services. Other
competitors have announced plans to introduce similar services.
If our competitors are able to provide applications and features
that are comparable to ours, any competitive advantage from the
differentiation of our services from those of our competitors
would be reduced. To the extent that the competitive environment
requires us to decrease prices or increase service and product
offerings, our revenue could decline or our costs could
increase. Competition in pricing and service and product
offerings also may adversely impact customer retention. See
Item 1A. Risk Factors We face
intense competition that may reduce our market share and harm
our financial performance.
Long
Distance
Through our Long Distance segment, we provide a broad suite of
wireline voice and data communications services targeted to
domestic business customers, multinational corporations and
other communications companies. We are one of the nations
largest providers of long distance services and operate
all-digital long distance and Tier 1 IP networks.
In an effort to maintain market share in an environment where
many long distance communications services, primarily
stand-alone voice services, are being marketed and sold as
low-cost commodities, our Long Distance segment focuses on
expanding its presence in the data communications markets by
utilizing our principal strategic assets: our high-capacity
national fiber-optic network, our Tier 1 IP network, our
base of business customers, our established national brand and
offerings available from our Wireless segment. We continue to
assess the portfolio of services provided by our Long Distance
segment and are focusing our efforts on IP-based services and
de-emphasizing stand-alone voice services and non-IP-based data
services. For example, in addition to increased emphasis on
selling IP services, we are converting many of our existing
customers from ATM and frame relay to more advanced IP
technologies, in part to support our effort to move to one
platform, which will reduce our network cost structure. We also
are taking advantage of the growth in voice services
9
provided by cable MSOs, as consumers increase their use of cable
MSOs as alternatives to local and long distance voice
communications providers, by providing large cable MSOs with
local and long distance voice communications service, which they
offer as part of their bundled service offerings.
Products
and Services
Through our Long Distance segment, we provide a broad suite of
wireline voice and data communications services, including
domestic and international 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 of their telephone service provided over cable
facilities primarily to residential end user customers. Although
we continue to provide voice services to residential consumers,
we no longer actively market those services. Our Long Distance
segment markets and sells its services primarily through direct
sales representatives. We also provide voice and data services
to our Wireless segment.
Our Long Distance segment competes with AT&T, Verizon
Communications, Qwest Communications, Level 3
Communications, Inc., other major local incumbent operating
companies, cable operators and other telecommunications
providers in all segments of the long distance communications
market. Some competitors are targeting the high-end data market
and are offering deeply discounted rates in exchange for
high-volume traffic as they attempt to utilize excess capacity
in their networks. In addition, we face increasing competition
from other wireless and IP-based service providers. Many
carriers are competing in the residential and small business
markets by offering bundled packages of both local and long
distance services. Competition in long distance is based on
price and pricing plans, the types of services offered, customer
service, and communications quality, reliability and
availability. Our ability to compete successfully will depend on
our ability to anticipate and respond to various competitive
factors affecting the industry, including new services that may
be introduced, changes in consumer preferences, demographic
trends, economic conditions and pricing strategies. See
Item 1A. Risk Factors We face
intense competition that may reduce our market share and harm
our financial performance.
Legislative
and Regulatory Developments
Overview
Communications services are subject to regulation at the federal
level by the FCC and in certain states by public utilities
commissions, or PUCs. The Communications Act of 1934, or
Communications Act, preempts states from regulating the rates of
commercial mobile radio service, or CMRS, providers, such as
with respect to our Wireless segment, as well as various
licensing and technical requirements imposed by the FCC,
including provisions related to the acquisition, assignment or
transfer of radio licenses. CMRS providers are subject to state
regulation of other terms and conditions of service. Our Long
Distance segment also is subject to limited federal and state
regulation.
The following is a summary of the regulatory environment in
which we operate and does not describe all present and proposed
federal, state and local legislation and regulations affecting
the communications industry. Some legislation and regulations
are the subject of judicial proceedings, legislative hearings
and administrative proceedings that could change the manner in
which our industry operates. We cannot predict the outcome of
any of these matters or their potential impact on our business.
See Item 1A. Risk Factors Government
regulation could adversely affect our prospects and results of
operations; the FCC and state regulatory commissions may adopt
new regulations or take other actions that could adversely
affect our business prospects or results of operations.
Regulation in the communications industry is subject to change,
which could adversely affect us in the future. The following
discussion describes some of the major communications-related
regulations that affect us, but numerous other substantive areas
of regulation not discussed here may also influence our business.
10
Regulation
and Wireless Operations
The FCC regulates the licensing, construction, operation,
acquisition and sale of our wireless operations and wireless
spectrum holdings. FCC requirements impose operating and other
restrictions on our wireless operations that increase our costs.
The FCC does not currently regulate rates for services offered
by CMRS providers, and states are legally preempted from
regulating such rates and entry into any market, although states
may regulate other terms and conditions. The Communications Act
and FCC rules also require the FCCs prior approval of the
assignment or transfer of control of an FCC license, although
the FCCs rules permit spectrum lease arrangements for a
range of wireless radio service licenses, including our
licenses, with FCC oversight. Approval from the Federal Trade
Commission and the Department of Justice, as well as state or
local regulatory authorities, also may be required if we sell or
acquire spectrum interests. The FCC sets rules, regulations and
policies to, among other things:
|
|
|
|
|
grant licenses in the 800 MHz band, 900 MHz band, 1.9 GHz PCS
band, and 2.1 and 2.5 GHz Broadband Radio Service, or BRS, and
Educational 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 licenses held by other
persons and organizations;
|
|
|
|
govern the interconnection of our iDEN and CDMA networks with
other wireless and wireline carriers;
|
|
|
|
establish access and universal service funding provisions;
|
|
|
|
impose rules related to unauthorized use of and access to
customer information;
|
|
|
|
impose fines and forfeitures for violations of FCC rules;
|
|
|
|
regulate the technical standards governing wireless services; and
|
|
|
|
impose other obligations that it determines to be in the public
interest.
|
We hold several kinds of licenses to deploy our services: 1.9
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 also hold
and lease 2.5 GHz, 1.9 GHz and other FCC licenses that we
currently do not utilize in our networks or operations, but
which we intend to use in the future consistent with customer
demand and our obligations as a licensee.
|
|
|
1.9 GHz
PCS License Conditions
|
All PCS licenses are granted for ten-year terms. For purposes of
issuing PCS licenses, the FCC utilizes major trading areas, or
MTAs, and basic trading areas, or BTAs, with several BTAs making
up each MTA. Each license is subject to buildout requirements,
and the FCC may revoke a license after a hearing if the buildout
or other applicable requirements have not been met. We have met
these requirements in all of our MTA and BTA markets.
If applicable buildout conditions are met, these licenses may be
renewed for additional ten-year terms. Renewal applications are
not subject to auctions. If a renewal application is challenged,
the FCC grants a preference commonly referred to as a license
renewal expectancy to the applicant if the applicant can
demonstrate that it has provided substantial service
during the past license term and has substantially complied with
applicable FCC rules and policies and the Communications Act.
The licenses for the 10 MHz of spectrum in the 1.9 GHz band that
we received as part of the FCCs Report and Order,
described below, have ten-year terms and are not subject to
specific buildout conditions, but are subject to renewal
requirements that are similar to those for our PCS licenses.
11
|
|
|
800 MHz
and 900 MHz License Conditions
|
We hold licenses for channels in the 800 MHz and 900 MHz bands
that are used to deploy our iDEN services. Because spectrum in
these bands originally was licensed in small groups of channels,
we hold thousands of these licenses, which together allow us to
provide coverage across much of the continental United States.
Our 800 MHz and 900 MHz licenses are subject to requirements
that we meet population coverage benchmarks tied to the initial
license grant dates. To date, we have met all of these
construction requirements applicable to these licenses, except
in the case of licenses that are not material to our business.
Our 800 MHz and 900 MHz licenses have ten-year terms, at the end
of which each license is subject to renewal 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 a portion of this spectrum to provide fixed
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 that the 2496-2690 MHz band, or the 2.5
GHz band, which is the spectrum for our EBS and BRS licenses, be
reconfigured into upper and lower-band segments for low-power
operations, and a mid-band segment for high-power operations.
Transition to the new band plan has begun. We and other parties
are transitioning the 2.5 GHz band to its new configuration
market-by-market
in a process that may require several years to complete
nationally. As of early January 2007, we had served
pre-transition data requests to licensees in 115 BTAs, filed
initiation plans with the FCC for 57 BTAs and filed notices of
completion for transitions in 19 BTAs. When the transition is
complete, we believe that the 2.5 GHz band will be more suitable
for our WiMAX next generation broadband wireless network. We
intend to provide fourth generation Wireless Interactive
Multimedia Services, or WIMS, and other services, such as fixed
point-to-point
communications, using this spectrum.
The FCC affirmed its prohibition of commercial ownership on
approximately 62% of the total 2.5 GHz spectrum band, which is
held primarily by educational institutions; however, these
institutions are authorized to lease up to 95% of their licensed
spectrum to commercial operators, such as us, subject to certain
restrictions. In addition, the FCC adopted a band plan that
requires the relocation of licensed BRS operations from the
2150-2162 MHz band, or the 2.1 GHz band, into the 2.5 GHz band.
The FCC adopted rules that require new licensees in the 2.1 GHz
band to provide incumbent licensees with comparable
facilities, which will permit incumbents to continue to
offer fixed data services to current and future subscribers if
they choose to do so.
All BRS-EBS licenses are subject to renewal. In January 2007,
the FCC Wireless Telecommunications Bureau reinstated more than
50 expired EBS licenses and additional requests for
reinstatement of expired EBS licenses remain pending at the FCC.
We have and will continue to challenge the validity of these
requested or adopted reinstatements, but there can be no
assurance that our challenges will be successful. The
reinstatement of an expired license may affect our wireless
broadband deployment plans in a market in which the reinstated
license interferes with one or more of our 2.5 GHz holdings or
otherwise requires alteration of our deployment plans.
The FCC conditioned its approval of the Sprint-Nextel merger on
two deployment milestones in the 2.5 GHz spectrum band. Within
four years following the August 8, 2005 effective date of
the merger order, we must offer service using the 2.5 GHz band
to a population of no less than 15 million people. This
deployment must include areas within a minimum of nine of the
nations most populous 100 BTAs and at least one BTA less
populous than the nations 200th most populous BTA. In
these ten BTAs, the deployment must cover at least one-third of
each BTAs population. In addition, within six years from
the effective date of the merger order, we must offer service
using the 2.5 GHz band to at least 15 million more people
in areas within a minimum of nine additional BTAs in the 100
most populous BTAs, and at least one additional BTA less
populous than the nations 200th most populous BTA. In
these additional ten BTAs, the deployment must also cover at
least one-third of each BTAs population.
12
|
|
|
800 MHz
Band Spectrum Reconfiguration
|
In recent years, the operations of a number of public safety
communications systems in the 800 MHz block of spectrum have
experienced interference that is believed to be a result of the
operations of CMRS providers operating on adjacent frequencies
in the same geographic area.
In 2001, Nextel filed a proposal with the FCC that would result
in a more efficient use of spectrum through the reconfiguration
of spectrum licenses and spectrum allocations in the 700, 800
and 900 MHz bands and, thereby, resolve many of these
interference 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 accepted the Report and Order, which was necessary
before the order became effective, because the Report and Order
required Nextel to undertake a number of obligations and accept
modifications to its FCC licenses. We assumed these obligations
when we merged with Nextel in August 2005.
The Report and Order provides for the exchange of a portion of
our FCC spectrum licenses, which the FCC is implementing through
modifications to these licenses. Specifically, the Report and
Order modified a number of FCC licenses in the 800 MHz band,
including many of our licenses, and implemented rules to
reconfigure spectrum in the 800 MHz band in a
36-month
phased transition process. It also obligated us to surrender all
of our holdings in the 700 MHz spectrum band and certain
portions of our holdings in the 800 MHz spectrum band, and to
fund the cost incurred by public safety systems and other
incumbent licensees to reconfigure the 800 MHz spectrum band.
Under the Report and Order, we received licenses for 10 MHz of
nationwide spectrum in the 1.9 GHz band, but we are required to
relocate and reimburse the incumbent licensees in this band for
their costs of relocation to another band designated by the FCC.
The reconfiguration process is to be completed by geographic
region and involves reaching agreement and coordinating numerous
processes with the incumbent licensees in that region, as well
as vendors and contractors that will be performing much of the
reconfiguration. We are permitted to continue to use the
spectrum in the 800 MHz band that was surrendered under the
Report and Order during the reconfiguration process; however, as
part of the reconfiguration process in most regions, we must
cease using portions of the surrendered 800 MHz spectrum before
we are able to commence use of replacement 800 MHz spectrum,
which has contributed to the capacity constraints experienced on
our iDEN network, particularly in some of our more capacity
constrained markets, and has impacted the performance of our
iDEN network in the affected markets.
We believe we have substantially met the first progress
milestone established by the Report and Order by retuning all
incumbent licensees on the first 120 800 MHz channels in at
least 26 FCC-defined regions, and by initiating retuning
negotiations with all licensees on the last 120 800 MHz channels
in those 26 regions, within an
18-month
period which began on June 27, 2005. The Report and Order
required us to complete these actions in at least 20 of 55
FCC-defined regions within the
18-month
period. We have reported our progress to the FCC.
The Report and Order requires us to complete the 800 MHz band
reconfiguration within a
36-month
period, ending in June 2008, subject to certain exceptions
particularly with respect to markets that border Mexico and
Canada, and to complete the 1.9 GHz band reconfiguration within
a 31.5-month period, ending in September 2007. If, as a result
of events within our control, we fail to complete our
reconfiguration responsibilities within the designated time
periods for either the 800 MHz or 1.9 GHz reconfigurations, the
FCC could take actions against us to enforce the Report and
Order. These actions could have adverse operating or financial
impacts on us, some of which could be material. We believe,
based on our experiences to date, that neither the 800 MHz
reconfiguration nor the 1.9 GHz reconfiguration will be
completed within the applicable FCC designated time periods due
primarily to circumstances largely outside of our control. We do
not believe at this time that the impact from this delay will be
material to our results of operations or financial condition,
although there can be no assurances. Recognizing the current
limitations in the reconfiguration process, both Sprint Nextel
and the public safety community jointly filed a letter with the
FCC on February 15, 2007, requesting that the FCC direct
the independent Transition Administrator, or TA, through working
closely with the affected parties, to develop a schedule and
benchmarks for completing the second phase of the 800 MHz
reconfiguration. See
13
Part II, Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Forward-Looking Statements.
The Report and Order requires us to make a payment to the U.S.
Treasury at the conclusion of the band reconfiguration process
to the extent that the value of the 1.9 GHz spectrum we received
exceeds the total of the value of licenses for spectrum
positions in the 700 MHz and 800 MHz bands that we surrendered
under the decision, plus the actual costs that we incur to
retune incumbents and our own facilities under the Report and
Order. The FCC determined under the Report and Order that, for
purposes of calculating that payment amount, the value of the
1.9 GHz spectrum is about $4.9 billion and the aggregate
value of the 700 MHz spectrum and the 800 MHz spectrum
surrendered, net of 800 MHz spectrum received as part of the
exchange, is about $2.1 billion, which, because of the
potential payment to the U.S. Treasury, results in minimum cash
expenditures of about $2.8 billion by us under the Report
and Order. The FCC has designated an independent Transition
Administrator to monitor, facilitate and review our expenditures
for 800 MHz band reconfiguration. A precise methodology for
evaluating and confirming our internal network costs has not yet
been established by the TA. Because the TA may not agree that
all of the costs we submit as external and internal costs are
appropriate or are subject to credit, we may incur certain costs
as part of the reconfiguration process for which we will not
receive credit against the potential payment to the U.S.
Treasury.
We are obligated to pay the full amount of the costs relating to
the reconfiguration plan, even if those costs exceed
$2.8 billion. As of December 31, 2006, we estimate
that we had incurred about $721 million of costs directly
attributable to the reconfiguration program. This amount does
not include any indirect network costs that we have
preliminarily allocated to the reconfiguration program.
As required under the terms of the Report and Order, we
delivered a $2.5 billion letter of credit to provide
assurance that funds will be available to pay the relocation
costs of the incumbent users of the 800 MHz spectrum. Although
the Report and Order provides for the possibility of periodic
reductions in the amount of the letter of credit, we have not
requested any reductions as of December 31, 2006.
In addition, a financial reconciliation is required to be
completed at the end of the reconfiguration implementation to
determine whether the value of the spectrum rights received
exceeds the total of (i) the value of spectrum rights that
are surrendered and (ii) the qualifying costs referred to
above. If so, we will be required to pay the difference to the
U.S. Treasury, as described above. As a result of the
uncertainty with regard to the calculation of the credit for our
internal network costs, as well as the significant number of
variables outside of our control, particularly with regard to
the 800 MHz reconfiguration licensee costs, we do not believe
that we can reasonably estimate what amount, if any, will be
paid to the U.S. Treasury.
|
|
|
New
Spectrum Opportunities and Spectrum Auctions
|
We are a non-voting, minority shareholder in a consortium called
SpectrumCo LLC, which was recently awarded numerous advanced
wireless services, or AWS, licenses in the 1.7 GHz / 2.1 GHz
bands. AWS licensees such as SpectrumCo have no FCC build-out or
active spectrum management requirements until they are required
to demonstrate substantial service at the end of
their fifteen-year license terms. Separately, several FCC
proceedings and initiatives are underway that may affect the
availability of spectrum used or useful in the provision of
commercial wireless services, which may allow new competitors to
enter the wireless market. For instance, federal law requires
the FCC to commence auction of sixty megahertz in the 700 MHz
spectrum band for commercial use no later than January 2008. We
cannot predict when or whether the FCC will conduct any spectrum
auctions or if it will release additional spectrum that might be
useful to wireless carriers, including us, in the future.
Pursuant to FCC rules, CMRS providers, including us, are
required to provide enhanced 911, or 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 callers 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 and
14
longitude, and, with respect to our iDEN and CDMA network
services, such information can be determined only if the caller
is using a handset with global positioning satellite, or GPS,
capability. Implementation of Phase I or Phase II E911 service
must be completed within six months of a PSAP request for
service in its area, or longer, based on the agreement between
the individual PSAP and carrier.
We were unable to satisfy the FCC requirement that 95% of our
iDEN subscriber base have Assisted-GPS capable handsets by
December 31, 2005. The FCC recently denied our request for
an extension of this deadline and has referred the matter to the
FCCs Enforcement Bureau for further action. Although we
have asked the FCC to reconsider their decision, the FCC may
impose fines, set new deadlines for compliance or seek to
require us to take actions to encourage our customers to upgrade
their handsets so we can fulfill the 95% requirement.
|
|
|
Truth in
Billing and Consumer Protection
|
The FCCs Truth in Billing rules generally require CMRS
licensees, such as us, to provide full and fair disclosure of
all charges on their wireless bills, including brief, clear, and
non-misleading plain language descriptions of the services
provided. In response to a petition from the National
Association of State Utility Consumer Advocates, the FCC found
that state regulation of CMRS rates, including line items on
consumer bills, is preempted by federal statute. This decision
was overturned by the 11th Circuit Court of Appeals, however,
and many states continue to attempt to impose various
regulations on the billing practices of wireless carriers. The
FCC is continuing 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.
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 and several new
initiatives could lead to new regulatory requirements regarding
disaster preparedness, network reliability, and communications
among first responders. In October 2006, Congress passed the
Warning, Alert and Response Network Act, or WARN Act, which
created a new voluntary wireless emergency alert program. As a
result of the WARN Act, the FCC created the Commercial Mobile
Service Alert Advisory Committee to recommend standards and
protocols for delivery of emergency alerts to wireless
customers. We are unable to predict the impact of these
initiatives on our business.
Wireless systems must comply with various federal, state and
local regulations that govern the siting, lighting and
construction of transmitter towers and antennas, including
requirements imposed by the FCC and the Federal Aviation
Administration. FCC rules subject certain cell site locations to
extensive zoning, environmental and historic preservation
requirements and mandate consultation with various parties,
including Native Americans. The FCC adopted significant changes
to its rules governing historic preservation review of projects,
which makes it more difficult and expensive to deploy antenna
facilities. The FCC is also considering changes to its rules
regarding environmental protection as related to tower
constructions, which, if adopted, could make it more difficult
to deploy facilities. To the extent governmental agencies impose
additional requirements on the tower siting process, the time
and cost to construct cell towers could be negatively impacted.
|
|
|
State and
Local Regulation
|
While the Communications Act generally preempts state and local
governments from regulating entry of, or the rates charged by,
wireless carriers, certain State PUCs and local governments
regulate customer billing, termination of service arrangements,
advertising, certification of operation, use of handsets when
driving, service quality, sales practices, management of
customer call records and protected information and many other
areas. Also, some state attorneys general have become more
active in enforcing state consumer
15
protection laws against sales practices and services of wireless
carriers. States also may impose their own universal service
support requirements on wireless and other communications
carriers, similar to the contribution requirements that have
been established by the FCC. We anticipate that these trends
will continue. It will require us to devote legal and other
resources to working with the states to respond to their
concerns while minimizing, if not preventing, any new regulation
and enforcement actions that could increase our costs of doing
business.
Regulation
and Wireline Operations
|
|
|
Competitive
Local Service
|
The Telecommunications Act of 1996, or Telecom Act, the first
comprehensive update of the Communications Act, was designed to
promote competition, and it eliminated legal and regulatory
barriers for entry into local and long distance communications
markets. It also required ILECs to allow resale of specified
local services at wholesale rates, negotiate interconnection
agreements, provide nondiscriminatory access to unbundled
network elements, or UNEs, and allow co-location of
interconnection equipment by competitors. The rules implementing
the Telecom Act remain subject to legal challenges. Thus, the
scope of future local competition remains uncertain. These local
competition rules impact us because we provide wholesale
services to cable television companies that wish to compete in
the local voice telephony market.
We provide cable companies with communications and back-office
services to enable the cable companies to provide competitive
local and long distance telephony services primarily in a voice
over IP, or VoIP, format to their end-user customers. We are now
providing these cable services in a number of states while
working to gain regulatory approvals and obtain interconnection
agreements to enter additional markets. Certain ILECs continue
to take steps to impede our ability to provide services to the
cable companies in an efficient manner. However, regulatory
decisions in several states may speed our market entry in those
states.
|
|
|
Voice
over Internet Protocol
|
With the increasing availability of VoIP services, the FCC
continues to consider the regulatory status of various forms of
VoIP. In 2004, the FCC issued an order finding that one form of
VoIP, involving a specific form of
computer-to-computer
services for which no charge is assessed and conventional
telephone numbers are not used, is an unregulated
information service, rather than a
telecommunications service, and preempted state regulation of
this service. The FCC also ruled that long distance offerings in
which calls begin and end on the ordinary public switched
telephone network, but are transmitted in part through the use
of IP, are telecommunications services, thereby
rendering the services subject to all the regulatory obligations
imposed on ordinary long distance services, including payment of
access charges and contributions to the universal service funds
or USF. In addition, the FCC preempted states from exercising
entry and related economic regulation of interconnected VolP
services that originate through the use of broadband connections
and specialized customer premises equipment. However, this
ruling did not address specifically whether this form of VoIP is
an information service or a telecommunications
service, or what regulatory obligations, such as
intercarrier compensation, should apply. Nevertheless, the FCC
requires interconnected VoIP providers to contribute to the
federal USF. The FCC also requires 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
FCCs classification of cable modem Internet access service
as an information service and declining to impose
mandatory common carrier regulation on cable providers, the FCC
issued an order in September 2005 declaring the wireline
high-speed Internet access services, which are provided by
ILECs, are information services rather than
telecommunications services. As a result, over time
ILECs have been relieved of certain obligations regarding the
provision of the underlying broadband transmission services. The
FCC is considering similar deregulation of wireless high-speed
Internet access services. Such deregulation could result in less
regulation of some of our EV-DO and WiMAX products and services.
Deregulation of broadband services has sparked a debate over
16
net neutrality. Proponents of net
neutrality assert that operators of broadband transmission
facilities should not be permitted to make distinctions among
content providers for priority access to the underlying
facilities. A net neutrality mandate could adversely affect the
operation of our networks that utilize EV-DO and WiMAX
technologies by constraining our ability to control the network
and enter into innovative business arrangements with third-party
content providers. Additionally, the FCC has a pending
proceeding to consider whether all high-speed Internet access
services, regardless of the technology used, are subject to
various FCC consumer protection regulations. The imposition of
any such obligations could result in significant costs to us.
Other
Regulations
|
|
|
Access
Charge Reform and Universal Service Requirements
|
Incumbent local exchange carriers, or ILECs, and other carriers
impose access charges for the origination and termination of
long distance calls upon wireless and long distance carriers,
including our Wireless and Long Distance segments. Also,
interconnected local carriers, including our Wireless segment,
pay to each other reciprocal compensation fees for terminating
interconnected local calls. In addition, ILECs impose special
access charges for their provision of dedicated facilities to
other carriers, including both our Long Distance and Wireless
segments. These fees and charges are a significant cost for our
Wireless and Long Distance segments. There are ongoing
proceedings at the FCC related to access charges and special
access rates, which could impact our costs for these services.
Communications carriers also pay fees into and receive revenues
from the USF, established by the FCC and many states. The
federal USF program funds 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 segments, who must make contributions into the fund.
Our contributions to the federal USF are based on separate
FCC-prescribed percentages of our interstate and international
end-user revenues from telecommunications services for our
Wireless and Long Distance segments. The FCC is considering
changing the interstate revenue-based assessment with an
assessment based on telephone numbers or connections to the
public network, which could impact the amount of our
assessments. As permitted, we assess customers for these USF
charges. The FCC is considering changing the way it distributes
federal USF support to carriers. In particular, FCC or state
actions could make it more difficult for our Wireless segment,
which currently receives support in 24 states as an Eligible
Telecommunications Carrier, or ETC, to qualify for and to
receive support. Further restrictions on our ETC status at the
federal and state levels could result in the rescission of our
ETC status.
The Communications Assistance for Law Enforcement Act, or CALEA,
requires telecommunications carriers, including us, to modify
equipment, facilities and services to allow for authorized
electronic surveillance based on either industry or FCC
standards. Our CALEA obligations have been extended to data and
VoIP networks, with which we are required to be compliant by May
2007.
|
|
|
Privacy-Related
Regulations
|
We comply with FCC-mandated rules that limit how carriers may
use customer proprietary network information, or CPNI, for
marketing purposes, and specify what carriers must do to
safeguard CPNI held by third parties. It has recently been
reported that the call detail records of both wireline and
wireless telephone customers are available from certain
Internet-based vendors. Congress has enacted, and state
legislatures are considering, legislation to criminalize the
sale of call detail records and to further restrict the manner
in which carriers make such information available. The FCC is
investigating these practices and is examining whether existing
regulations with respect to CPNI require revision or expansion,
which could result in additional costs to us, including
administrative or operational burdens on our customer care,
sales, marketing and IT systems.
17
Environmental
Compliance
Our environmental compliance and remediation obligations relate
primarily to the operation of standby power generators,
batteries and fuel storage for our telecommunications equipment.
These obligations require compliance with storage and related
standards, obtaining of permits and occasional remediation.
Although we cannot assess with certainty the impact of any
future compliance and remediation obligations, we do not believe
that any such expenditures will have a material adverse effect
on our financial condition or results of operations.
We have identified seven former manufactured gas plant sites in
Nebraska, not currently owned or operated by us, that may have
been owned or operated by entities acquired by Centel
Corporation, formerly a subsidiary of ours and now a subsidiary
of Embarq. We and Embarq have agreed to share the environmental
liabilities arising from these former manufactured gas plant
sites. Three of the sites are part of ongoing settlement
negotiations and administrative consent orders with the
Environmental Protection Agency, or EPA. Two of the sites have
had initial site assessments conducted by the Nebraska
Department of Environmental Quality, or NDEQ, but no regulatory
actions have followed. The two remaining sites have had no
regulatory action by the EPA or the NDEQ. Centel has entered
into agreements with other potentially responsible parties to
share costs in connection with five of the seven sites. We are
working to assess the scope and nature of these sites and our
potential responsibility, which is not expected to be material.
Patents,
Trademarks and Licenses
We own numerous patents, patent applications, service marks and
trademarks in the United States and other countries. We have a
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, and we often
license copyrights, patents and trademarks of others. In total,
these licenses and our copyrights, patents, trademarks and
service marks are of material importance to the business.
Generally, our trademarks and service marks endure and are
enforceable so long as they continue to be used. Our patents and
licensed patents have remaining terms generally ranging from one
to 19 years.
We occasionally license our intellectual property to others,
including licenses to others to use the trademarks
Sprint and Nextel.
We have received claims in the past, and may in the future
receive claims, that we, or third parties from whom we license
intellectual property, have infringed on the intellectual
property of others. These claims can be time-consuming and
costly to defend, and divert management resources. If these
claims are successful, we could be forced to pay significant
damages or stop selling certain products or services, or the
third parties from whom we license intellectual property could
be forced to pay significant damages, which could increase the
cost of these products and services or force the third parties
to stop providing certain products or services to us. We also
could enter into licenses with unfavorable terms, including
royalty payments, which could adversely affect our business.
Employee
Relations
As of December 31, 2006, we had about 64,600 employees,
representing a reduction of about 15,000 employees since
December 31, 2005, due primarily to the spin-off of Embarq.
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 achieve
synergies from the Sprint-Nextel merger and the acquisitions of
the PCS Affiliates and Nextel Partners. In January 2007, we
announced that we would be reducing our workforce. We expect to
complete the majority of the reductions in the first quarter
2007.
Management
For information concerning our executive officers, see
Executive Officers of the Registrant in this
document.
18
Information
as to Business Segments
For information regarding our business segments, see
Part II, Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations
and also refer to note 14 of the Notes to Consolidated
Financial Statements appearing at the end of this annual report
on
Form 10-K.
Item 1A. Risk
Factors
In addition to the other information contained in this
Form 10-K,
the following risk factors should be considered carefully in
evaluating us. Our business, financial condition, liquidity or
results of operations could be materially adversely affected by
any of these risks.
Risks
Related to the Sprint-Nextel Merger and the Spin-off of
Embarq
We may not be able to successfully integrate the businesses
of Nextel, the acquired PCS Affiliates or Nextel Partners with
ours and realize the anticipated benefits of the merger and
acquisitions.
We continue to devote significant management attention and
resources to integrating the Nextel wireless network and other
wireless technologies with ours, as well as the business
practices, operations and support functions of the two
companies. The challenges we are facing and/or may face in the
future in connection with these integration efforts include the
following:
|
|
|
|
|
integrating our CDMA and iDEN wireless networks, which operate
on different technology platforms and use different spectrum
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 approaches;
|
|
|
|
preserving subscriber, supplier and other important
relationships;
|
|
|
|
consolidating and integrating duplicative facilities and
operations, including back-office systems; 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.
|
The process of integrating Nextels operations with ours
has caused, and may in the future cause, interruptions of, or
loss of momentum in, our business and financial performance. The
diversion of managements attention and any delays or
difficulties encountered in connection with the integration of
the two companies operations has had, and could continue
to have, an adverse effect on our business, financial condition
or results of operations. We may also incur additional and
unforeseen expenses in connection with the integration efforts.
There can be no assurance that the expense savings and synergies
that we anticipate from the merger will be realized fully or
within our expected timeframe.
During 2005 and 2006, we also acquired six PCS Affiliates and
Nextel Partners. The process of integrating the business
practices, operations and support functions of these companies
involves challenges similar to those identified above and could
add to those challenges by placing a greater strain on our
management and employees.
We are subject to exclusivity provisions and other
restrictions under our arrangements with the remaining
independent PCS Affiliates. Continued compliance with those
restrictions may limit our ability to achieve synergies and
fully integrate the operations of Nextel and Nextel Partners in
the geographic areas served by those PCS Affiliates, and we
could incur significant costs to resolve issues related to the
merger under these arrangements.
The arrangements with the four independent PCS Affiliates
restrict our and their ability to own, operate, build or manage
specified wireless communication networks or to sell certain
wireless services within specified
19
geographic areas. Two of these PCS Affiliates have litigation
pending against us asserting that actions that we have taken or
may take in the future in connection with our integration
efforts are inconsistent with our obligations under our
agreements with them, particularly with respect to the
restrictions noted above. Continued compliance with those
restrictions may limit our ability to achieve synergies and
fully integrate the operations of Nextel and Nextel Partners in
the areas served by those PCS Affiliates. We could incur
significant costs to resolve these issues.
We are subject to restrictions on acquisitions involving our
stock and other stock issuances and possibly other corporate
opportunities in order to enable the spin-off of Embarq to
qualify for tax-free treatment.
The spin-off of Embarq cannot qualify 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 spin-off. Because the
Sprint-Nextel merger generally is treated as involving the
acquisition of 49.9% of our stock (and the stock of Embarq) for
purposes of this analysis, we are subject to restrictions on
certain acquisitions using our stock and other issuances of our
stock in order to enable the spin-off to qualify for tax-free
treatment. These restrictions apply to transactions occurring
subsequent to the spin-off that are deemed to be part of a plan
or series of transactions related to the Sprint-Nextel merger
and the Embarq spin- off. Under applicable tax law, transactions
occurring within two years of the spin-off are presumed to be
pursuant to such a plan unless we can establish the contrary. At
this time, it is not possible to determine how long these
restrictions will apply, or whether they will have a material
impact on us.
If the spin-off of Embarq does not qualify as a tax-free
transaction, tax could be imposed on both our shareholders and
us.
We received a private letter ruling from the Internal Revenue
Service, or IRS, that the spin-off of Embarq qualifies for
tax-free treatment under Code Sections 355 and 361. In
addition, we obtained opinions of counsel from each of Cravath,
Swaine & Moore LLP and Paul, Weiss, Rifkind,
Wharton & Garrison LLP that the spin-off so qualifies.
The IRS ruling and the opinions rely on certain representations,
assumptions and undertakings, including those relating to the
past and future conduct of Embarqs and our business. The
IRS private letter ruling does not address all the issues that
are relevant to determining whether the distribution qualifies
for tax-free treatment. The IRS could determine that the
distribution should be treated as a taxable transaction if it
determines that any of the representations, assumptions or
undertakings that were included in the request for the private
letter ruling are false or have been violated, or if it
disagrees with the conclusions in the opinions that are not
covered by the IRS private letter ruling. If 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 Embarqs equity securities (i.e.,
Embarqs common stock issued to our common shareholders)
received by them. In addition, we would be required to recognize
gain in an amount up to the fair market value of the Embarq
equity securities that we distributed on the distribution date
plus the fair market value of the senior notes of Embarq
received by us.
Furthermore, subsequent events, some of which are not in our
control, could cause us to recognize gain on the distribution.
For example, even minimal acquisitions of our equity securities
or Embarqs equity securities that are deemed to be part of
a plan or a series of related transactions that include the
distribution and the Sprint-Nextel merger could cause us to
recognize gain on the distribution.
Risks
Related to our Business and Operations
We face intense competition that may reduce our market share
and harm our financial performance.
Our operating segments face intense competition. Our
ability to compete effectively depends on, among other things,
the factors discussed below.
If we are not able to attract and retain customers, our
financial performance could be impaired.
Our ability to compete successfully for new customers and to
retain our existing customers will depend on:
|
|
|
|
|
our marketing and sales and service delivery activities, and our
credit and collection policies;
|
20
|
|
|
|
|
our ability to anticipate and develop new or enhanced products
and services that are attractive to existing or potential
customers; and
|
|
|
|
our ability to anticipate and respond to various competitive
factors affecting the industry, including new services that may
be introduced by our competitors, changes in consumer
preferences, demographic trends, economic conditions, and
discount pricing and other strategies that may be implemented by
our competitors.
|
A key element in the economic success of communications carriers
is the ability to retain customers as measured by the rate of
subscriber churn. Our ability to retain customers and reduce our
rate of churn is affected by a number of factors including, with
respect to our wireless business, the actual or perceived
quality and coverage of our network and the attractiveness of
our service offerings. For example, peak usage in certain
metropolitan markets is being impacted by capacity constraints
of the iDEN network, which in turn adversely affects customer
satisfaction and churn. Our ability to retain customers also is
affected by competitive pricing pressures and the quality of our
customer service. Our efforts to reduce churn may not be
successful. A high rate of churn could impair our ability to
increase the revenues of, or cause a deterioration in the
operating margins of, our wireless operations or our operations
as a whole.
|
|
|
As the
wireless market matures, we must increasingly seek to attract
customers from competitors and face increased credit risk from
first time wireless subscribers.
|
We increasingly must attract a greater proportion of our new
customers from our competitors existing customer bases
rather than from first time purchasers of wireless services. The
higher market penetration also means that customers purchasing
wireless services for the first time, on average, have a lower
credit rating than existing wireless users, which generally
results in a higher rate of involuntary churn and increased bad
debt expense.
Competition
and technological changes in the market for wireless services
could negatively affect our average revenue per user, subscriber
churn, our ability to attract new subscribers and operating
costs, which would adversely affect our revenues, growth and
profitability.
We compete with several other wireless service providers in each
of the markets in which we provide wireless services. As
competition among 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 retention, which would adversely affect our results of
operations.
The wireless communications industry is experiencing significant
technological change, including improvements in the capacity and
quality of digital technology and the deployment of unlicensed
spectrum devices. This change causes uncertainty about future
subscriber demand for our wireless services and the prices that
we will be able to charge for these services. Rapid change in
technology may lead to the development of wireless
communications technologies or alternative services that are
superior to our technologies or services or that consumers
prefer over ours. If we are unable to meet future advances in
competing technologies on a timely basis, or at an acceptable
cost, we may not be able to compete effectively and could lose
customers to our competitors.
Mergers or other business combinations involving our competitors
and new entrants, including MVNOs, beginning to offer wireless
services may also continue to increase competition. These
wireless operators may be able to offer subscribers network
features or products and services not offered by us, coverage in
areas not served by either of our wireless networks or pricing
plans that are lower than those offered by us, all of which
would negatively affect 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 service competes with a number of regional carriers,
including Metro PCS and Leap Wireless, which offer
competitively-priced calling plans that include unlimited local
calling.
21
One of the primary differentiating features of our
Nextel-branded service is the two-way walkie-talkie service
available on our iDEN network. A number of wireless equipment
vendors, including Motorola, which supplies equipment for our
Nextel-branded service, have begun to offer wireless equipment
that is capable of providing walkie-talkie services that are
designed to compete with our walkie-talkie services. Several of
our competitors have introduced handsets that are capable of
providing walkie-talkie services. If these competitors
services are perceived to be or become, or if any such services
introduced in the future are, comparable to our Nextel-branded
walkie-talkie services, a key competitive advantage of our
Nextel service would be reduced, which in turn could adversely
affect our business.
Failure
to improve wireless subscriber service and failure to continue
to enhance the quality and features of our wireless networks and
meet capacity requirements of our subscriber growth could impair
our financial performance and adversely affect our results of
operations.
We must continually make investments and incur costs in order to
improve our wireless subscriber service and remain competitive.
In connection with our continuing enhancement of the quality of
our wireless networks and related services, we must:
|
|
|
|
|
maintain and expand the capacity and coverage of our networks;
|
|
|
|
secure sufficient transmitter and receiver sites and obtain
zoning and construction approvals or permits at appropriate
locations;
|
|
|
|
obtain adequate quantities of system infrastructure equipment
and handsets, and related accessories to meet subscriber demand;
and
|
|
|
|
obtain additional spectrum in some or all of our markets, if and
when necessary.
|
Network enhancements may not occur as scheduled or at the cost
that we have estimated. Delays or failure to add network
capacity, or increased costs of adding capacity, could limit our
ability to satisfy our wireless subscribers, resulting in
decreased revenues. Even if we continuously upgrade our wireless
networks, there can be no assurance that existing subscribers
will not prefer features of our competitors and switch wireless
providers.
Consolidation
and competition in the wholesale market for wireline services
could adversely affect our revenues and profitability.
Our Long Distance segment competes with AT&T, Verizon, Qwest
Communications, Level 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 structure advantages which, among
other factors, may allow them to maintain profitability while
offering services at a price below that which we can offer
profitably. Increased competition and the significant increase
in capacity resulting from new technologies and networks may
drive already low prices down further. AT&T and Verizon, as
a result of their acquisitions, continue to be our two largest
competitors in the domestic long distance communications market.
We and other long distance carriers depend heavily on local
access facilities obtained from ILECs to serve our long distance
customers, and payments to ILECs for these facilities are a
significant cost of service for our Long Distance segment. The
long distance operations of AT&T and Verizon have cost and
operational advantages with respect to these access facilities
because those carriers serve significant geographic areas,
including many large urban areas, as the incumbent local carrier.
Failure
to complete development, testing and deployment of new
technology that supports new services could affect our ability
to compete in the industry. In addition, the technology we use
may place us at a competitive disadvantage.
We develop, test and deploy various new technologies and support
systems intended to enhance our competitiveness by both
supporting new services and features and reducing the costs
associated with providing those services. Successful development
and implementation of technology upgrades depend, in part, on
the
22
willingness of third parties to develop new applications in a
timely manner. We may not successfully complete the development
and rollout of new technology and related features or services
in a timely manner, and they may not be widely accepted by our
customers or may not be profitable, in which case we could not
recover our investment in the technology. Deployment of
technology supporting new service offerings may also adversely
affect the performance or reliability of our networks with
respect to both the new and existing services. Any resulting
customer dissatisfaction could affect our ability to retain
customers and have an adverse effect on our results of
operations and growth prospects.
Our wireless networks provide services utilizing CDMA and iDEN
technologies. Wireless subscribers served by these two
technologies represent a smaller portion of global wireless
subscribers than the subscribers served by wireless networks
that utilize GSM technology. As a result, our costs with respect
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 Internet services
contribute to increased competition.
The traditional dividing lines between long distance, local,
wireless, video and Internet services are increasingly becoming
blurred. Through mergers, joint ventures and various service
expansion strategies, major providers are striving to provide
integrated services in many of the markets we serve. This trend
is also reflected in changes in the regulatory environment that
have encouraged competition and the offering of integrated
services.
We expect competition to intensify across all of our business
segments as a result of the entrance of new competitors or the
expansion of services offered by existing competitors, and the
rapid development of new technologies, products and services. We
cannot predict which of many possible future technologies,
products, or services will be important to maintain our
competitive position or what expenditures we will be required to
make in order to develop and provide these technologies,
products or services. To the extent we do not keep pace with
technological advances or fail to timely respond to changes in
the competitive environment affecting our industry, we could
lose market share or experience a decline in revenue, cash flows
and net income. As a result of the financial strength and
benefits of scale enjoyed by some of our competitors, they may
be able to offer services at lower prices than we can, thereby
adversely affecting our revenues, growth and profitability.
If we are unable to meet our future capital needs relating to
investment in our networks and other obligations, it may be
necessary for us to curtail, delay or abandon our business
growth plans. If we incur significant additional indebtedness to
fund our plans, it could cause a decline in our credit rating
and could increase our borrowing costs or limit our ability to
raise additional capital.
We likely will require additional capital to make the capital
expenditures necessary to implement our business plans and
support future growth of our wireless business and satisfy our
debt service requirements. In addition, we may incur additional
debt in the future for a variety of reasons, including future
acquisitions. We may not be able to arrange additional financing
to fund our requirements on terms acceptable to us. Our ability
to arrange additional financing will depend on, among other
factors, our credit rating, financial performance, general
economic conditions and prevailing market conditions. Some of
these factors are beyond our control. Failure to obtain suitable
financing when needed could, among other things, result in our
inability to continue to expand our businesses and meet
competitive challenges. If we incur significant additional
indebtedness, or if we do not continue to generate sufficient
cash from our operations, our credit rating could be adversely
affected, which would likely increase our future borrowing costs
and could affect our ability to access capital.
We have entered into outsourcing agreements related to
certain business operations. Any difficulties experienced in
these arrangements could result in additional expense, loss of
customers and revenue, interruption of our services or a delay
in the roll-out of new technology.
We have entered into outsourcing agreements for the development
and maintenance of certain software systems necessary for the
operation of our business. We have also entered into agreements
with third parties to provide customer service and related
support to our wireless subscribers and outsourced many aspects
of our
23
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,
and we sublease space on these towers. As a result, we must rely
on third parties to perform certain of our operations and, in
certain circumstances, interface with our customers. If these
third parties are unable to perform to our requirements, we
would have to pursue alternative strategies to provide these
services and that could result in delays, interruptions,
additional expenses and loss of customers.
The intellectual property rights utilized by us and our
suppliers and service providers may infringe on intellectual
property rights owned by others.
Some of our products and services use intellectual property that
we own. We also purchase products from suppliers, including
handset device suppliers, and outsource services to service
providers, including billing and customer care functions, that
incorporate or utilize intellectual property. We and some of our
suppliers and service providers have received, and may receive
in the future, assertions and claims from third parties that the
products or software utilized by us or our suppliers and service
providers infringe on the patents or other intellectual property
rights of these third parties. These claims could require us or
an infringing supplier or service provider to cease certain
activities or to cease selling the relevant products and
services. Such claims and assertions also could subject us to
costly litigation and significant liabilities for damages or
royalty payments, or require us to cease certain activities or
to cease selling certain products and services.
If Motorola is unable or unwilling to provide us with
equipment and handsets in support of our iDEN based services, as
well as anticipated handset and infrastructure improvements for
those services, our operations will be adversely affected.
Motorola is our sole source for most of the equipment that
supports the iDEN network and for all of the handsets we offer
under the Nextel brand except primarily for BlackBerry devices.
Although our handset supply agreement with Motorola is
structured to provide competitively priced handsets, the cost of
iDEN handsets is generally higher than handsets that do not
incorporate a similar multi-function capability. This difference
may make it more difficult or costly for us to offer handsets at
prices that are attractive to potential customers. In addition,
the higher cost of iDEN handsets requires us to absorb a larger
part of the cost of offering handsets 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, including a dual-mode handset. A
decision by Motorola to discontinue manufacturing, supporting or
enhancing our iDEN-based infrastructure and handsets would have
a material adverse effect on us. In addition, because iDEN
technology is not as widely adopted and has fewer subscribers
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 manufacture iDEN
infrastructure equipment and handsets. Further, our ability to
timely and efficiently implement the spectrum reconfiguration
plan in connection with the FCCs Report and Order is
dependent, in part, on Motorola.
The reconfiguration process contemplated by the FCCs
Report and Order may adversely affect our business and
operations, which could adversely affect our future growth and
operating results.
In order to accomplish the reconfiguration of the 800 MHz
spectrum band that is contemplated by the Report and Order, in
most cases we will need to cease our use of a portion of the 800
MHz spectrum on our iDEN network in a particular market before
we are able to commence use of replacement 800 MHz spectrum in
that market. To mitigate the temporary loss of the use of this
spectrum, in many markets we will need to construct additional
transmitter and receiver sites or acquire additional spectrum in
the 800 MHz or 900 MHz bands. This spectrum may not be available
to us on acceptable terms. In markets where we are unable to
construct additional sites or acquire additional spectrum as
needed, the decrease in capacity may adversely affect the
performance of our iDEN network, require us to curtail
subscriber additions in those markets until the capacity
limitation can be corrected, or a combination of the two.
Degradation in network performance in any market could result in
higher subscriber churn in that market, the effect of which
could be exacerbated if we are forced to curtail subscriber
additions in that market. A resulting loss of a significant
number of subscribers
24
could adversely affect our results of operations. We believe
that the reconfiguration process has contributed adversely to
the capacity and performance of our iDEN network, particularly
in some of our more capacity constrained markets. In addition,
the Report and Order gives the FCC the authority to suspend our
use of the 1.9 GHz spectrum that we received under the Report
and Order if we do not comply with our obligations under the
Report and Order.
Government regulation could adversely affect our prospects
and results of operations; the FCC and state regulatory
commissions may adopt new regulations or take other actions that
could adversely affect our business prospects or results of
operations.
The FCC and other federal, state and local governmental
authorities have jurisdiction over our business and could adopt
regulations or take other actions that would adversely affect
our business prospects or results of operations.
The licensing, construction, operation, sale and interconnection
arrangements of wireless telecommunications systems are
regulated by the FCC and, depending on the jurisdiction, state
and local regulatory agencies. In particular, the FCC imposes
significant regulation on licensees of wireless spectrum with
respect to:
|
|
|
|
|
how radio spectrum is used by licensees;
|
|
|
|
the nature of the services that licensees may offer and how such
services may be offered; and
|
|
|
|
resolution of issues of interference between spectrum bands.
|
Various states are considering regulations over terms and
conditions of service, including such things as certain billing
practices and consumer-related issues, that may not be preempted
by federal law. If imposed, these regulations could increase the
costs of our wireless operations.
The FCC grants wireless licenses for terms of generally ten
years that are subject to renewal and revocation. There is no
guarantee that our licenses will be renewed. Failure to comply
with FCC requirements in a given license area could result in
revocation of the license for that license area.
The FCC has initiated a number of proceedings to evaluate its
rules and policies regarding spectrum licensing and usage. It is
considering new harmful interference concepts that
might permit unlicensed users to share licensed
spectrum. These new uses could adversely impact our utilization
of our licensed spectrum, and our operational costs.
CMRS providers must implement E911 capabilities in accordance
with FCC rules. We were unable to satisfy the requirement that
95% of our iDEN subscriber base have Assisted-GPS capable
handsets by December 31, 2005. The matter has been referred
to the FCCs Enforcement Bureau for further action, which
could result in fines, new deadlines for compliance or further
actions by us to encourage our customers to upgrade their
handsets so we can fulfill the 95% requirement.
Depending upon their outcome, the FCCs proceedings
regarding regulation of special access rates could affect the
rates paid by our Long Distance and Wireless segments for
special access services in the future. Similarly, depending on
their outcome, the FCCs proceedings on the regulatory
classification of VoIP services could affect the intercarrier
compensation rates and the level of USF contributions paid by us.
Concerns 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 against numerous wireless carriers, including us,
seeking not only damages but also remedies that could increase
our cost of doing business. We cannot be sure of the outcome of
those cases or that our business and financial condition will
not be adversely affected by litigation of this nature or public
perception about health risks. The actual or perceived risk of
mobile communications devices could adversely affect us through
a reduction in subscribers, reduced network usage per subscriber
or reduced financing available to the mobile
25
communications industry. Further research and studies are
ongoing, and we cannot be sure that additional studies will not
demonstrate a link between radio frequency emissions and health
concerns.
Item 1B. Unresolved
Staff Comments
Not applicable.
Item 2. Properties
We currently lease our corporate headquarters offices in Reston,
Virginia. These facilities total about 801,000 square feet and
the related operating leases have initial terms expiring in
2009, 2010 and 2014. Such facilities have renewal options, which
we may, or may not, exercise. Our operational headquarters
campus is located in Overland Park, Kansas and consists of about
4 million square feet.
Our gross property, plant and equipment at December 31,
2006 totaled $42.4 billion, distributed among the business
segments as follows:
|
|
|
|
|
|
|
2006
|
|
|
|
(in billions)
|
|
Wireless
|
|
$
|
37.0
|
|
Long Distance
|
|
|
3.3
|
|
Other
|
|
|
2.1
|
|
|
|
|
|
|
Total
|
|
$
|
42.4
|
|
|
|
|
|
|
Properties utilized by our Wireless segment consist of base
transceiver stations, switching equipment and towers, as well as
leased and owned general office facilities and retail stores. We
lease space for base station towers and switch sites for our
wireless network. At December 31, 2006, we had 61,000 cell
sites on air.
In May 2005, we closed a transaction with Global Signal under
which Global Signal has exclusive rights to lease or operate
about 6,500 communication towers owned by us for a negotiated
lease term which is the greater of the remaining terms of the
underlying ground leases or up to 32 years, assuming
successful re-negotiation of the underlying ground leases at the
end of their current lease terms. We have committed to sublease
space on about 6,400 of the towers from Global Signal. We will
maintain ownership of the towers and will continue to reflect
the towers on our consolidated balance sheet.
Properties utilized by our Long Distance segment generally
consist of land, buildings, switching equipment, digital
fiber-optic network and other transport facilities. We have been
granted easements,
rights-of-way
and
rights-of-occupancy
by railroads and other private landowners for our fiber-optic
network.
As of December 31, 2006, about $621 million of
outstanding debt, comprised of certain secured notes, capital
lease obligations and mortgages, is secured by $1.9 billion
of gross property, plant and equipment, and 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 relating to
the recombination of our tracking stocks were filed against us
and our directors by holders of PCS common stock. Seven of the
lawsuits were consolidated in the District Court of Johnson
County, Kansas. The eighth, pending in New York, has been
voluntarily stayed. The consolidated lawsuit alleges breach of
fiduciary duty in connection with allocations between the
wireline operations and the wireless operations before the
recombination of the tracking stocks and breach of fiduciary
duty in the recombination. The lawsuit seeks to rescind the
recombination and monetary damages. In December 2006, the court
denied defendants motions to dismiss the complaint and for
summary judgment, and granted a motion to certify the class. In
February 2007, the court upon reconsideration dismissed a count
of the complaint related to intracompany allocations, which
requires dismissal of the complaint against three
26
of our former directors and reconsideration of the class
definition. The court has asked the parties for further briefing
on the class certification issue and the plaintiffs
request for a jury trial. Trial is scheduled for September 2007.
All defendants have denied plaintiffs allegations and
intend to defend this matter vigorously.
In September 2004, the U.S. District Court for the District of
Kansas denied a motion to dismiss a shareholder lawsuit alleging
that our 2001 and 2002 proxy statements were false and
misleading in violation of federal securities laws to the extent
they described new employment agreements with certain senior
executives without disclosing that, according to the
allegations, replacement of those executives was inevitable.
These allegations, made in an amended complaint in a lawsuit
originally filed in 2003, are asserted against us and certain of
our current and former officers and directors, and seek to
recover any decline in the value of our tracking stocks during
the class period. The parties have stipulated that the case can
proceed as a class action. All defendants have denied
plaintiffs allegations and intend to defend this matter
vigorously. Allegations in the original complaint, which
asserted claims against the same defendants and our former
independent auditor, were dismissed by the court in April 2004.
A number of putative class action cases that allege Sprint
Communications Company L.P. failed to obtain easements from
property owners during the installation of its fiber optic
network in the 1980s have been filed in various courts.
Several of these cases sought certification of nationwide
classes, and in one case, a nationwide class has been certified.
In 2002, a nationwide settlement of these claims was approved by
the U.S. District Court for the Northern District of Illinois,
but objectors appealed the preliminary approval order to the
Seventh Circuit Court of Appeals, which overturned the
settlement and remanded the case to the trial court for further
proceedings. The parties now are proceeding with litigation
and/or settlement negotiations on a state by state basis. In
2001, we accrued an expense reflecting the estimated settlement
costs of these suits.
Various other suits, proceedings and claims, including purported
class actions, typical for a large business enterprise are
pending against us or our subsidiaries. While it is not possible
to determine the ultimate disposition of each of these
proceedings and whether they will be resolved consistent with
our beliefs, we expect that the outcome of such proceedings,
individually or in the aggregate, will not have a material
adverse effect on our financial condition or results of
operation.
Item 4. Submission
of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
fourth quarter 2006.
Executive
Officers of the Registrant
The following people are serving as our executive officers as of
February 28, 2007. These executive officers were elected to
serve until their successors have been elected. There is no
familial relationship between any of our executive officers and
directors.
|
|
|
|
|
|
|
|
Office
|
|
Name
|
|
Age
|
|
Chairman, Chief Executive Officer
and President
|
|
|
Gary D.
Forsee(1)
|
|
|
56
|
|
Chief Financial Officer
|
|
|
Paul N.
Saleh(2)
|
|
|
50
|
|
General Counsel
|
|
|
Leonard J.
Kennedy(3)
|
|
|
55
|
|
Chief Information Officer
|
|
|
Richard
LeFave(4)
|
|
|
55
|
|
Chief Network Officer
|
|
|
Kathryn A.
Walker(5)
|
|
|
47
|
|
Chief Technology Officer
|
|
|
Barry
West(6)
|
|
|
61
|
|
President
Sales & Distribution
|
|
|
Mark
Angelino(7)
|
|
|
50
|
|
President Customer
Management
|
|
|
Timothy E.
Kelly(8)
|
|
|
48
|
|
Senior Vice President &
Controller
|
|
|
William G.
Arendt(9)
|
|
|
49
|
|
Senior Vice President &
Treasurer
|
|
|
Richard S.
Lindahl(10)
|
|
|
43
|
|
|
|
(1) |
Mr. Forsee has been our Chief Executive Officer and one
of our directors since March 2003. He was appointed President in
August 2005, and was appointed Chairman in December 2006. He had
been our
|
27
|
|
|
Chairman from May 2003 until August 2005. He served as Vice
ChairmanDomestic Operations of BellSouth Corporation from
January 2002 to March 2003, and President of BellSouth
International from 2001 to 2002, during which time he also
served as Chairman of Cingular Wireless from 2001 to January
2002.
|
|
|
(2)
|
Mr. Saleh was appointed Chief Financial Officer at the
time of the Sprint-Nextel merger in August 2005. He served as
Executive Vice President and Chief Financial Officer of Nextel
from September 2001 to August 2005.
|
|
(3)
|
Mr. Kennedy was appointed General Counsel at the time of
the Sprint-Nextel merger in August 2005. He served as Senior
Vice President and General Counsel of Nextel from January 2001
to August 2005.
|
|
(4)
|
Mr. LeFave was appointed Chief Information Officer at
the time of the Sprint-Nextel merger in August 2005. He served
as Senior Vice President, Chief Information Officer of Nextel
from February 1999 to August 2005.
|
|
(5)
|
Ms. Walker was appointed Chief Network Officer at the
time of the Sprint-Nextel merger in August 2005. She served as
our Executive Vice President-Network Services from October 2003
to August 2005. She served as Senior Vice President-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 Broadband Operations effective
August 2006. He served as Executive Vice President and Chief
Technology Officer of Nextel from March 1996 until August
2005.
|
|
(7)
|
Mr. Angelino was appointed President
Sales & Distribution in December 2006. He served as
President, Business Solutions from the time of the Sprint-Nextel
merger in August 2005 until December 2006. He served as Senior
Vice President at Nextel from September 2001 until August
2005.
|
|
(8)
|
Mr. Kelly was appointed President Customer
Management in December 2006. He served as President, Consumer
Solutions from the time of the Sprint-Nextel merger in August
2005 until December 2006. He served as our President-Sprint
Consumer Solutions from October 2004 until August 2005. He
served as Senior Vice PresidentConsumer Solutions
Marketing from October 2003 until October 2004. He served as
PresidentSprint Business from 2002 to October 2003,
PresidentMass Markets in 2002 and PresidentNational
Consumer Organization in 2001.
|
|
(9)
|
Mr. Arendt was appointed Senior Vice
President & Controller at the time of the Sprint-Nextel
merger in August 2005. He served as Senior Vice President of
Nextel from February 2004 until August 2005 and as Controller of
Nextel from May 1997 until August 2005. He also served as Vice
President of Nextel from May 1997 until February 2004.
|
|
(10)
|
Mr. Lindahl was appointed Senior Vice
President & Treasurer in July 2006. He served as Vice
President & Treasurer from the time of the
Sprint-Nextel merger in August 2005 until July 2006. He served
as Vice President and Treasurer of Nextel from May 2002 until
August 2005. He served in various capacities at Nextel,
including Assistant Treasurer and Director, Financial
Planning & Analysis, from August 1997 until May
2002.
|
28
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Common
Share Data
The principal trading market for our common stock, Series 1
is the New York Stock Exchange, or NYSE. Our common stock,
Series 2 is not publicly traded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Market Price
|
|
|
|
|
|
|
|
|
|
End
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
High
|
|
|
Low
|
|
|
Period
|
|
|
Common shares,
Series 1
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
26.25
|
|
|
$
|
22.47
|
|
|
$
|
25.84
|
|
Second quarter
|
|
|
26.89
|
|
|
|
19.33
|
|
|
|
19.99
|
|
Third quarter
|
|
|
20.80
|
|
|
|
15.92
|
|
|
|
17.15
|
|
Fourth quarter
|
|
|
20.63
|
|
|
|
16.75
|
|
|
|
18.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Market Price
|
|
|
|
|
|
|
|
|
|
End
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
High
|
|
|
Low
|
|
|
Period
|
|
|
Common shares,
Series 1(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
25.16
|
|
|
$
|
21.80
|
|
|
$
|
22.75
|
|
Second quarter
|
|
|
25.87
|
|
|
|
21.57
|
|
|
|
25.09
|
|
Third quarter
|
|
|
27.20
|
|
|
|
23.10
|
|
|
|
23.78
|
|
Fourth quarter
|
|
|
26.86
|
|
|
|
22.15
|
|
|
|
23.36
|
|
|
|
|
(1) |
|
Until August 12, 2005, when it was redesignated in
connection with the Sprint-Nextel merger, our common stock,
Series 1, was designated as FON common stock,
Series 1. |
Number of
Shareholders of Record
As of February 21, 2007, we had about 56,000 common stock,
Series 1 record holders, 12 common stock, Series 2
record holders, and no non-voting common stock record holders.
Dividends
We paid a dividend of $0.025 per outstanding share on our common
stock on a quarterly basis in 2006 and in the third and fourth
quarters 2005. We paid a dividend of $0.125 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 our common shares. These restricted stock units were
the result of dividend equivalent rights attached to restricted
stock units granted to these individuals in 2003. Each
restricted stock unit represents the right to one common share
once the unit vests. Some of these restricted stock units vested
in 2006, but the holder of these restricted stock units elected
to delay delivery of the underlying shares. The other restricted
stock units vest in 2007. Neither these restricted stock units,
nor the common stock issuable once the units vest, were
registered under the Securities Act of 1933, or Securities Act.
The restricted stock units were issued in reliance on the
exemption from registration provided by Section 4(2) of the
Securities Act because the restricted stock units were issued in
transactions not involving a public offering.
29
In connection with our Employees Stock Purchase Plan, or ESPP,
the number of shares deposited in the accounts of certain
participants was greater than the number of shares purchased
based on their fourth quarter payroll deductions. When the error
was discovered in January 2007, we took steps to remove the
excess shares from the accounts of these participants. However,
about 300 participants already had sold an aggregate of about
2,500 excess shares into the public market. Steps have been
taken to recover the proceeds that the participants received
from the sale of the excess shares. The excess shares were not
registered under the Securities Act of 1933, as amended. No
exemption from registration is available.
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Dollar Value) Of
|
|
|
|
Total
|
|
|
|
|
|
Part of Publicly
|
|
|
Shares that May
|
|
|
|
Number of
|
|
|
|
|
|
Announced
|
|
|
Yet Be Purchased
|
|
|
|
Shares
|
|
|
Average Price Paid
|
|
|
Plans or
|
|
|
Under the Plans
|
|
Period
|
|
Purchased(1)
|
|
|
Per
Share(2)
|
|
|
Programs(3)
|
|
|
or Programs
|
|
|
October 1 through October 31
common shares, Series 1
|
|
|
6,975,300
|
|
|
$
|
17.21
|
|
|
|
6,975,300
|
|
|
$
|
4.4
|
|
November 1 through November 30
common shares, Series 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.4
|
|
December 1 through December 31
common shares, Series 1
|
|
|
8,494
|
|
|
|
19.67
|
|
|
|
|
|
|
$
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,983,794
|
|
|
$
|
17.21
|
|
|
|
6,975,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisitions 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-based
awards made under those plans. Under the terms of these plans
and awards, acquisitions consist of the following: the
forfeiture of restricted shares; the surrender of restricted
shares to pay required minimum income, Medicare and Federal
Insurance Contributions Act, or FICA, tax withholding on the
vesting of restricted shares, which represented the
8,494 shares acquired during December; and the delivery of
previously owned shares by the grantee to pay the exercise price
of options. Excludes shares used for required minimum tax
withholding on the exercise of options and the delivery of
shares underlying restricted stock units and deferred shares
since only the net shares are issued. |
|
(2) |
|
Excludes forfeited restricted shares since the purchase price
was zero. The purchase price of shares used for the exercise
price of options is the market price of the shares on the date
of the exercise of the option. The purchase price of shares used
for tax withholding is the market price of the shares on the
trading date immediately preceding the date of vesting of the
restricted shares. |
|
(3) |
|
On August 3, 2006, we announced that our board of
directors authorized us to repurchase through open market
purchases up to $6.0 billion of our common shares over an
18 month period expiring in the first quarter 2008. As of
December 31, 2006, we had repurchased $1.6 billion of
our common shares at an average price of $16.76. |
No options may be granted pursuant to the Management Incentive
Stock Option Plan after April 18, 2005; no awards may be
granted pursuant to the 1997 Long-Term Stock Incentive Program
after April 15, 2007; and no awards may be granted pursuant
to the Nextel Incentive Equity Plan after July 13, 2015.
Options, restricted share awards and restricted stock unit
awards outstanding on those dates may continue to be outstanding
after those dates. We cannot estimate how many shares will be
acquired in the manner described in footnote (1) to the
table above pursuant to the terms of these plans.
30
Performance
Graph
The graph below compares the yearly percentage change in the
cumulative total shareholder return for our Series 1 common
stock with the
S&P®
500 Stock Index and the Dow Jones U.S. Telecommunications Index
for the five-year period from December 31, 2001 to
December 31, 2006. The cumulative total shareholder return
for our Series 1 common stock has been adjusted for the
periods shown for the recombination of our FON common stock and
PCS common stock that was effected on April 23, 2004. The
graph assumes an initial investment of $100 in our common stock
on December 31, 2001 and reinvestment of all dividends.
The Dow Jones U.S. Telecommunications Index is currently
composed of the following companies: Alltel Corp., AT&T
Inc., CenturyTel Inc., Cincinnati Bell Inc., Citizens
Communications Co., Dobson Communications Corp., Embarq, IDT
Corp., 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. and Windstream Corp.
5-Year Total Return
Value of
$100 Invested on December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Sprint Nextel
|
|
$
|
100.00
|
|
|
$
|
41.31
|
|
|
$
|
49.65
|
|
|
$
|
87.44
|
|
|
$
|
83.13
|
|
|
$
|
73.54
|
|
S&P 500
|
|
$
|
100.00
|
|
|
$
|
77.90
|
|
|
$
|
100.25
|
|
|
$
|
111.15
|
|
|
$
|
116.61
|
|
|
$
|
135.04
|
|
Dow Jones U.S. Telecom Index
|
|
$
|
100.00
|
|
|
$
|
67.23
|
|
|
$
|
75.76
|
|
|
$
|
91.29
|
|
|
$
|
93.16
|
|
|
$
|
125.58
|
|
31
Item 6. Selected
Financial Data
The 2006 and 2005 data presented below is not comparable to that
of the prior periods as a result of the Sprint-Nextel merger and
the Nextel Partners and the PCS Affiliate acquisitions during
2006 and 2005. The acquired companies financial results
subsequent to their acquisition dates are included in our
consolidated financial statements. The spin-off of Embarq in
2006 and our directory publishing business in 2003 are shown as
discontinued operations for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
41,028
|
|
|
$
|
28,789
|
|
|
$
|
21,647
|
|
|
$
|
20,414
|
|
|
$
|
20,889
|
|
Depreciation
|
|
|
5,738
|
|
|
|
3,864
|
|
|
|
3,651
|
|
|
|
3,909
|
|
|
|
3,744
|
|
Amortization
|
|
|
3,854
|
|
|
|
1,336
|
|
|
|
7
|
|
|
|
1
|
|
|
|
4
|
|
Operating income
(loss)(1)
|
|
|
2,484
|
|
|
|
2,141
|
|
|
|
(1,999
|
)
|
|
|
(729
|
)
|
|
|
417
|
|
Income (loss) from continuing
operations(1)
|
|
|
995
|
|
|
|
821
|
|
|
|
(2,006
|
)
|
|
|
(1,306
|
)
|
|
|
(522
|
)
|
Discontinued operations, net
|
|
|
334
|
|
|
|
980
|
|
|
|
994
|
|
|
|
2,338
|
|
|
|
1,132
|
|
Cumulative effect of change in
accounting principle,
net(4)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
258
|
|
|
|
|
|
Earnings (loss) per share and
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share(3)
Continuing
operations(1)(2)
|
|
|
0.34
|
|
|
|
0.40
|
|
|
|
(1.40
|
)
|
|
|
(0.92
|
)
|
|
|
(0.38
|
)
|
Discontinued operations
|
|
|
0.11
|
|
|
|
0.48
|
|
|
|
0.69
|
|
|
|
1.65
|
|
|
|
0.81
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
Diluted earnings (loss) per common
share(3)
Continuing
operations(1)(2)
|
|
|
0.34
|
|
|
|
0.40
|
|
|
|
(1.40
|
)
|
|
|
(0.92
|
)
|
|
|
(0.38
|
)
|
Discontinued operations
|
|
|
0.11
|
|
|
|
0.48
|
|
|
|
0.69
|
|
|
|
1.65
|
|
|
|
0.81
|
|
Cumulative effect of change in
accounting
principle(4)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
0.18
|
|
|
|
|
|
Dividends per common
share(5)
|
|
|
0.10
|
|
|
|
0.30
|
|
|
-----------See (5) below---------
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
97,161
|
|
|
$
|
102,760
|
|
|
$
|
41,321
|
|
|
$
|
42,675
|
|
|
$
|
45,113
|
|
Property, plant and equipment, net
|
|
|
25,868
|
|
|
|
23,329
|
|
|
|
14,662
|
|
|
|
19,130
|
|
|
|
21,127
|
|
Intangible assets
|
|
|
60,057
|
|
|
|
49,307
|
|
|
|
7,809
|
|
|
|
7,788
|
|
|
|
9,019
|
|
Total debt and capital lease
obligations (including equity unit notes)
|
|
|
22,154
|
|
|
|
25,014
|
|
|
|
16,425
|
|
|
|
18,243
|
|
|
|
20,853
|
|
Seventh series redeemable
preferred shares
|
|
|
|
|
|
|
247
|
|
|
|
247
|
|
|
|
247
|
|
|
|
256
|
|
Shareholders equity
|
|
|
53,131
|
|
|
|
51,937
|
|
|
|
13,521
|
|
|
|
13,113
|
|
|
|
12,108
|
|
Cash flow data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
$
|
10,055
|
|
|
$
|
8,655
|
|
|
$
|
4,478
|
|
|
$
|
4,141
|
|
|
$
|
3,869
|
|
Capital expenditures
|
|
|
7,556
|
|
|
|
5,057
|
|
|
|
3,980
|
|
|
|
3,797
|
|
|
|
4,821
|
|
The tables above set forth selected consolidated financial data
for the periods or as of the dates indicated and should be read
in conjunction with the consolidated financial statements,
related notes and other financial information appearing at the
end of this annual report on
Form 10-K.
Highlighted below are certain transactions and factors that may
be significant to an understanding of the comparability of our
results of operations and our financial condition.
|
|
|
(1) |
|
In 2006, we recorded net charges of $620 million
($381 million after tax) primarily related to merger and
integration costs, asset impairments, severance and exit
costs. |
32
|
|
|
In 2005, we recorded net charges of $723 million
($445 million after tax) primarily related to merger and
integration costs, asset impairments, severance and
hurricane-related costs.
|
|
|
In 2004, we recorded net charges of $3.7 billion
($2.3 billion after tax) primarily related to severance and
a Long Distance network impairment, partially offset by
recoveries of fully reserved MCI (now Verizon) receivables.
|
|
|
In 2003, we recorded net charges of $1.9 billion
($1.2 billion after tax) primarily related to severance,
asset impairments and executive separation agreements, partially
offset by recoveries of fully reserved MCI (now Verizon)
receivables.
|
|
|
In 2002, we recorded net charges of $318 million
($200 million after tax) primarily related to severance,
asset impairments and expected loss on WorldCom (now Verizon)
receivables.
|
|
|
|
(2) |
|
As the effects of including the incremental shares associated
with options, restricted stock units and employees stock
purchase plan shares are antidilutive, both basic loss per share
and diluted loss per share from continuing operations reflect
the same calculation for the years ended December 31, 2004,
2003 and 2002. |
|
(3) |
|
All per share amounts have been restated, for all periods
before 2004, to reflect the recombination of our common stock
and PCS common stock as of the earliest period presented at an
identical conversion ratio (0.50 shares of our common stock
for each share of PCS common stock). The conversion ratio was
also applied 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. |
|
(4) |
|
In 2005, we recorded a charge of $16 million due to the
adoption of Financial Accounting Standards Board Interpretation
No. 47, Accounting for Conditional Asset Retirement
Obligations, and in 2003, we recorded a credit of
$258 million as a result of the adoption of Statement of
Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations. Both resulted in a cumulative
effect of change in accounting principle. |
|
(5) |
|
In the first and second quarter 2005, a dividend of $0.125
per share was paid. In the third and fourth quarter 2005 and for
each quarter of 2006, the dividend was $0.025 per share. Before
the recombination of our two tracking stocks, shares of PCS
common stock did not receive dividends. For each of the three
years ended December 31, 2004, shares of our common stock
(before the conversion of shares of PCS common stock) received
dividends of $0.50 per share. In the first quarter 2004, shares
of our common stock received a dividend of $0.125 per share. In
the second, third and fourth quarter 2004, shares of our common
stock, which included shares resulting from the conversion of
shares of PCS common stock, received quarterly dividends of
$0.125 per share. |
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
We include certain estimates, projections and other
forward-looking statements in our annual, quarterly and current
reports, and in other publicly available material. Statements
regarding expectations, including performance assumptions and
estimates relating to capital requirements, as well as other
statements that are not historical facts, are forward-looking
statements.
These statements reflect managements judgments based on
currently available information and involve a number of risks
and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. With
respect to these forward-looking statements, management has made
assumptions regarding, among other things, customer and network
usage, customer growth and retention, pricing, operating costs,
the timing of various events and the economic environment.
Future performance cannot be assured. Actual results may differ
materially from those in the forward-looking statements. Some
factors that could cause actual results to differ include:
|
|
|
|
|
the effects of vigorous competition, including the impact of
competition on the price we are able to charge customers for
services we provide and our ability to attract new customers and
retain existing
|
33
|
|
|
|
|
customers; the overall demand for our service offerings,
including the impact of decisions of new subscribers between our
post-paid and prepaid services offerings and between our two
network platforms; and the impact of new, emerging and competing
technologies on our business;
|
|
|
|
|
|
the impact of overall wireless market penetration on our ability
to attract and retain customers with good credit standing and
the intensified competition among wireless carriers for those
customers;
|
|
|
|
the potential impact of difficulties we may encounter in
connection with the integration of the pre-merger Sprint and
Nextel businesses, and the integration of the businesses and
assets of certain of the third party affiliates, or PCS
Affiliates, that provide wireless personal communications
services, or PCS, under the
Sprint®
brand that we have acquired, and Nextel Partners, Inc.,
including the risk that these difficulties could prevent or
delay our realization of the cost savings and other benefits we
expect to achieve as a result of these integration efforts and
the risk that we will be unable to continue to retain key
employees;
|
|
|
|
the uncertainties related to the implementation of our business
strategies, investments in our networks, our systems, and other
businesses, including investments required in connection with
our planned deployment of a next generation broadband wireless
network;
|
|
|
|
the costs and business risks associated with providing new
services and entering new geographic markets, including with
respect to our development of new services expected to be
provided using the next generation broadband wireless network
that we plan to deploy;
|
|
|
|
the impact of potential adverse changes in the ratings afforded
our debt securities by ratings agencies;
|
|
|
|
the effects of mergers and consolidations and new entrants in
the communications industry and unexpected announcements or
developments from others in the communications industry;
|
|
|
|
unexpected results of litigation filed against us;
|
|
|
|
the inability of third parties to perform to our requirements
under agreements 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;
|
|
|
|
the impact of adverse network performance;
|
|
|
|
the costs of compliance with regulatory mandates, particularly
requirements related to the Federal Communications
Commissions, or FCCs, Report and Order;
|
|
|
|
equipment failure, natural disasters, terrorist acts, or other
breaches of network or information technology security;
|
|
|
|
one or more of the markets in which we compete being impacted by
changes in political or other factors such as monetary policy,
legal and regulatory changes or other external factors over
which we have no control; and
|
|
|
|
other risks referenced from time to time in this report and
other filings of ours with the Securities and Exchange
Commission, or SEC, including Part I, Item 1A,
Risk Factors.
|
The words may, could,
estimate, project, forecast,
intend, expect, believe,
target, providing guidance and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are found throughout this
Managements Discussion and Analysis of Financial Condition
and Results of Operations, and elsewhere in this report. The
reader should not place undue reliance on forward-looking
statements, which speak only as of the date of this report. We
are not obligated to publicly release any revisions to
forward-looking statements to reflect events after the date of
this report, including unforeseen events.
34
Overview
We are a global communications company offering a comprehensive
range of wireless and wireline communications products and
services that are designed to meet the needs of individual
consumers, businesses and government customers. We have
organized our operations to meet the needs of our targeted
customer groups through focused communications solutions that
incorporate the capabilities of our wireless and wireline
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 Spin-off
On August 12, 2005, a subsidiary of our company merged with
Nextel Communications, Inc. and, as a result, we acquired
Nextel. We merged with Nextel to secure a number of potential
strategic and financial benefits, including those arising from
the combination of our networks, spectrum assets, and diverse
customer bases and services, the size and scale of the combined
company and the opportunity to focus on the fastest growing
areas of the communications industry. We also believe that the
merger provides significant opportunities to achieve operating
efficiencies by realizing revenue, operating cost and capital
spending synergies.
We have begun to realize cost savings and other synergies as a
result of the merger and over a number of years expect to
continue to realize significant cost savings and other synergies
associated with the merger. However, we believe that our
operating results for at least the next several quarters will be
impacted negatively by costs that will be incurred to achieve
these benefits and other synergies. Such costs are generally not
expected to be recurring in nature, and include costs associated
with integrating back office systems, severance costs associated
with the termination of the employment of certain employees, and
lease and other contract termination costs. The merger and
integration costs that we incur will be dependent on a number of
business or strategic decisions whose timing cannot be predicted
with certainty, which could cause merger and integration costs,
and our realization of benefits from the merger and integration
efforts, to vary from period to period. The ability to achieve
these cost savings and other synergies and the timing in which
the benefits can be realized will depend in large part on the
ability to integrate our networks, business operations,
back-office functions and other support systems and
infrastructure.
At the time that we announced the merger, we also announced our
plans to spin-off to our shareholders our local communications
business, which is now known as Embarq Corporation and is
comprised primarily of what was our Local segment prior to the
spin-off. We completed the spin-off on May 17, 2006. In the
spin-off, we distributed pro rata to our shareholders one Embarq
common share for every 20 shares of our voting and
non-voting common stock, or about 149 million shares of
Embarq common stock, and received net cash consideration and net
proceeds from the sale of Embarq senior notes totaling about
$6.3 billion. Cash was paid for fractional shares. As a
result of the spin-off, we no longer own any shares of Embarq.
The results of Embarq for periods prior to the spin-off are
presented as discontinued operations.
We received a ruling from the Internal Revenue Service that,
based on certain facts, assumptions, representations and
undertakings set forth in the ruling, for U.S. federal income
tax purposes, the distribution of Embarq common shares is not
taxable to us or U.S. holders of our common shares, except cash
payments made in lieu of fractional shares, which generally are
taxable.
Business
We offer a comprehensive range of wireless and wireline
communications products and services that are designed to meet
the needs of individual consumers, businesses and government
customers. We conduct our operations through two segments
referred to as Wireless and Long Distance.
We, together with the PCS Affiliates, offer digital wireless
services in all 50 states, Puerto Rico and the U.S. Virgin
Islands under the Sprint brand name utilizing wireless code
division multiple access, or CDMA, technology. The PCS
Affiliates, through commercial arrangements with us, provide
wireless services mainly in and around smaller U.S. metropolitan
areas on wireless networks built and operated at their expense,
in most
35
instances using spectrum licensed to and controlled by us.
During 2005, we acquired three PCS Affiliates and in 2006 we
acquired three additional PCS Affiliates. We also offer digital
wireless services under the Nextel and Boost brand names using
iDEN technology. During 2006, we acquired Nextel Partners which
provides digital wireless communications services under the
Nextel brand name in certain mid-sized and tertiary U.S.
markets. The acquisitions of these PCS Affiliates and Nextel
Partners gave us more 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. We also are one of
the largest providers of long distance services and one of the
largest carriers of Internet traffic in the nation.
We believe the communications industry has been and will
continue to be highly competitive on the basis of price, the
types of services offered and quality of service. Although we
believe that many of our targeted customers base their purchase
decisions on quality of service and the availability of
differentiated features and services, competitive pricing, both
in terms of the monthly recurring charges and the number of
minutes or other features available under a particular rate
plan, and handset offerings are often important factors in
potential customers purchase decisions.
Our industry has been and continues to be subject to
consolidation and dynamic change as well as intense competition.
To maintain our operating margins in a price-competitive
environment, we continually seek ways to create or improve
capital and operating efficiencies in our business.
Consequently, we routinely reassess our business strategies and
their implications on our operations, and these assessments may
continue to impact the future valuation of our long-lived
assets. As part of our overall business strategy, we regularly
evaluate opportunities to expand and complement our business and
may at any time be discussing or negotiating a transaction that,
if consummated, could have a material effect on our business,
financial condition, liquidity or results of operations.
The FCC regulates the licensing, operation, acquisition and sale
of the licensed radio spectrum that is essential to our
business. The FCC and state Public Utilities Commissions, or
PUCs, also regulate the provision of communications services.
Future changes in regulations or legislation related to spectrum
licensing or other matters related to our business could impose
significant additional costs on us either in the form of direct
out-of-pocket
costs or additional compliance obligations.
Management
Overview
Wireless
We offer a wide array 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 wireless service in all 50 states, Puerto Rico and
the U.S. Virgin Islands, and provide wireless coverage in over
300 metropolitan markets, including 297 of the 300 largest U.S.
metropolitan areas, where more than 280 million people live
or work. We offer wireless international voice roaming for
subscribers of both CDMA and iDEN-based services in numerous
countries. We, together with the PCS Affiliates and resellers of
our wholesale wireless services, served about 53.1 million
wireless subscribers at the end of 2006.
We offer wireless mobile telephone and data transmission
services and features in a variety of pricing plans, including
prepaid service plans. We offer these services, other than those
offered under prepaid service plans, typically on a contract
basis, for one or two year periods, with services billed on a
monthly basis according to the applicable pricing plan. We
market our prepaid services under the Boost Mobile brand, as a
means to directly target the youth and prepaid wireless service
markets. We also offer wholesale wireless services to resellers,
commonly known as mobile virtual network operators, or MVNOs,
such as Embarq, Modiva Communications, Inc., Helio Inc., Qwest
Communications International, Inc., The Walt Disney Company and
Virgin Mobile USA, which purchase wireless services from us at
wholesale rates and resell the services to their customers under
their own brand names. Under these MVNO arrangements, the
operators bear the costs of acquisition, billing and customer
service.
36
We also provide wireless services that are marketed and sold by
several cable multiple systems operators, or MSOs, in four
markets. We also have entered into an agreement with several
cable MSOs to jointly develop converged services designed to
combine many of cables 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 service, to the
participating cable MSOs customers. During 2007, we expect
to develop new products and services and introduce service in
additional markets.
Our strategy is to utilize
state-of-the-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 that utilize high-speed evolution data
optimized, or EV-DO, technology. Currently EV-DO technology
covers nearly 209 million people and serves customers in
over 219 communities with populations of at least 100,000. EV-DO
data roaming is available in selected markets in Canada and
Mexico. We also have begun to incorporate EV-DO Rev. A, the next
version of EV-DO technology, into our network, with plans for
coverage across the majority of the footprint of our CDMA
network by the end of 2007. EV-DO Rev. A is designed to support
a variety of Internet Protocol, or IP, and video and high
performance walkie-talkie applications for our CDMA network.
On our iDEN network, we continue to support features and
services that are designed to meet the needs of our customers.
Both the Nextel and Boost Mobile brands feature our
industry-leading walkie-talkie services, which give subscribers
the ability to communicate instantly across the continental
United States and to and from Hawaii and, through agreements
with other iDEN providers, to and from selected markets in
Canada, Latin America and Mexico, as well as a variety of
digital wireless mobile telephone and wireless data transmission
services.
In recent periods, we have experienced declines in the number of
new subscribers for our wireless services and increases in our
rate of subscriber churn. Customer satisfaction and churn have
been adversely impacted by capacity constraints on our iDEN
network as a result of a number of factors, including the
addition to the network in recent years of many high-call-volume
subscribers, limited effectiveness of the 6:1 voice coder
upgrade in the iDEN technology that was designed to increase
network capacity, and the impact of the reconfiguration process
under the Report and Order. In certain of our most capacity
constrained markets, we have had to take actions to limit the
acquisition of new subscribers of Nextel and Boost Mobile
branded services. Also, churn of subscribers of our CDMA
services remains high relative to our competitors, in large part
due to credit-related deactivations. In 2006, we reorganized our
sales and distribution and customer management operations to
improve customer satisfaction, adopted a regional sales,
service, and distribution structure to streamline operations,
increase productivity and move decision-making closer to the
customer, and tightened our credit policies for new subscribers
of both CDMA and iDEN services. In 2007, we:
|
|
|
|
|
are adding cell sites to improve network performance and expand
the coverage and capacity of our networks;
|
|
|
|
are increasing media expenditures to improve brand awareness;
|
|
|
|
have enhanced incentives to improve third-party sales
distribution and accelerate growth, and are implementing
customer retention programs that focus on our high-value
customers;
|
|
|
|
are adjusting our credit policies on a
market-by-market
basis in an effort to optimize the balance between new
subscribers who are of a prime and
sub-prime
quality;
|
|
|
|
are improving our handset portfolio across both our CDMA and
iDEN network platforms;
|
|
|
|
are helping to relieve capacity constraints on the iDEN network
and to offer subscribers of our iDEN services all of the
benefits of applications on our CDMA network and our
walkie-talkie applications, by offering a new line of combined
CDMA-iDEN devices, marketed as
PowerSourceTM,
that feature voice and data applications over our CDMA network
and walkie-talkie applications over our iDEN network and we are
expecting to introduce PowerSource devices that also feature our
Power Vision data applications over our CDMA network; and
|
37
|
|
|
|
|
expect to substantially complete the integration of a number of
other systems, including human resources, general ledger, sales
commissions and billing. We believe that integration of these
systems onto single platforms will create efficiencies in the
way we do business, and in the case of our billing system, will
increase functionality for our customer care representatives and
produce more reliable information, which should enhance the
customer experience. We have completed various phases of our
systems and processes consolidation plan in the fourth quarter
2006 as discussed in Part II, Item 9A, Controls
and Procedures.
|
In the future, we also plan to utilize QUALCOMM
Incorporateds
QChat®
technology, which is designed to provide high performance
walkie-talkie services on our CDMA network, and we are designing
interfaces to provide for interoperability of walkie-talkie
services on our CDMA and iDEN networks.
We also plan to deploy a next generation broadband wireless
network that will be designed to provide significantly higher
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 contemplate deploying the
new network in larger metropolitan areas with a goal of
launching the related service offerings in some of those markets
beginning in 2008.
Our Wireless segment generates revenues from the provision of
wireless services, the sale of wireless equipment and the
provision of wholesale and other services. The ability of our
Wireless segment to generate service revenues is primarily a
function of:
|
|
|
|
|
the number of subscribers that we serve, which in turn is a
function of our ability to acquire new and retain existing
subscribers; and
|
|
|
|
the revenue generated by each subscriber, which in turn is a
function of the types and amount of services utilized by each
subscriber and the rates that we charge for those services.
|
We believe that wireless carriers increasingly must attract a
greater proportion of new customers from the existing customer
bases of competitors rather than from first time purchasers of
wireless services. For example, we are experiencing increased
competition in our prepaid and youth markets from new entrants
that are targeting these subscribers. Certain of our competitors
continue to increase their focus on customer retention efforts
and have reported improvements in their customer retention
rates, which may make it harder for us to acquire new customers
from these competitors. In addition, the higher market
penetration of wireless services in our markets may suggest that
customers purchasing wireless services for the first time may,
on average, have a lower credit rating than existing wireless
users, which generally results in both a higher churn rate due
to involuntary churn and in higher bad debt expense. This has
intensified the competition among wireless carriers to attract
higher quality customers with stronger credit standing,
resulting in aggressive pricing strategies for both voice
services and other features that are designed to attract those
customers.
We have also experienced declines in the average voice revenue
per subscriber due to our offering more competitive service
pricing plans, including lower priced plans, such as
business essentials and plans that allow users to
add additional units to their plans at attractive rates. We are
developing and implementing service plans that are designed to
offset these declines in voice revenue by expanding and
enhancing our value-added array of imaging, high-speed data
messaging, entertainment and location-based applications.
Recently, the growth in revenue per subscriber generated by
these data services, while significant, has not kept pace with
the decline in voice revenue, resulting in a decline in our
overall monthly average revenue per subscriber.
The ability of our Wireless segment to generate equipment
revenues is primarily a function of the number of new and
existing subscribers who purchase handsets and other
accessories. The ability of our Wireless segment to generate
wholesale revenues is primarily a function of the number and
type of MVNOs that resell our wireless service and the rates
that we charge MVNOs for utilization of our network.
Although many of the costs relating to the operation of our
wireless networks are fixed in the short-term, other costs, such
as interconnection fees, fluctuate based on the utilization of
the networks. Sales and marketing
38
expenses are dependent on the number of subscriber additions and
the nature and extent of our marketing and promotional
activities. Customer care costs are dependent on the number of
subscribers that we serve and the nature of programs designed to
serve and retain subscribers. General and administrative
expenses consist of fees paid for billing, customer care and
information technology operations, bad debt expense, customer
retention and back office support activities, including
collections, legal, finance, human resources, strategic planning
and technology and product development, along with the related
payroll and facilities costs. Although our goal is to improve
operating margins through cost savings initiatives and benefits
of scale, costs that fluctuate based on network utilization and
the number of subscribers that we serve and costs associated
with enhancing and expanding the coverage of our network
generally will increase in absolute terms over time. We also
seek to realize operating efficiencies in our 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 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 parties in connection
with the reconfiguration plan, which is required to be completed
within a
36-month
period, subject to certain exceptions particularly with respect
to markets that border Mexico and Canada. We assumed these
obligations when we merged with Nextel in August 2005. If, as a
result of events within our control, we fail to complete the
reconfiguration plan within the
36-month
period, the FCC could take actions against us to enforce the
Report and Order. These actions could have adverse operating or
financial impacts on us, some of which could be material. We
believe that, based on our experiences to date, we will not
complete the reconfiguration process within the
36-month
period due to events largely outside of our control. We do not
believe at this time that the impact from this delay will be
material to our results of operation or financial condition,
although there can be no assurance. Recognizing the current
limitations in the reconfiguration process, both Sprint Nextel
and the public safety community jointly filed a letter with the
FCC on February 15, 2007 requesting that the FCC direct the
Transition Administrator, through working closely with the
affected parties, to develop a schedule and benchmarks for
completing the second phase of the 800 MHz reconfiguration. See
Forward-Looking Statements.
As part of the reconfiguration process in most markets, we must
cease using portions of the surrendered 800 MHz spectrum before
we are able to commence use of replacement 800 MHz spectrum,
which has contributed to the capacity constraints experienced on
our iDEN network, particularly in some of our more capacity
constrained markets, and has impacted performance of our iDEN
network in the affected markets.
Based on the FCCs determination of the values of the
spectrum rights received and surrendered by Nextel, the minimum
obligation to be incurred under the Report and Order is
$2.8 billion. The Report and Order also provides that
qualifying costs we incur as part of the reconfiguration plan,
including costs to reconfigure our own infrastructure and
spectrum positions, can be used to offset the minimum obligation
of $2.8 billion; however, we are obligated to pay the full
amount of the costs relating to the reconfiguration plan, even
if those costs exceed that amount.
In addition, a financial reconciliation is required to be
completed at the end of the reconfiguration implementation, at
which time we will be required to make a payment to the U.S.
Treasury to the extent that the value of the spectrum rights
received exceeds the total of (i) the value of spectrum
rights that are surrendered and (ii) the qualifying costs
referred to above. As a result of the uncertainty with regard to
the calculation of the credit for our internal network costs, as
well as the significant number of variables outside of our
control, particularly with regard to the 800 MHz reconfiguration
licensee costs, we do not believe that we can reasonably
estimate what amount, if any, will be paid to the U.S. Treasury.
As required under the terms of the Report and Order, we
delivered a $2.5 billion letter of credit to provide
assurance that funds will be available to pay the relocation
costs of the incumbent users of the 800 MHz spectrum. Although
the Report and Order provides for the possibility of periodic
reductions in the amount of the letter of credit, no reductions
have been made as of December 31, 2006.
39
Long
Distance
Through our Long Distance segment, we provide a broad suite of
wireline voice and data communications services targeted to
domestic business customers, multinational corporations and
other communications companies. These services include domestic
and international data communications using various protocols,
such as multi-protocol label switching, or MPLS, technologies,
Internet Protocol, or IP, asynchronous transfer mode, or ATM,
frame relay, managed network services and voice services. We
also provide services to the cable MSOs that resell our long
distance service and/or use our back office systems and network
assets in support of their telephone service provided over cable
facilities primarily to residential end-user customers. We are
one of the nations largest providers of long distance
services and 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 MSOs and Internet
service providers. Growth in voice services provided by cable
MSOs is accelerating as consumers use cable MSOs as alternatives
to local and long distance voice communications providers. We
continue to assess the portfolio of services provided by our
Long Distance segment and are focusing our efforts on
IP-based
services and de-emphasizing stand-alone voice services and
non-IP-based data services. For example, in addition to
increased emphasis on selling IP services, we are converting
many of our existing customers from ATM and frame relay to more
advanced IP technologies, in part to support our effort to move
to one platform, which will reduce our cost structure. Over
time, this conversion is expected to result in decreases in
revenue from frame relay and ATM service offset by increases in
IP and MPLS services. We also are taking advantage of the growth
in voice services provided by cable MSOs, by providing large
cable MSOs with long distance voice communications service,
which they offer as part of their bundled service offerings.
Critical
Accounting Policies and Estimates
We consider the following accounting policies and estimates to
be the most important to our financial position and results of
operations, either because of the significance of the financial
statement item or because they require the exercise of
significant judgment and/or use of significant estimates. While
management believes that the estimates used are reasonable,
actual results could differ from those estimates.
Revenue
Recognition and Allowance for Doubtful Accounts
Policies
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 and Internet revenues. Service
revenues consist of fixed monthly recurring charges, variable
usage charges and miscellaneous fees, such as activation fees,
directory assistance, operator-assisted calling, equipment
protection, late payment charges and certain regulatory related
fees. We recognize service revenues as services are rendered and
equipment revenue when title passes to the dealer or end-user
customer, in accordance with SEC Staff Accounting Bulletin, or
SAB, No. 104, Revenue Recognition, and Emerging
Issues Task Force, or EITF, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. We
recognize revenue for access charges and other services charged
at fixed amounts ratably over the service period, net of credits
and adjustments for service discounts, billing disputes and
fraud or unauthorized usage. We recognize excess wireless usage
and long distance revenue at contractual rates per minute as
minutes are used. Additionally, we recognize excess wireless
data usage based on kilobytes and one-time use charges, such as
for the use of premium services, as incurred. As a result of the
cutoff times of our multiple billing cycles each month, we are
required to estimate the amount of subscriber revenues earned
but not billed from the end of each billing cycle to the end of
each reporting period. These estimates are based primarily on
rate plans in effect and our historical usage and billing
patterns and represented about 13% of our accounts receivable
balance as of December 31, 2006.
Certain of our bundled products and services, primarily in our
Wireless segment, are considered to be revenue arrangements with
multiple deliverables. Total consideration received in these
arrangements is allocated and measured using units of accounting
within the arrangement (i.e., service and handset contracts)
based on relative fair values. The activation fee revenue
associated with these arrangements in our direct sales channels
40
is recognized as equipment sales at the time the related handset
is sold. For our indirect sales channels, the activation fee is
solely linked to the service contract with the subscriber.
Accordingly, the activation fee revenue is deferred and
amortized over the estimated average service life of the end
user customer, and is classified as service revenue.
We establish an allowance for doubtful accounts receivable
sufficient to cover probable and reasonably estimable losses.
Because of the number of accounts that we have, it is not
practical to review the collectibility of each of those accounts
individually when we determine the amount of our allowance for
doubtful accounts each period, although we do perform some
account level analysis with respect to long distance customers.
Our estimate of the allowance for doubtful accounts considers a
number of factors, including collection experience, current
economic trends, estimates of forecasted write-offs, aging of
the accounts receivable portfolios, industry norms, regulatory
decisions and other factors. If our allowance for doubtful
accounts estimate at December 31, 2006 were to change by
10%, it would represent a change in bad debt expense of
$39 million for the Wireless segment and $3 million
for the Long Distance segment.
The accounting estimates related to the recognition of revenue
in the results of operations require us to make assumptions
about future billing adjustments for disputes with customers,
unauthorized usage and future returns on handset sales.
The allowance amounts recorded, in each instance, represent our
best estimate of future outcomes, but the actual outcomes could
differ from the estimate selected, and the impact that changes
in our actual performance versus these amounts recorded would
have 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 determine cost by the
first-in,
first-out, or FIFO, method. Handset costs in excess of the
revenues generated from handset sales, or handset subsidies, are
expensed at the time of sale. We do not recognize the expected
handset subsidies prior to the time of sale because the
promotional discount decision is made at the point of sale
and/or because we expect to recover the handset subsidies
through service revenues.
As of December 31, 2006, we held about $1.2 billion of
inventory. We analyze the realizable value of our handset and
other inventory on a quarterly basis. This analysis includes
assessing obsolescence, sales forecasts, product life cycle,
marketplace and other considerations. If our assessments
regarding the above factors change, we may be required to sell
handsets at a higher subsidy or potentially record expense in
future periods prior to the point of sale to the extent that we
expect that we will be unable to sell handsets with a service
contract.
Valuation and Recoverability of Long-lived Assets
Including Definite Lived Intangible Assets
A significant portion of our total assets are long-lived assets,
consisting primarily of property, plant and equipment and
definite lived intangible assets. Changes in technology or in
our intended use of these assets, as well as changes in economic
or industry factors or in our business or prospects, may cause
the estimated period of use or the value of these assets to
change.
Long-lived assets consisting of property, plant and equipment
represented $25.9 billion of our $97.2 billion in
total assets as of December 31, 2006. We generally
calculate depreciation on these assets using the straight-line
method based on estimated economic useful lives as follows:
|
|
|
|
|
|
|
|
|
Long-lived Assets
|
|
Estimated Useful Life
|
|
|
Average Useful Life
|
|
|
Buildings and improvements
|
|
|
3 to 31 years
|
|
|
|
15 years
|
|
Network equipment and software
|
|
|
3 to 31 years
|
|
|
|
9 years
|
|
Non-network
internal use software, office equipment and other
|
|
|
3 to 12 years
|
|
|
|
4 years
|
|
41
Since changes in technology or in our intended use of these
assets, as well as changes in broad economic or industry
factors, may cause the estimated period of use of these assets
to change, we perform annual internal studies to confirm the
appropriateness of depreciable lives for most categories of
property, plant and equipment. These studies utilize models,
which take into account actual usage, physical wear and tear,
replacement history, and assumptions about technology evolution,
to calculate the remaining life of our asset base. When these
factors indicate that an assets useful life is different
from the original assessment, we depreciate the remaining book
values prospectively over the adjusted estimated useful life. If
our studies had resulted in a depreciable rate that was 5%
higher or lower than those used in the preparation of our
consolidated financial statements for the year ended
December 31, 2006, recorded depreciation expense would have
been impacted by about $300 million. In addition to
performing our annual studies, we also continue to assess the
estimated useful life of the iDEN network assets, which had a
net carrying value of $7.4 billion as of December 31,
2006, and our future strategic plans for this network, as a
larger portion of our subscriber base is served by our CDMA
network. A reduction in our estimate of the useful life of the
iDEN network assets would cause increased depreciation charges
in future periods that could be material.
We review our long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount
may not be recoverable. A significant amount of judgment is
involved in determining the occurrence of an indicator of
impairment that requires an evaluation of the recoverability of
our long-lived assets. If the total of the expected undiscounted
future cash flows is less than the carrying amount of our
assets, a loss, if any, is recognized for the difference between
the fair value and carrying value of the assets. Impairment
analyses, when performed, are based on our current business and
technology strategy, our views of growth rates for our business,
anticipated future economic and regulatory conditions and
expected technological availability. For software projects that
are under development, we periodically assess the probability of
deployment into the business to determine if an impairment
charge is required.
For the year ended December 31, 2006, we recorded
$69 million in asset impairment charges primarily related
to software asset impairments and abandonments of various
assets, including certain cell sites under construction. For the
year ended December 31, 2005, we recorded $44 million
in asset impairment charges primarily related to the write-down
of various software applications. In 2004, we determined that
business conditions and events impacting our Long Distance
operations constituted an indicator of possible impairment
requiring an evaluation of the recoverability of the Long
Distance long-lived assets, which resulted in a non-cash asset
impairment charge of $3.5 billion, reducing the net
carrying value of Long Distance property, plant and equipment by
about 60% to $2.3 billion at September 30, 2004.
Additionally, we recognized a non-cash charge of
$21 million in 2004 to adjust the carrying value of our
wholesale Dial IP assets to fair value. These impairments
represented 54% of Long Distances property, plant and
equipment, net and 13% of the consolidated property, plant and
equipment, net at December 31, 2003.
Intangible assets with definite useful lives represented
$9.2 billion of our $97.2 billion in total assets as
of December 31, 2006. Definite lived intangible assets
consist primarily of customer relationships that are amortized
over three to five years using the sum of the years digits
method, which we believe best reflects the estimated pattern in
which the economic benefits will be consumed. Other definite
lived intangible assets primarily include certain rights under
affiliation agreements that we reacquired in connection with the
acquisitions of the PCS Affiliates and Nextel Partners, which
are being amortized over the remaining terms of those
affiliation agreements on a straight-line basis, and the Nextel
and Direct ConnectSM trade names, which are being amortized over
10 years from the 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 or a
significant change in the extent or manner in which the asset is
used. In addition, if we ever were required to determine the
implied fair value of our goodwill as part of a second step
goodwill impairment test, it would result in our evaluating the
recorded value of our definite lived intangible assets for
impairment. We also evaluate the remaining useful lives of our
definite lived intangible assets each reporting period to
determine whether events and circumstances warrant a revision to
the remaining periods of amortization, which would be addressed
prospectively. For example, we review certain trends such as
customer churn, average revenue per user, revenue, our future
plans regarding the iDEN network and changes in
42
marketing strategies, among others. Significant changes in
certain trends may cause us to adjust, on a prospective basis,
the remaining estimated life of certain of our definite lived
intangible assets.
Valuation
and Recoverability of Goodwill and Indefinite Lived Intangible
Assets
Intangible assets with indefinite useful lives represented
$50.8 billion of our $97.2 billion in total assets as
of December 31, 2006. We have identified FCC licenses and
our Sprint and Boost Mobile trademarks as indefinite lived
intangible assets, in addition to our goodwill, after
considering the expected use of the assets, the regulatory and
economic environment within which they are being used, and the
effects of obsolescence on their use. We review our goodwill,
which relates solely to our wireless reporting unit, and other
indefinite lived intangibles annually on October 1 for
impairment, or more frequently if indicators of impairment
exist. We continually assess whether any indicators of
impairment exist. A significant amount of judgment is involved
in determining if an indicator of impairment has occurred. Such
indicators may include, a sustained, significant decline in our
share price and market capitalization, changes in our expected
future cash flows, a significant adverse change in legal factors
or in the business climate, unanticipated competition, the
testing for recoverability of a significant asset group within a
reporting unit, and/or slower growth rates, among others.
When required, we first test goodwill for impairment by
comparing the fair value of our wireless reporting unit with its
carrying amount. If the fair value of the wireless reporting
unit exceeds its carrying amount, goodwill is not deemed to be
impaired, and no further testing would be necessary. If the
carrying amount of our wireless reporting unit were to exceed
its fair value, we would perform a second test to measure the
amount of impairment loss, if any. To measure the amount of any
impairment loss, we would determine the implied fair value of
goodwill in the same manner as if our wireless reporting unit
were being acquired in a business combination. Specifically, we
would allocate the fair value of the wireless reporting unit to
all of the assets and liabilities of that unit, including any
unrecognized intangible assets, in a hypothetical calculation
that would yield the implied fair value of goodwill. If the
implied fair value of goodwill is less than the recorded
goodwill, we would record an impairment charge for the
difference.
When required, we test other indefinite lived intangibles for
impairment by comparing the assets 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 guidance as
prescribed by EITF Issue
No. 02-7,
Unit of Accounting for Testing Impairment of Indefinite-Lived
Intangible Assets, except for our FCC licenses in the 2.5
GHz band, which are tested separately.
The accounting estimates related to our goodwill and other
indefinite lived intangible assets require us to make
significant assumptions about fair values. Our assumptions
regarding fair values require significant judgment about
economic factors, industry factors and technology
considerations, as well as our views regarding the prospects of
our business. Changes in these judgments may have a significant
effect on the estimated fair values.
During the fourth quarter 2006, we performed our annual goodwill
and other indefinite lived intangible asset analyses as
described above. The result of these analyses was that our
indefinite lived intangible assets were not impaired. As
permitted by Financial Accounting Standards Board, or FASB,
guidance, our goodwill analysis included an estimate of a
control premium with respect to the minority interest traded
value of our common shares and an estimate of the value of our
long distance business, as well as other assumptions. As of
December 31, 2006, we have not identified any indicators of
impairment with respect to our goodwill and other indefinite
lived intangible assets. However, if our share price were to
experience a sustained, significant decline as compared to the
share price as of December 31, 2006, or if any other
indicator of impairment exists, such as a decline in expected
cash flows, we may be required to perform the second step of the
goodwill impairment test, which could cause us to recognize a
non-cash impairment charge that could be material to our
consolidated financial statements.
Tax
Valuation Allowances
We are required to estimate the amount of taxes payable or
refundable for the current year and the deferred income tax
liabilities and assets for the future tax consequences of events
that have been reflected in our
43
consolidated financial statements or tax returns for each taxing
jurisdiction in which we operate. This process requires our
management to make assessments regarding the timing and
probability of the ultimate tax impact. We record valuation
allowances on deferred tax assets if we determine it is more
likely than not that the asset will not be realized.
Additionally, we establish reserves for uncertain tax positions
based upon our judgment regarding potential future challenges to
those positions. Actual income taxes could vary from these
estimates due to future changes in income tax law, significant
changes in the jurisdictions in which we operate, our inability
to generate sufficient future taxable income or unpredicted
results from the final determination of each years
liability by taxing authorities. These changes could have a
significant impact on our financial position.
The accounting estimate related to the tax valuation allowance
requires us to make assumptions regarding the timing of future
events, including the probability of expected future taxable
income and available tax planning opportunities. These
assumptions require significant judgment because actual
performance has fluctuated in the past and may do so in the
future. The impact that changes in actual performance versus
these estimates could have on the realization of tax benefits as
reported in our results of operations could be material.
We carried an income tax valuation allowance of
$953 million as of December 31, 2006. This amount
includes a valuation allowance of $743 million for the
total tax benefits related to net operating loss carryforwards,
subject to utilization restrictions, acquired in connection with
certain acquisitions. The remainder of the valuation allowance
relates to capital loss, state net operating loss and tax credit
carryforwards. Within our total valuation allowance we had
$54 million related to separate company state net operating
losses incurred by the PCS entities while owned by us. The
valuation allowance was provided on these separate company state
net operating loss benefits since these entities had no history
of taxable income. Current trends indicate that the valuation
allowance continues to be appropriate and we do not anticipate
adjusting this amount in the near term. We continue to monitor
these trends, and in the future it is possible that our
cumulative historical test will ultimately yield sufficient
positive evidence that it is more likely than not that we will
realize the tax benefit of some of the separate company state
net operating losses for which the valuation allowance has been
provided. Should that occur, subject to review of other
qualitative factors and uncertainties at that time, we would
expect to start reversing some of the valuation allowance. For
the valuation allowance related to the acquired tax benefits
described above, we would first reduce goodwill or intangible
assets resulting from the acquisitions, or reduce income tax
expense if these intangible assets have been reduced to zero.
For the remainder of our valuation allowance, we would reduce
income tax expense. Assumption changes that result in a change
of expected benefits from realization of capital loss, state net
operating loss and tax credit carryforwards by 10% would result
in a decrease or increase in our valuation allowance by
$38 million, which would be reflected in the statement of
operations.
Significant
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement defines fair
value and establishes a framework for measuring fair value.
Additionally, this statement expands disclosure requirements for
fair value with a particular focus on measurement inputs.
SFAS No. 157 is effective for our quarterly reporting
period ending March 31, 2008. We are in the 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 Service from the Service Provider.
EITF Issue
No. 06-1
provides guidance regarding whether the consideration given by a
service provider to a manufacturer or reseller of specialized
equipment should be characterized as a reduction of revenue or
an expense. This issue is effective for our quarterly reporting
period ending March 31, 2008. Entities are required to
recognize the effects of applying this issue as a change in
accounting principle through retrospective application to all
prior periods unless it is impracticable to do so. We are in the
process of evaluating the impact of this issue on our
consolidated financial statements.
In June 2006, the EITF reached a consensus on Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net
44
Presentation). EITF Issue
No. 06-3
requires that companies disclose their accounting policy
regarding the gross or net presentation of certain taxes. Taxes
within the scope of EITF Issue
No. 06-3
are any tax assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a
seller and a customer and may include, but is not limited to,
sales, use, value added and some excise taxes. EITF Issue
No. 06-3
is effective for our quarterly reporting period ending
March 31, 2007. We are in the process of evaluating the
impact of this issue on our consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or
FIN 48, an interpretation of SFAS No. 109,
Accounting for Income Taxes. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109, and prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for our quarterly reporting period
ending March 31, 2007. The cumulative effect of adopting
FIN 48 generally will be recorded directly to retained
earnings. However, to the extent the adoption of FIN 48
results in a revaluation of uncertain tax positions acquired in
purchase business combinations, the cumulative effect will be
recorded as an adjustment to any goodwill remaining from the
corresponding business combination. We do not believe the
adoption of FIN 48 will have a material impact on our
consolidated financial statements.
Results
of Operations
We present consolidated information as well as separate
supplemental financial information for our two reportable
segments, Wireless and Long Distance. The disaggregated
financial results for our two segments have been prepared in a
manner that is consistent with the basis and manner in which our
executives evaluate segment performance and make resource
allocation decisions. Consequently, we define segment earnings
as operating income before depreciation, amortization,
severance, lease exit costs, asset impairments and other
expenses. See note 14 of the Notes to Consolidated
Financial Statements appearing at the end of this annual report
on
Form 10-K
for additional information on our segments. For reconciliations
of segment earnings to the closest generally accepted accounting
principles measure, operating income, see tables set forth in
Wireless and
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 from July 1 through the end of the year and the PCS
Affiliates that we acquired in 2006, either from the date of
acquisition or from the start of the month closest to the
acquisition date through the end of the year. Our operating
results for 2005 include the results of Nextel from August 12
through the end of the year and the PCS Affiliates that we
acquired in 2005, from the date of acquisition through the end
of the year. For further information on business combinations,
see note 3 of the Notes to the Consolidated Financial
Statements appearing at the end of this annual report on
Form 10-K.
These transactions affect the comparability of our reported
operating results with other periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions)
|
|
|
Net operating revenues
|
|
$
|
41,028
|
|
|
$
|
28,789
|
|
|
$
|
21,647
|
|
Income (loss) from continuing
operations
|
|
|
995
|
|
|
|
821
|
|
|
|
(2,006
|
)
|
Net income (loss)
|
|
|
1,329
|
|
|
|
1,785
|
|
|
|
(1,012
|
)
|
Net operating revenues increased 43% in 2006 as compared to 2005
and 33% in 2005 as compared to 2004, reflecting growth in
revenues of our Wireless segment, resulting primarily from the
business combinations discussed above, partially offset by
declining revenues of our Long Distance segment. For additional
information, see Segment Results of
Operations below.
45
Income (loss) from continuing operations increased 21% in 2006
as compared to 2005 and improved from a loss to income in 2005
as compared to 2004, primarily due to a decrease in impairment
charges. In 2004, we recorded a $3.5 billion 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 and
interconnection expenses. For additional information, see
Segment Results of Operations and
Consolidated Information below.
Net income (loss) decreased 26% in 2006 as compared to 2005
primarily as a result of the Embarq spin-off. Net income
improved in 2005 from a net loss in 2004 primarily as a result
of the $3.5 billion asset impairment charge in 2004 related
to our long distance network. For additional information, see
Segment Results of Operations and
Consolidated Information below.
Presented below are results of operations for our Wireless and
Long Distance segments, followed by a discussion of results of
operations on a consolidated basis.
Segment
Results of Operations
Wireless
Our Wireless segment results of operations for the year ended
December 31, 2006 include the results of acquired companies
from either the date of the acquisition or the start of the
month closest to the acquisition date. As such, the results of
acquired companies are included as of the following dates:
Enterprise Communications Partnership and Alamosa Holdings, Inc.
from February 1, 2006, Velocita Wireless Holding
Corporation from March 1, 2006 and Nextel Partners and
UbiquiTel Inc. from July 1, 2006. The year ended
December 31, 2005 results include the results of operations
of Nextel and US Unwired, Inc. from August 12, 2005, Gulf
Coast Wireless from October 1, 2005 and IWO Holdings from
November 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change from Previous Year
|
|
Wireless
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs 2005
|
|
|
2005 vs 2004
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
31,059
|
|
|
$
|
19,289
|
|
|
$
|
12,529
|
|
|
|
61
|
%
|
|
|
54
|
%
|
Wholesale, affiliate and other
|
|
|
859
|
|
|
|
892
|
|
|
|
608
|
|
|
|
(4)
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services revenue
|
|
|
31,918
|
|
|
|
20,181
|
|
|
|
13,137
|
|
|
|
58
|
%
|
|
|
54
|
%
|
Cost of services
|
|
|
(7,933
|
)
|
|
|
(5,379
|
)
|
|
|
(3,720
|
)
|
|
|
47
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin
|
|
$
|
23,985
|
|
|
$
|
14,802
|
|
|
$
|
9,417
|
|
|
|
62
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin percentage
|
|
|
75
|
%
|
|
|
73
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
Equipment revenue
|
|
$
|
3,197
|
|
|
$
|
2,147
|
|
|
$
|
1,510
|
|
|
|
49
|
%
|
|
|
42
|
%
|
Cost of products
|
|
|
(4,921
|
)
|
|
|
(3,272
|
)
|
|
|
(2,381
|
)
|
|
|
50
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment net subsidy
|
|
$
|
(1,724
|
)
|
|
$
|
(1,125
|
)
|
|
$
|
(871
|
)
|
|
|
53
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment net subsidy percentage
|
|
|
(54
|
)%
|
|
|
(52
|
)%
|
|
|
(58
|
)%
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expense
|
|
$
|
(10,572
|
)
|
|
$
|
(6,733
|
)
|
|
$
|
(4,434
|
)
|
|
|
57
|
%
|
|
|
52
|
%
|
Wireless segment earnings
|
|
|
11,689
|
|
|
|
6,944
|
|
|
|
4,112
|
|
|
|
68
|
%
|
|
|
69
|
%
|
Severance, lease exit costs, asset
impairments and
other(1)
|
|
|
(175
|
)
|
|
|
(105
|
)
|
|
|
(25
|
)
|
|
|
67
|
%
|
|
|
NM
|
|
Depreciation(1)
|
|
|
(5,232
|
)
|
|
|
(3,364
|
)
|
|
|
(2,571
|
)
|
|
|
56
|
%
|
|
|
31
|
%
|
Amortization(1)
|
|
|
(3,854
|
)
|
|
|
(1,335
|
)
|
|
|
(6
|
)
|
|
|
189
|
%
|
|
|
NM
|
|
Wireless operating income
|
|
|
2,428
|
|
|
|
2,140
|
|
|
|
1,510
|
|
|
|
13
|
%
|
|
|
42
|
%
|
NM Not Meaningful
|
|
|
(1) |
|
Severance, lease exit costs, asset impairments and other,
depreciation and amortization are discussed in the Consolidated
Information section. |
46
Selected
Financial and Operating Data
The following is a summary of our subscriber activity and
related subscriber metrics. The number of subscribers impacts
service revenues, cost of service and bad debt expense as well
as support costs, such as customer care, which are recorded in
general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Direct subscribers, end of period
(millions)
|
|
|
45.8
|
(1)
|
|
|
39.7
|
|
|
|
17.8
|
|
CDMA network
|
|
|
24.2
|
|
|
|
20.5
|
|
|
|
17.8
|
|
iDEN network
|
|
|
21.6
|
|
|
|
19.2
|
|
|
|
N/A
|
|
Wholesale and affiliate
subscribers, end of period (millions)
|
|
|
7.3
|
|
|
|
7.9
|
|
|
|
6.9
|
|
Direct net subscriber
additions(2)
(millions)
|
|
|
1.7
|
|
|
|
3.0
|
|
|
|
1.9
|
|
Monthly customer churn rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct post-paid
|
|
|
2.3
|
%
|
|
|
2.2
|
%
|
|
|
2.6
|
%
|
Direct
prepaid(3)
|
|
|
6.2
|
%
|
|
|
4.4
|
%
|
|
|
N/A
|
|
Weighted average
|
|
|
2.6
|
%
|
|
|
2.3
|
%
|
|
|
2.6
|
%
|
Average monthly service revenue
per user
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct post-paid
|
|
|
$61
|
|
|
|
$63
|
|
|
|
$62
|
|
Direct
prepaid(3)
|
|
|
33
|
|
|
|
37
|
|
|
|
N/A
|
|
Weighted average
|
|
|
59
|
|
|
|
62
|
|
|
|
62
|
|
N/A Not Applicable
|
|
|
(1) |
|
In the quarter ended December 31, 2006, we changed our
subscriber deactivation process for post-paid subscribers. To
effect this change, the customer subscriber base as of
October 1, 2006 was increased by 436,000 subscribers. This
adjustment did not impact direct net subscriber additions or the
monthly customer churn rates for the quarter ended
December 31, 2006. In addition, there were additional
customer subscriber base adjustments of 101,000 during the first
three quarters of 2006. |
|
(2) |
|
Direct net subscriber additions do not include subscribers
acquired in connection with the Sprint-Nextel merger or the PCS
Affiliate or Nextel Partners acquisitions. |
|
(3) |
|
The direct prepaid monthly customer churn rate and average
monthly service revenue per user metrics in 2005 are calculated
based only on results subsequent to the Sprint-Nextel merger. |
Service
Revenue
Service revenues consist of fixed monthly recurring charges,
variable usage charges and miscellaneous fees such as 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 of our direct subscribers,
partially offset by a decrease in our weighted average monthly
service revenue per user to $59 in 2006 as compared to $62 in
2005. Service revenues increased 54% in 2005 as compared to 2004
primarily due to the merger with Nextel and the increase in the
number of our direct subscribers, while our weighted average
monthly service revenue per user remained flat year over year.
In 2006, we ended the year with about 45.8 million direct
subscribers and during the year had about 1.7 million net
direct subscriber additions, excluding the Nextel Partners and
PCS Affiliate subscribers of about 4.1 million that were
acquired with these companies. In comparison, we ended 2005 with
about 39.7 million direct subscribers and during the year
had about 3.0 million net direct subscriber additions
excluding the Nextel and PCS Affiliate subscribers of about
18.9 million that were acquired with the merger or
acquisition of these companies. In 2004, we ended the year with
about 17.8 million direct subscribers and had about
1.9 million net direct subscriber additions. We believe
that the growth in direct subscribers, separate from the growth
attributable to subscribers gained as part of the
47
Sprint-Nextel merger and PCS Affiliate and Nextel Partners
acquisitions, is primarily due to the following factors:
|
|
|
|
|
growth in the number of subscribers purchasing our wireless
prepaid service offering of 49% in 2006 compared to 53% in 2005
for a 2006 end of period wireless prepaid subscriber total of
4.0 million;
|
|
|
|
our differentiating products and services, 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 promotions and improved handset choices.
|
Our weighted average monthly service revenue per user decreased
to $59 in 2006 from $62 in both 2005 and 2004, primarily due to
the following factors:
|
|
|
|
|
we continued to offer more competitive service pricing plans,
including lower priced plans, such as business
essentials on both the iDEN and CDMA networks and plans
that allow users to add additional units to their plan at
attractive rates, such as add a phone and
family plans;
|
|
|
|
our prepaid wireless subscribers, who generally have a lower
average revenue per user, as illustrated in the table above,
increased as a percentage of our total subscriber base to 8% in
2006 compared to 6% in 2005; and
|
|
|
|
our integrated PCS Affiliate subscribers, who have a lower
average monthly service revenue and who will no longer be a
source of roaming revenue for us; partially offset by
|
|
|
|
the increase in data service revenues, resulting from higher
usage as subscribers took advantage of our wide array of data
offerings such as short message service, or SMS, connection
cards and our Sprint Vision and Power Vision service plans.
|
We have limited distribution of our prepaid services, which may
adversely impact our ability to add users of prepaid services in
the affected markets. We also are adjusting our credit policies
in certain markets, which may adversely impact our ability to
add lower credit quality subscribers in markets with relatively
tight credit policies. We expect our weighted average monthly
service revenue per user to continue to decline as a result of
decreases in pricing due to competitive market pricing,
incremental customer acquisitions at lower average revenues and
existing customer migrations to lower priced plans, partially
offset by expected growth in demand for our data services. See
Forward-Looking Statements.
Wholesale,
Affiliate and Other Revenue
Wholesale, affiliate and other revenues consist primarily of net
revenues retained from wireless subscribers residing in PCS
Affiliate territories and revenues from the sale of wireless
services to companies that resell those services to their
subscribers. Wholesale, affiliate and other revenues decreased
4% in 2006 primarily due to the PCS Affiliate acquisitions,
partially offset by wholesale operator additions of
1.2 million subscribers in 2006. Wholesale, affiliate and
other revenues increased 47% in 2005 reflecting the growth in
the wholesale operator subscriber base of 1.5 million
additions, as well as the 450,000 and 374,000 net subscriber
additions in 2005 and 2004 in the PCS Affiliate base.
Cost
of Services
Cost of services consists primarily of:
|
|
|
|
|
costs to operate and maintain our CDMA and iDEN networks,
including direct switch and cell site costs, such as rent,
utilities, maintenance, payroll costs associated with our
network engineering employees and frequency leasing costs;
|
|
|
|
fixed and variable interconnection costs, the fixed component of
which consists of monthly flat-rate fees for facilities leased
from local exchange carriers based on the number of cell sites
and switches in service in a particular period and the related
equipment installed at each site; and the variable component of
which generally consists of per-minute use fees charged by
wireline and wireless
|
48
|
|
|
|
|
providers for calls terminating on their networks, which
fluctuates in relation to the level and duration of those
terminating calls; and
|
|
|
|
|
|
costs to service and repair handsets, activate service for new
subscribers and roaming fees paid to other carriers.
|
Cost of services increased 47% in 2006 compared to 2005 and 45%
in 2005 compared to 2004, primarily due to increased costs
relating to the expansion of our network and increased minutes
of use on our networks due to our acquisitions. Specifically, we
experienced:
|
|
|
|
|
an increase in cell site and switch related operational costs,
including increases in fixed and variable interconnection costs,
due to the increase in usage, cell sites and related equipment
in service;
|
|
|
|
an increase in backhaul costs driven by the increased capacity
required to support our EV-DO service, as well as our PCS
Affiliate and Nextel Partners acquisitions; and
|
|
|
|
an increase in costs for premium data services resulting from
increased subscriber data usage; partially offset by
|
|
|
|
the decrease in roaming expenses due to the acquisition 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, Liquidity and Capital
Resources and Capital Requirements.
Service gross margin increased 62% in 2006 compared to a 57%
increase in 2005 because total service revenues grew at a faster
rate than cost of services. As a percentage of total service
revenue, service gross margin increased slightly to 75% in 2006
from 73% in 2005 and 72% in 2004.
Equipment
Revenue
We recognize equipment revenues when title to the handset or
accessory passes to the dealer or end-user customer. Revenues
from sales of handsets and accessories increased 49% in 2006 as
compared to 2005, and increased 42% in 2005 as compared to 2004.
The number of handset units sold increased by 39% in 2006 as
compared to 2005, and 53% in 2005 as compared to 2004. These
increases were primarily due to the Sprint-Nextel merger and the
PCS Affiliate and Nextel Partners acquisitions. The average
sales price per handset increased 7% in 2006 compared to 2005,
primarily due to higher priced handsets being sold, including
those that are Power Vision enabled. The average sales price per
unit decreased 7% in 2005 compared to 2004, because we lowered
our handset retail prices as the cost of handsets declined, we
changed our third-party compensation plan in 2005, and we
continued to offer rebates on existing handsets as new
promotional programs were rolled out.
Cost
of Products
We recognize the cost of handsets and accessories, including
handset costs in excess of the revenues generated from handset
sales (or subsidy), when title to the handset or accessory
passes to the dealer or end-user customer. Cost of handset and
accessories also includes order fulfillment related expenses and
write-downs of handset and related accessory inventory for
shrinkage and obsolescence. The cost of handsets is reduced by
any rebates that we earned from the supplier. Handset and
accessory costs increased 50% in 2006 as compared to 2005 and
increased 37% in 2005 as compared to 2004 primarily due to the
Sprint-Nextel merger and the PCS Affiliate and the Nextel
Partners acquisitions. There was also a 8% increase in the
average cost per handset sold in 2006 as compared to 2005, as
opposed to a 10% decrease in 2005 as compared to 2004. Equipment
net subsidy as a percentage of equipment revenues increased to
54% in 2006 from 52% in 2005 and declined in 2005 from 58% in
2004.
Our marketing plans assume that handsets typically will be sold
at prices below our cost, which is consistent with industry
practice. Our subscriber retention efforts often include
providing incentives to customers such as offering new handsets
at discounted prices. We expect to increase handset subsidies to
acquire new subscribers or to retain existing subscribers. For
example, we have introduced a new line of hybrid CDMA-iDEN
devices, marketed as PowerSource, and may offer these devices at
a discount in an effort to retain our iDEN
49
subscribers, which may result in an increase in handset
subsidies in future periods. See
Forward-Looking Statements.
Selling,
General and Administrative Expense
Sales and marketing costs primarily consist of customer
acquisition costs, including commissions paid to our indirect
dealers, third-party distributors and direct sales force for new
handset activations, upgrades, residual payments to our indirect
dealers, payroll and facilities costs associated with our direct
sales force, retail stores and marketing employees, 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 debt expense and back office support activities,
including collections, legal, finance, human resources,
strategic planning and technology and product development, along
with the related payroll and facilities costs.
Sales and marketing expense increased 52% in 2006 from 2005 as
compared to an increase of 55% in 2005 from 2004, primarily due
to the launch of new branding initiatives and advertising
campaigns in connection with the Sprint-Nextel merger and
increased sales and distribution costs to support a larger
subscriber base primarily due to the Sprint-Nextel merger and
PCS Affiliate and Nextel Partners acquisitions. Additionally, we
increased the compensation of our post-paid third-party dealers
in the fourth quarter 2006 for both new subscriber additions and
upgrades.
General and administrative costs increased 62% in 2006 from 2005
as compared to an increase of 49% in 2005 from 2004, primarily
due to the Sprint-Nextel merger and the PCS Affiliate and Nextel
Partners acquisitions, as well as:
|
|
|
|
|
an increase in bad debt expense reflecting an increase in the
number of subscribers and an increase in involuntary churn. Bad
debt expense for 2006 increased 88% from 2005, and increased
112% from 2004 to 2005. The allowance for doubtful accounts as a
percentage of 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 a larger subscriber base in addition to an increase in
credit card fees as more subscribers submit invoice payments
through credit cards.
|
We expect certain selling, general and administrative expenses
to continue to increase primarily as a result of increased costs
associated with customer acquisition and retention, including
increased costs related to strengthening third party
distribution channels, and additional marketing, advertising and
brand awareness initiatives and customer care and information
technology and billing activities. See
Forward-Looking Statements.
Wireless
Segment Earnings
Wireless segment earnings increased 68% in 2006 from 2005 as
compared to an increase of 69% in 2005 from 2004, primarily due
to increased revenue resulting from the additional subscribers
as a result of the Sprint-Nextel merger and the PCS Affiliate
and Nextel Partners acquisitions.
50
Long
Distance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change from Previous Year
|
|
Long Distance
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs 2005
|
|
|
2005 vs 2004
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
Voice
|
|
$
|
3,979
|
|
|
$
|
4,213
|
|
|
$
|
4,560
|
|
|
|
(6
|
)%
|
|
|
(8
|
)%
|
Data
|
|
|
1,440
|
|
|
|
1,632
|
|
|
|
1,722
|
|
|
|
(12
|
)%
|
|
|
(5
|
)%
|
Internet
|
|
|
933
|
|
|
|
736
|
|
|
|
793
|
|
|
|
27
|
%
|
|
|
(7
|
)%
|
Other
|
|
|
219
|
|
|
|
253
|
|
|
|
252
|
|
|
|
(13
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net services revenue
|
|
|
6,571
|
|
|
|
6,834
|
|
|
|
7,327
|
|
|
|
(4
|
)%
|
|
|
(7
|
)%
|
Cost of services and products
|
|
|
(4,426
|
)
|
|
|
(4,378
|
)
|
|
|
(4,249
|
)
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin
|
|
$
|
2,145
|
|
|
$
|
2,456
|
|
|
$
|
3,078
|
|
|
|
(13
|
)%
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin percentage
|
|
|
33
|
%
|
|
|
36
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expense
|
|
$
|
(1,169
|
)
|
|
$
|
(1,434
|
)
|
|
$
|
(1,962
|
)
|
|
|
(18
|
)%
|
|
|
(27
|
)%
|
Long Distance segment earnings
|
|
|
976
|
|
|
|
1,022
|
|
|
|
1,116
|
|
|
|
(5
|
)%
|
|
|
(8
|
)%
|
Severance, lease exit costs, asset
impairments and
other(1)
|
|
|
(31
|
)
|
|
|
(30
|
)
|
|
|
(3,653
|
)
|
|
|
3
|
%
|
|
|
(99
|
)%
|
Depreciation(1)
|
|
|
(506
|
)
|
|
|
(499
|
)
|
|
|
(1,081
|
)
|
|
|
1
|
%
|
|
|
(54
|
)%
|
Long Distance operating income
(loss)
|
|
|
439
|
|
|
|
493
|
|
|
|
(3,618
|
)
|
|
|
(11
|
)%
|
|
|
114
|
%
|
|
|
|
(1) |
|
Severance, lease exit costs, asset impairments and other and
depreciation are discussed in the Consolidated Information
section. |
Total Net
Services Revenues
Total net services revenues decreased 4% in 2006 as compared to
2005 and decreased 7% in 2005 as compared to 2004 as a result of
a lower priced product mix, the exiting of our unbundled network
element platform, or UNE-P, business in the first quarter 2006
and our conferencing business in the third quarter 2005, and
migration from legacy data products, partially offset by a
higher volume of minutes in our wholesale and affiliate business
and increases in our IP revenues. Additionally, the termination
of a large Dial IP contract during 2004 and the sale of our
wholesale Dial IP business in 2004 further contributed to the
decreased revenues from 2004 to 2005. These decreases were
partially offset by reduced billing adjustments achieved through
improved billing processes and dispute resolution.
In 2007, we expect to see continued revenue growth in IP
services, offset by declines in voice revenues due to lower
pricing on commercial contracts and continued pressures in the
long distance market. Increased competition and the excess
capacity resulting from new technologies and networks may drive
already low prices down further. See
Forward-Looking Statements.
Voice
Revenues
Voice revenues decreased 6% in 2006 as compared to 2005 and
decreased 8% in 2005 as compared to 2004, primarily as a result
of competition from major local exchange carriers and cable MSOs
for our consumer and small business customers, as well as
wireless,
e-mail and
instant messaging substitution. Additionally, the 2006 decrease
reflects the sale of our UNE-P customers in the first quarter
2006.
Our retail business experienced a 23% decrease in voice revenues
from 2005 to 2006 as competition resulted in lower prices per
minute notwithstanding increased minute volumes. Market trends
indicate a shift away from the retail business and towards the
wholesale business.
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 that they offer to
their customers as part of their bundled service offerings.
51
Voice revenues generated from 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 2005 and decreased 5% in
2005 as compared to 2004, primarily related to declines in frame
relay and ATM services as customers migrated to
IP-based
technologies. These declines were partially offset by growth in
managed network services.
Internet
Revenues
Internet revenues reflect sales of
IP-based
data services, including MPLS. Internet revenues increased 27%
in 2006 as compared to 2005 and decreased 7% in 2005 as compared
to 2004. The 2006 increase was due to higher dedicated IP
revenues as business customers increasingly migrate to MPLS
services. The 2005 decline was primarily due to the loss of the
Dial IP revenues due to the sale of our Dial IP business in
October 2004.
Other
Revenues
Other revenues decreased 13% in 2006 as compared to 2005 and
2004 as a result of fewer customer premises equipment, or CPE,
projects in 2006 compared to prior years.
Costs of
Services and Products
Costs of services and products include access costs paid to
local phone companies, other domestic service 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 1% in
2006 and 3% in 2005. The increases relate primarily to network
costs to support growth in our cable initiatives in addition to
increased domestic access volume, partially offset by fewer CPE
projects in 2006, the loss of UNE-P customers in the first
quarter 2006 and renegotiated access rate agreements and
initiatives to reduce access circuit costs. The 2005 increase
was driven by access volume and international access costs,
somewhat offset by renegotiated access rate agreements and
initiatives to reduce access circuit costs.
Service gross margin decreased from 42% in 2004 to 36% in 2005
to 33% in 2006 primarily as a result of declining net services
revenues and a lower margin product mix.
Selling,
General and Administrative Expense
Selling, general and administrative expense decreased 18% in
2006 as compared to 2005 and decreased 27% in 2005 as compared
to 2004. The 2006 decline was due primarily to decreased
marketing and advertising as a result of a change in the mix of
marketing strategies and other cost savings that resulted in
lower general and administrative and information technology
expenses. The 2005 decline was due primarily to continued
restructuring efforts, headcount reductions, aggressive cost
savings initiatives, reduced rent costs and lower bad debt
expense.
Selling, general and administrative expense includes charges for
estimated bad debt expense. Every quarter we reassess our
allowance for doubtful accounts, based on customer-specific
indicators, as well as historical trends and industry data, to
ensure we are adequately reserved. Bad debt expense for 2006
decreased to $11 million from $30 million in 2005,
which was a decrease from $142 million in 2004. The
improvement in bad debt expense reflects improved trends in
collections and agings. The allowance for doubtful accounts as a
percentage of outstanding accounts receivable was 4% in 2006 and
8% in 2005.
Total selling, general and administrative expense as a
percentage of net services revenues was 18% in 2006, 21% in
2005, and 27% in 2004.
Long
Distance Segment Earnings
Long Distance segment earnings decreased 5% in 2006 from 2005 as
compared to a decrease of 8% in 2005 from 2004, primarily due to
voice revenue declines related to customer migrations to
alternate sources such as cable and wireless.
52
Consolidated
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change from Previous Year
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs 2005
|
|
|
2005 vs 2004
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expense
|
|
$
|
(12,178
|
)
|
|
$
|
(8,916
|
)
|
|
$
|
(6,459
|
)
|
|
|
37%
|
|
|
|
38%
|
|
Severance, lease exit costs and
asset impairments
|
|
|
(207
|
)
|
|
|
(43
|
)
|
|
|
(3,691
|
)
|
|
|
NM
|
|
|
|
(99)%
|
|
Depreciation
|
|
|
(5,738
|
)
|
|
|
(3,864
|
)
|
|
|
(3,651
|
)
|
|
|
48%
|
|
|
|
6%
|
|
Amortization
|
|
|
(3,854
|
)
|
|
|
(1,336
|
)
|
|
|
(7
|
)
|
|
|
NM
|
|
|
|
NM
|
|
Interest expense
|
|
|
(1,533
|
)
|
|
|
(1,294
|
)
|
|
|
(1,218
|
)
|
|
|
18%
|
|
|
|
6%
|
|
Interest income
|
|
|
301
|
|
|
|
236
|
|
|
|
60
|
|
|
|
28%
|
|
|
|
NM
|
|
Equity in (losses) earnings of
unconsolidated investees, net
|
|
|
(6
|
)
|
|
|
107
|
|
|
|
(41
|
)
|
|
|
(106)%
|
|
|
|
NM
|
|
Realized gain on sale or exchange
of investments
|
|
|
205
|
|
|
|
62
|
|
|
|
15
|
|
|
|
NM
|
|
|
|
NM
|
|
Other, net
|
|
|
32
|
|
|
|
39
|
|
|
|
(61
|
)
|
|
|
(18)%
|
|
|
|
164%
|
|
Income tax (expense) benefit
|
|
|
(488
|
)
|
|
|
(470
|
)
|
|
|
1,238
|
|
|
|
4%
|
|
|
|
138%
|
|
Discontinued operations, net
|
|
|
334
|
|
|
|
980
|
|
|
|
994
|
|
|
|
(66)%
|
|
|
|
(1)%
|
|
Income (loss) available to common
shareholders
|
|
|
1,327
|
|
|
|
1,778
|
|
|
|
(1,028
|
)
|
|
|
(25)%
|
|
|
|
NM
|
|
NM Not Meaningful
Selling,
General and Administrative Expense
Selling, general and administrative expenses are primarily
allocated at the segment level and are discussed in the segment
earnings discussions above. The selling, general and
administrative expenses related to Wireless were
$10.6 billion in 2006, $6.7 billion in 2005 and
$4.4 billion in 2004. The selling, general and
administrative expenses related to Long Distance were
$1.2 billion in 2006, $1.4 billion in 2005 and
$2.0 billion in 2004.
In addition to the selling, general and administrative expenses
discussed in the segment earnings discussions, we incurred
corporate selling, general and administrative expenses,
including merger and integration costs of $413 million in
2006 and $580 million in 2005. Merger and integration costs
are generally non-recurring in nature and primarily include
charges for costs to adopt and launch a new branding strategy
and logos, including costs to re-brand company-owned stores and
facilities, costs to train customer-facing employees and prepare
systems for the launch 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 administrative expenses, and thus excluded from
segment results.
Severance,
Lease Exit Costs and Asset Impairments
We recorded $128 million in 2006 related to the separation
of employees and lease exit costs as part of the Sprint-Nextel
merger and integration initiatives, and in 2004 we recorded
$151 million in severance and lease exit costs related to
organizational realignment and other activities. We recorded
asset impairment charges of $69 million in 2006 and
$44 million in 2005 primarily related to the write-off of
various software applications and $3.5 billion in 2004
related to the impairment of our Long Distance property, plant
and equipment. We incurred $10 million in facility lease
termination costs due to subtenant lease terminations in 2006,
$9 million in 2005 and $65 million in 2004.
Depreciation
and Amortization Expense
Depreciation expense increased 48% in 2006 from 2005 and
increased 6% in 2005 from 2004, primarily due to the
Sprint-Nextel merger and the PCS Affiliate and Nextel Partners
acquisitions. Excluding the impact of
53
these business combinations, depreciation expense increased 10%
as a result of an increase in cell sites in service and the
capitalized costs incurred to modify existing switches and cell
sites to enhance the capacity of our networks, partially offset
by the reduction in value of assets associated with the
impairment of our property, plant and equipment in 2004.
Amortization expense increased $2.5 billion in 2006 from
2005 and increased $1.3 billion in 2005 from 2004,
primarily due to the amortization of 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 10-K
for additional information regarding our definite lived
intangible assets.
Interest
Expense
Interest expense in 2006 increased $239 million as compared
to 2005 due to the additional indebtedness assumed in connection
with the Sprint-Nextel merger and the PCS Affiliate and Nextel
Partners acquisitions. The effective interest rate on our
average long-term debt balance of $23.3 billion in 2006 was
6.9%. The effective interest rate on our average long-term debt
balance of $19.7 billion in 2005 was 6.7%. This increase is
primarily related to debt assumed as part of the acquisitions in
2006 with, on average, higher interest rates relative to our
existing debt. The effective interest rate on our average
long-term debt balance of $17.4 billion in 2004 was 7.1%.
The decrease in our effective interest rate between 2005 and
2004 primarily relates to lower effective interest rates on the
assumed Nextel long-term debt. The effective interest rate
includes the effect of interest rate swap agreements that are
discussed in note 10 of the Notes to Consolidated Financial
Statements appearing at the end of this annual report on
Form 10-K.
As of December 31, 2006, the average floating rate of
interest on the interest rate swaps was 8.3%, while the weighted
average coupon on the underlying debt was 7.2%. See
Liquidity and Capital Resources for more
information on our financing activities.
Interest
Income
Interest income includes dividends received from certain
investments in equity securities and interest earned on
marketable debt securities and cash equivalents. In 2006,
interest income increased 28% as compared to 2005 primarily due
to the higher interest rates on the cash equivalents balances as
well as interest income recognized in relation to a favorable
tax audit settlement for the years 1995 to 2002. This increase
was partially offset by the decrease in cash investment balances
due to debt retirements, purchases of common stock and
acquisitions. In 2005, interest income increased as compared to
2004 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 increase in
the Federal funds rates during 2005.
Equity in
(Losses) Earnings of Unconsolidated Investees, net
Under the equity method of accounting, we record our
proportional share of the earnings or losses of the companies in
which we have invested and have the ability to exercise
significant influence over, up to the amount of our investment
in the case of losses. We recorded $6 million of equity
method losses during 2006, primarily due to our ownership
interests in
E-wireless.
We recorded $107 million of equity method earnings in 2005
primarily related to Nextel Partners. Our $41 million of
equity method losses in 2004 primarily related to our investment
in Virgin Mobile USA.
Realized
Gain on Sale or Exchange of Investments
During 2006, we recognized a gain from the sale of investments
of $205 million, primarily due to $433 million of
gains on the sales of our investment in NII Holdings, Inc.,
partially offset by a loss of $274 million from the change
in fair value of an option contract associated with our
investment in NII Holdings, as described in note 10 of the
Notes to Consolidated Financial Statements appearing at the end
of this annual report on
Form 10-K.
We recognized a gain of $62 million from the sale of our
equity method and other investments in 2005, which primarily
consisted of gains related to our investments in
Call-Net
Enterprises, Inc., NII Holdings and
54
Earthlink, Inc. In 2004, we recognized a gain of
$15 million from the sale of investments, primarily
attributable to our investment in Earthlink.
Income
Tax (Expense) Benefit
Our consolidated effective tax rates were 32.9% in 2006, 36.4%
in 2005 and 38.2% in 2004. The 2006 effective tax rate was
impacted by a $42 million benefit related to tax audit
settlements for the years 1995 to 2002 and a $27 million
benefit related to state income tax law changes. Information
regarding the items that caused the effective income tax rates
to vary from the statutory federal rate for income taxes related
to continuing operations can be found in note 12 of the
Notes to Consolidated Financial Statements appearing at the end
of this annual report on
Form 10-K.
Discontinued
Operations, net
Discontinued operations reflect the results of our Local segment
for the full years 2004 and 2005 and the
year-to-date
period through May 17, 2006, the date of the Embarq
spin-off. Additional information regarding our discontinued
operations can be found in note 2 of the Notes to
Consolidated Financial Statements appearing at the end of this
annual report on
Form 10-K.
Income from discontinued operations related to the spin-off of
Embarq remained relatively stable in 2005 and 2004.
Financial
Condition
Our consolidated assets were $97.2 billion as of
December 31, 2006, which included $60.1 billion of
intangible assets, and $102.8 billion as of
December 31, 2005, which included $49.3 billion of
intangible assets. The decrease in our consolidated assets was
due primarily to the spin-off of Embarq, payments and
retirements of debt, purchases of shares of our common stock and
the retirement of our Seventh series redeemable preferred
shares, partially offset by an increase due to assets acquired
in connection with several business combinations, 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 Liquidity and Capital Resources for additional
information on the change in cash and cash equivalents.
Liquidity
and Capital Resources
Management exercises discretion regarding the liquidity and
capital resource needs of our business segments. This
responsibility includes the ability to prioritize the use of
capital and debt capacity, to determine cash management policies
and to make decisions regarding the timing and amount of capital
expenditures.
Discontinued
Operations
On May 17, 2006, we completed the spin-off of Embarq. The
separation of Embarq from us resulted in two separate companies
each of which can focus on maximizing opportunities for its
distinct business. We believe this separation presents the
opportunity for enhanced performance of each of the two
companies, including: allowing each company separately to pursue
the business and regulatory strategies that best suit its
long-term interests and, by doing so, addressing the growing
strategic divergence between Embarqs local
wireline-centric focus and our increasingly national
wireless-centric focus; creating separate companies that have
different financial characteristics, which may appeal to
different investor bases; creating opportunities to more
efficiently develop and finance expansion plans; and creating
effective management incentives tied to the relevant
companys performance.
In the spin-off, we distributed pro rata to our shareholders one
Embarq common share for every 20 shares of our voting and
non-voting common stock, or about 149 million Embarq common
shares. Cash was paid for fractional shares. The distribution of
Embarq common shares is considered a tax-free transaction for us
and for our shareholders, except cash payments made in lieu of
fractional shares which are generally taxable.
In connection with the spin-off, Embarq transferred to our
parent company $2.1 billion in cash and about
$4.5 billion of Embarq senior notes in partial
consideration for, and as a condition to, our transfer to Embarq
of the local communications business. Embarq also retained about
$665 million in debt obligations of its subsidiaries. The
cash and senior notes were transferred by our parent company to
our finance subsidiary,
55
Sprint Capital Corporation, in satisfaction of indebtedness owed
by our parent company to Sprint Capital. On May 19, 2006,
Sprint Capital sold the Embarq senior notes to the public, and
received about $4.4 billion in net proceeds.
In connection with the spin-off, we entered into a separation
and distribution agreement and related agreements with Embarq,
which provide that generally each party will be responsible for
its respective assets, liabilities and businesses following the
spin-off and that we and Embarq will provide each other with
certain transition services relating to our respective
businesses for specified periods at cost-based prices. We also
entered into agreements pursuant to which we and Embarq will
provide each other with specified services at commercial rates.
Further, the agreements provide for a settlement process
surrounding the transfer of certain assets and liabilities. It
is possible that adjustments will occur in future periods as
these matters are settled.
At the time of the spin-off, all outstanding options to purchase
our common stock held by employees of Embarq were cancelled and
replaced with options to purchase Embarq common stock.
Outstanding options to purchase our common stock held by our
directors and employees who remained with us were adjusted by
multiplying the number of shares subject to the options by
1.0955 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-off (including those held by those of our employees who
became employees of Embarq) were treated in a manner similar to
the treatment of outstanding shares of our common stock in the
spin-off. Holders of these restricted stock units received one
Embarq restricted stock unit for every twenty restricted stock
units held. Outstanding deferred shares granted under the Nextel
Incentive Equity Plan, which represent the right to receive
shares of our common stock, were adjusted by multiplying the
number of deferred shares by 1.0955. Cash was paid to the
holders of deferred shares in lieu of fractional shares. If the
spin-off of Embarq does not qualify as a tax-free transaction,
tax could be imposed on both our shareholders and us.
We believe that our cash and liquidity requirements will be met
without the net cash provided by Embarq.
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2006
|
|
|
2005
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in millions)
|
|
|
Cash provided by operating
activities
|
|
$
|
10,958
|
|
|
$
|
10,679
|
|
|
$
|
279
|
|
|
|
3%
|
|
Cash used in investing activities
|
|
|
(11,392
|
)
|
|
|
(4,724
|
)
|
|
|
(6,668
|
)
|
|
|
141%
|
|
Cash used in financing activities
|
|
|
(6,423
|
)
|
|
|
(1,228
|
)
|
|
|
(5,195
|
)
|
|
|
NM
|
|
NM Not Meaningful
Operating
Activities
Net cash provided by operating activities of $11.0 billion
in 2006 increased $279 million from 2005 primarily due to a
$12.0 billion increase in cash received from our customers
as a result of the Sprint-Nextel merger in the third quarter
2005, the PCS Affiliate acquisitions in 2005 and 2006 and the
Nextel Partners acquisition in the second quarter 2006, as well
as continued growth in the Wireless customer base. This increase
was partially offset by an $8.5 billion increase in cash
paid to suppliers and employees, $1.2 billion of proceeds
received in 2005 from the communications towers lease
transaction and a decrease in cash provided from discontinued
operations of $1.1 billion.
Investing
Activities
Net cash used in investing activities for 2006 increased by
$6.7 billion from 2005 due primarily to:
|
|
|
|
|
a $10.3 billion increase in cash paid in 2006 for
acquisitions, including $3.2 billion of net cash paid to
acquire Alamosa Holdings, $66 million of net cash paid to
acquire Enterprise Communications, $150 million of net cash
paid to acquire Velocita Wireless, $847 million of net cash
paid to acquire UbiquiTel, and $6.2 billion of net cash
paid to acquire Nextel Partners compared to $1.4 billion of
net
|
56
|
|
|
|
|
cash paid to acquire three PCS Affiliates in 2005, offset by net
cash received in 2005 of $1.2 billion related to the
Sprint-Nextel merger;
|
|
|
|
|
|
a $2.5 billion net increase in cash paid for capital
expenditures, including a $481 million decrease related to
discontinued operations; and
|
|
|
|
$866 million in cash used to collateralize securities loan
agreements; partially offset by
|
|
|
|
$6.3 billion in proceeds in connection with the spin off of
our Local segment, including $1.8 billion received from
Embarq at the time it was spun-off net of cash contributed and
proceeds from the sale of Embarq notes of about
$4.4 billion.
|
Capital expenditures increased due to higher spending in our
Wireless segment, 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 well as to improve iDEN network reliability to
meet capacity demands and fulfill our obligations under the
Report and Order. We invested in our Long Distance segment to
maintain network reliability, upgrade capabilities for providing
new products and services and meet capacity demands.
Financing
Activities
Net cash used in financing activities of $6.4 billion
during 2006 consisted primarily of:
|
|
|
|
|
$1.6 billion for the purchase of our outstanding common
shares pursuant to our share repurchase program that commenced
in the third quarter 2006;
|
|
|
|
$3.7 billion paid for the retirement of our term loan and
Nextel Partners bank credit facility; and
|
|
|
|
$4.3 billion in payments and retirements related to our
capital lease obligations and senior notes; partially offset by
|
|
|
|
net proceeds from the sale of $2.0 billion in principal
amount of 6.0% senior serial redeemable notes due in 2016;
|
|
|
|
proceeds of $866 million from a securities loan agreement;
|
|
|
|
net proceeds of $514 million from issuance of commercial
paper; and
|
|
|
|
$405 million in proceeds from common share issuances,
primarily resulting from exercises of stock options by employees.
|
We paid cash dividends of $296 million in 2006 compared to
$525 million in 2005. The decrease in cash dividends paid
is due to a decrease in the dividend rate from $0.125 per
common share per quarter in the first two quarters of 2005 to
$0.025 per common share per quarter beginning in the third
quarter 2005. This dividend rate decrease was partially offset
by an increase in the average number of common shares
outstanding in the year ended December 31, 2006 compared to
the year ended December 31, 2005, primarily as a result of
the Sprint-Nextel merger.
Capital
Requirements
We currently anticipate that future funding needs in the near
term will principally relate to:
|
|
|
|
|
operating expenses relating to our networks;
|
|
|
|
capital expenditures, particularly with respect to the expansion
of the coverage and capacity of our wireless networks and the
deployment of new technologies in those networks, including our
plans to build a new broadband wireless network;
|
|
|
|
scheduled interest and principal payments related to our debt
and any purchases or redemptions of our debt securities;
|
|
|
|
dividend payments as declared by our board of directors, and
purchases of our common shares pursuant to our share repurchase
program;
|
|
|
|
amounts required to be expended in connection with the Report
and Order;
|
57
|
|
|
|
|
potential costs of compliance with regulatory mandates; and
|
|
|
|
other general corporate expenditures.
|
Liquidity
As of December 31, 2006, our cash and cash equivalents and
marketable securities totaled $2.1 billion.
We have a $6.0 billion revolving credit facility, which
represents our total committed financing capacity under this
facility. This credit facility, which expires in December 2010,
provides for interest rates equal to the London Interbank
Offered Rate, or LIBOR, or Prime Rate plus a spread that varies
depending on the parent companys credit ratings. There is
no rating trigger that would allow the lenders involved to
terminate this facility in the event of a credit rating
downgrade.
In April 2006, we commenced a commercial paper program, which
reduced our borrowing costs by allowing us to issue short-term
debt at lower rates than those available under our
$6.0 billion revolving credit facility. The
$2.0 billion program is backed by our revolving credit
facility and reduces the amount we can borrow under the facility
to the extent of the commercial paper outstanding. As of
December 31, 2006, we had $514 million of commercial
paper outstanding, net of discounts. Although our credit rating
remains investment grade, recent downgrades to our credit rating
by major credit rating agencies have impacted, and may continue
to impact, our ability to place the paper with investors, as
well as the duration and interest rates of commercial paper
issued since the ratings downgrade.
As of December 31, 2006, we had $2.6 billion in
letters of credit, including a $2.5 billion letter of
credit required by the Report and Order, outstanding under our
$6.0 billion revolving credit facility. These letters of
credit reduce the availability under the revolving credit
facility by an equivalent amount. As a result of the letters of
credit and outstanding commercial paper, we had about
$2.9 billion of borrowing capacity available under our
revolving credit facility. In addition, we had $16 million
of general letters of credit outstanding.
As of December 31, 2006, we were in compliance with all
debt covenants, including all financial ratio tests, associated
with our borrowings.
Our ability to fund our capital needs from outside sources is
ultimately impacted by the overall capacity and terms of the
banking and securities markets. Given the volatility in these
markets, we continue to monitor them closely and to take steps
to maintain financial flexibility and a reasonable capital cost
structure.
As of December 31, 2006, we had working capital of
$506 million compared to working capital of
$5.0 billion as of December 31, 2005. The decrease in
working capital is primarily due to the utilization of cash to
fund our 2006 acquisitions, the impact of the spin-off of
Embarq, debt payments and retirements, the purchase of common
shares and the retirement of our Seventh series redeemable
preferred shares. In addition to cash, cash equivalents 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.
Future
Contractual Obligations
The following table sets forth our best estimates as to the
amounts and timing of contractual payments for our most
significant contractual obligations as of December 31,
2006. The information in the table reflects future unconditional
payments and is based upon, among other things, the terms of the
relevant agreements, appropriate classification of items under
GAAP currently in effect and certain assumptions, such as future
58
interest rates. Future events, including additional purchases of
our securities and refinancing of those securities, could cause
actual payments to differ significantly from these amounts. See
Forward-Looking Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
Future Contractual Obligations
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
(in millions)
|
|
|
Senior notes, bank credit
facilities, debentures and commercial
paper(1)
|
|
$
|
38,244
|
|
|
$
|
2,646
|
|
|
$
|
2,758
|
|
|
$
|
2,009
|
|
|
$
|
2,233
|
|
|
$
|
3,388
|
|
|
$
|
25,210
|
|
Capital
leases(2)
|
|
|
170
|
|
|
|
21
|
|
|
|
27
|
|
|
|
14
|
|
|
|
10
|
|
|
|
10
|
|
|
|
88
|
|
Operating
leases(3)
|
|
|
17,905
|
|
|
|
1,816
|
|
|
|
1,700
|
|
|
|
1,595
|
|
|
|
1,432
|
|
|
|
1,244
|
|
|
|
10,118
|
|
Purchase orders and other
commitments(4)
|
|
|
12,659
|
|
|
|
6,340
|
|
|
|
2,177
|
|
|
|
1,626
|
|
|
|
918
|
|
|
|
615
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,978
|
|
|
$
|
10,823
|
|
|
$
|
6,662
|
|
|
$
|
5,244
|
|
|
$
|
4,593
|
|
|
$
|
5,257
|
|
|
$
|
36,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes principal and estimated interest payments. Interest
payments are based on managements 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 for further discussion. |
The table above does not include remaining costs to be paid in
connection with the fulfillment of our obligation under the
Report and Order. The total minimum cash obligation for the
Report and Order is $2.8 billion. Costs incurred under the
Report and Order associated with the reconfiguration of the
800 MHz band may be applied against the $2.8 billion
obligation, subject to approval by the Transition Administrator
under the Report and Order. In addition, costs associated with
the reconfiguration of the 1.9 GHz spectrum are not fully
approved for credit until the completion of the entire
reconfiguration process. Because the final reconciliation and
audit of the entire reconfiguration obligation outlined in the
Report and Order will not take place until after the completion
of all aspects of the reconfiguration process, there can be no
assurance that we will be given full credit for the expenditures
that we have incurred under the Report and Order. Additionally,
since we, the Transition Administrator and the FCC have not yet
reached an agreement on the methodology for calculating certain
amounts of property, plant and equipment to be submitted for
credit associated with reconfiguration activity with our own
network, we cannot provide assurance that we will be granted
full credit for certain of these network costs. As a result of
the uncertainty with regard to the calculation of the credit for
our internal network costs, as well as the significant number of
variables outside of our control, particularly with regard to
the 800 MHz reconfiguration licensee costs, we do not
believe that we can reasonably estimate what amount, if any,
will be paid to the U.S. Treasury. Since the inception of
the program through December 31, 2006, we estimate that we
have incurred $721 million of costs directly attributable
to the reconfiguration program. This amount does not include any
indirect network costs that we have preliminarily allocated to
the reconfiguration program.
Purchase orders and other commitments include
minimum purchases we commit to purchase from suppliers over time
and/or the
unconditional purchase obligations where we guarantee to make a
minimum payment to suppliers for goods and services regardless
of whether suppliers fully deliver them. They include agreements
for communications and customer billing services, advertising
services and contracts related to information technology and
customer care outsourcing arrangements. Amounts actually paid
under some of these other agreements will likely be
higher due to variable components of these agreements. The more
significant variable components that determine the ultimate
obligation owed include hours contracted, subscribers and other
factors. In addition, we are party to various arrangements that
are conditional in nature and create an obligation to make
payments only upon the occurrence of certain events, such as the
delivery of functioning software or products. Because it is not
possible to predict the timing or amounts that may be due under
these conditional arrangements, no such amounts have been
included in the table above. The table above also excludes about
$3.6 billion of blanket purchase order amounts since their
agreement terms are not specified.
59
No time frame is set for these purchase orders and they are not
legally binding. As a result, they are not firm commitments.
Off-Balance
Sheet Financing
We do not participate in, or secure, financings for any
unconsolidated, special purpose entities.
Future
Outlook
We expect to be able to meet our currently identified funding
needs for at least the next 12 months by using:
|
|
|
|
|
our anticipated cash flows from operating activities as well as
our cash, cash equivalents and marketable securities on hand;
and/or
|
|
|
|
cash available under our existing credit facility and our
commercial paper program.
|
In making this assessment, we have considered:
|
|
|
|
|
anticipated levels of capital expenditures, including funding
required in connection with the deployment of next generation
technologies and our next generation broadband 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 and the acquisitions of the PCS Affiliates and Nextel
Partners; and
|
|
|
|
other future contractual obligations.
|
If there are material changes in our business plans, or
currently prevailing or anticipated economic conditions in any
of our markets or competitive practices in the mobile wireless
communications industry, or if other presently unexpected
circumstances arise that have a material effect on our cash flow
or profitability, anticipated cash needs could change
significantly.
The conclusion that we expect to meet our funding needs for at
least the next 12 months as described above does not take
into account:
|
|
|
|
|
any significant acquisition transactions or the pursuit of any
significant new business opportunities or spectrum acquisition
strategies;
|
|
|
|
potential material purchases or redemptions of our outstanding
debt securities for cash; and
|
|
|
|
potential material increases in the cost of compliance with
regulatory mandates.
|
Any of these events or circumstances could involve significant
additional funding needs in excess of anticipated cash flows
from operating activities and the identified currently available
funding sources, including existing cash on hand, borrowings
available under our existing credit facility and our commercial
paper program. If existing capital resources are not sufficient
to meet these funding needs, it would be necessary to raise
additional capital to meet those needs. Our ability to raise
additional capital, if necessary, is subject to a variety of
additional factors that cannot currently be predicted with
certainty, including:
|
|
|
|
|
the commercial success of our operations;
|
|
|
|
the volatility and demand of the capital markets;
|
|
|
|
the market prices of our securities; and
|
|
|
|
tax law restrictions related to the spin-off of Embarq that may
limit our ability to raise capital from the sale of our equity
securities.
|
We have in the past and may in the future have discussions with
third parties regarding potential sources of new capital to
satisfy actual or anticipated financing needs. At present, other
than the existing arrangements that have been described in this
report, we have no legally binding commitments or understandings
with any third parties to obtain any material amount of
additional capital.
60
The above discussion is subject to the risks and other
cautionary and qualifying factors set forth under
Forward-Looking Statements and in
Part I, Item 1A Risk Factors.
Financial
Strategies
General
Risk Management Policies
We primarily use derivative instruments for hedging and risk
management purposes. Hedging activities may be done for various
purposes, including, but not limited to, mitigating the risks
associated with an asset, liability, committed transaction or
probable forecasted transaction. We seek to minimize
counterparty credit risk through stringent credit approval and
review processes, credit support agreements, continual review
and monitoring of all counterparties, and thorough legal review
of contracts. We also control exposure to market risk by
regularly monitoring changes in hedge positions under normal and
stress conditions to ensure they do not exceed established
limits.
Our board of directors has adopted a financial risk management
policy that authorizes us to enter into derivative transactions,
and all transactions comply with the policy. We do not purchase
or hold any derivative financial instruments for speculative
purposes with the exception of equity rights obtained in
connection with commercial agreements or strategic investments,
usually in the form of warrants to purchase common shares.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are primarily exposed to the market risk associated with
unfavorable movements in interest rates, foreign currencies and
equity prices. The risk inherent in our market risk sensitive
instruments and positions is the potential loss arising from
adverse changes in those factors.
Interest
Rate Risk
The communications industry is a capital intensive, technology
driven business. We are subject to interest rate risk primarily
associated with our borrowings. Interest rate risk is the risk
that changes in interest rates could adversely affect earnings
and cash flows. Specific interest rate risk include: the risk of
increasing interest rates on short-term debt; the risk of
increasing interest rates for planned new fixed rate long-term
financings; and the risk of increasing interest rates for
planned refinancing using long-term fixed rate debt.
Cash Flow
Hedges
We enter into interest rate swap agreements designated as cash
flow hedges to reduce the impact of interest rate movements on
future interest expense by effectively converting a portion of
our floating-rate debt to a fixed-rate. As of December 31,
2006, we had no outstanding interest rate cash flow hedges.
Fair
Value Hedges
We enter into interest rate swap agreements to manage exposure
to interest rate movements and achieve an optimal mixture of
floating and fixed-rate debt while minimizing liquidity risk.
The interest rate swap agreements designated as fair value
hedges effectively convert our fixed-rate debt to a
floating-rate by receiving fixed rate amounts in exchange for
floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. As of
December 31, 2006, we had outstanding interest rate swap
agreements that were designated as fair value hedges.
About 95% of our debt as of December 31, 2006 was
fixed-rate debt excluding interest rate swaps. While changes in
interest rates impact the fair value of this debt, there is no
impact to earnings and cash flows because we intend to hold
these obligations to maturity unless market and other conditions
are favorable.
As of December 31, 2006, we held fair value interest rate
swaps with a notional value of $1.0 billion. These swaps
were entered into as hedges of the fair value of a portion of
our senior notes. These interest rate swaps have maturities
ranging from 2008 to 2012. On a semiannual basis, we pay a
floating rate of interest equal to the six-month LIBOR plus a
fixed spread and receive an average interest rate equal to the
coupon rates stated 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 $28 million. These interest rate swaps met
all the requirements for perfect effectiveness under derivative
accounting rules as all of
61
the critical terms of the swaps perfectly matched the
corresponding terms of the hedged debt; therefore, there is no
net effect to earnings and cash flows for any fair value
fluctuations.
We perform interest rate sensitivity analyses on our variable
rate debt including interest rate swaps. These analyses indicate
that a one percentage point change in interest rates would have
an annual pre-tax impact of $20 million on our statements
of operations and cash flows as of December 31, 2006. While
our variable-rate debt may impact earnings and cash flows as
interest rates change, it is not subject to changes in fair
values.
We also perform a sensitivity analysis on the fair market value
of our outstanding debt. A 10% decline in market interest rates
would cause a $976 million increase in the fair market
value of our debt to $24.3 billion. This analysis includes
the hedged debt.
In 2005, we entered into a series of interest rate collars
associated with the issuance of debt by Embarq at the time of
its spin-off on May 17, 2006. These collars were designated
as cash flow hedges in Embarqs consolidated financial
statements against the variability in interest payments that
would result from a change in interest rates before the debt was
issued at the time of the spin-off. However, because the
forecasted interest payments of debt started after the spin-off,
the derivative instruments did not qualify for hedge accounting
treatment in our consolidated financial statements. As such,
included in discontinued operations in 2006 is $43 million
in gains, after tax, realized from the change in fair value of
these interest rate collars.
Foreign
Currency Risk
We also enter into forward contracts and options in foreign
currencies to reduce the impact of changes in foreign exchange
rates. Our foreign exchange risk management program focuses on
reducing transaction exposure to optimize consolidated cash
flow. We use foreign currency derivatives to hedge our foreign
currency exposure related to settlement of international
telecommunications access charges and the operation of our
international subsidiaries. The dollar equivalent of our net
foreign currency payables from international settlements was
$20 million and net foreign currency receivables from
international operations was $20 million as of
December 31, 2006. The potential immediate pre-tax loss to
us that would result from a hypothetical 10% change in foreign
currency exchange rates based on these positions would be
insignificant.
Equity
Risk
We are exposed to market risk as it relates to changes in the
market value of our investments. We invest in equity instruments
of public and private companies for operational and strategic
business purposes. These securities are subject to significant
fluctuations in fair market value due to volatility of the stock
market and industries in which the companies operate. These
securities, which are classified in investments and marketable
securities on the consolidated balance sheets, include equity
method investments, investments in private securities,
available-for-sale
securities and equity derivative instruments.
We entered into a series of option contracts associated with our
investment in NII Holdings in order to hedge the price risk
associated with this security. The first of these contracts did
not qualify for hedge accounting and the changes in fair value
of that contract were recognized in earnings during the period
of change. The remainder of these equity derivative instruments
were settled in December 2006. Additional 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. These
warrants are supplemental to the terms of the business
transaction and are not designated as hedging instruments.
During 2002 and 2003, we entered into variable prepaid forward
contracts to monetize equity securities held as available for
sale. The derivatives were designated as cash flow hedges to
reduce the variability in expected cash flows related to the
forecasted sale of the underlying equity securities. These
prepaid contracts were settled between the fourth quarter 2004
and fourth quarter 2005.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements required by this item
begin on
page F-1
of this annual report on
Form 10-K
and are incorporated herein by reference. The financial
statement schedule required under
62
Regulation S-X
is filed pursuant to Item 15 of this annual report on
Form 10-K
and is incorporated herein by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
Item 9A. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the
objective of ensuring that information required to be disclosed
in our reports under the Securities Exchange Act of 1934, such
as this
Form 10-K,
is reported in accordance with the SECs rules. Disclosure
controls are also designed with the objective of ensuring that
such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
In connection with the preparation of this
Form 10-K
as of December 31, 2006, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we carried out an
evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial
Officer each concluded that the design and operation of the
disclosure controls and procedures were effective as of
December 31, 2006 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, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure and in providing
reasonable assurance that the information is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms.
We continue to update our internal control over financial
reporting as necessary to accommodate any modifications to our
business processes or accounting procedures. During the quarter
ended December 31, 2006, we completed various phases of our
systems and processes consolidation plan. These included
migrating certain operating leases on to a single accounting
system, migrating certain customers onto a single billing
platform, transitioning part of our call traffic to a new call
processing system and standardizing the majority of our stores
onto one point of sale system. There have been no other changes
in our internal control over financial reporting that occurred
during the quarter ended December 31, 2006 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control system was designed to provide reasonable assurance to
our management and board of directors regarding the reliability
of financial reporting and the preparation of financial
statements for external purposes.
Our management conducted an assessment of the effectiveness of
our internal control over financial reporting as of
December 31, 2006. This assessment was based on the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission, or COSO, in Internal
Control Integrated Framework. Based on this
assessment, management believes that, as of December 31,
2006, our internal control over financial reporting was
effective.
Our independent registered public accounting firm has issued a
report on managements assessment of our internal control
over financial reporting. This report appears on
page F-4.
As discussed in note 3 to the consolidated financial
statements, we completed the acquisition of Nextel Partners,
Inc. in June 2006. We have excluded Nextel Partners from our
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 as of and for the year ended December 31, 2006.
63
|
|
Item 9B.
|
Other
Information
|
Not applicable.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item regarding our directors is
incorporated by reference to the information set forth under the
captions Election of Directors Nominees for
Director, Board Committees and Director
Meetings The Audit Committee and
Board Committees and Director
Meetings The Nominating and Corporate Governance
Committee in our proxy statement relating to our 2007
annual meeting of shareholders, which will be filed with the
SEC, and with respect to family relationships, to Part I of
this report under Executive Officers of the
Registrant. The information required by this item
regarding our executive officers is incorporated by reference to
Part I of this report under the caption Executive
Officers of the Registrant. The information required by
this item regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 by our directors, executive
officers and holders of ten percent of a registered class of our
equity securities is incorporated by reference to the
information set forth under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in our proxy
statement relating to our 2007 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 on our website at
http://www.sprint.com/governance. If we make any amendment to
our Code of Conduct, other than a technical, administrative or
non-substantive amendment, or we grant any waiver, including any
implicit waiver, from a provision of the Code of Conduct, that
applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, we will
disclose the nature of the amendment or waiver on our website at
the same location. Also, we may elect to disclose the amendment
or waiver in a current report on
Form 8-K
filed with the SEC.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item regarding compensation of
executive officers and directors is incorporated by reference to
the information set forth under the captions Election of
Directors Compensation of Directors,
Executive Compensation and Human Capital and
Compensation Committee Report in our proxy statement
relating to our 2007 annual meeting of shareholders, which will
be filed with the SEC. No information is required by this item
regarding compensation committee interlocks.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item, other than the equity
compensation plan information below, is incorporated by
reference to the information set forth under the captions
Security Ownership of Certain Beneficial Owners and
Security Ownership of Directors and Executive
Officers in our proxy statement relating to our 2007
annual meeting of shareholders, which will be filed with the SEC.
Equity
Compensation 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, or the 1997 Program, the
Employees Stock Purchase Plan, or ESPP, and the Nextel Incentive
Equity Plan, or Nextel Equity Plan. The 1997 Program and the
ESPP were approved by our shareholders, and the Nextel Equity
Plan had been approved by Nextels shareholders. Before
April 18, 2005, options could also be granted pursuant to
the terms of the Management Incentive Stock Option Plan, or
MISOP, which was also approved by our shareholders. Options
remain outstanding under the MISOP.
64
The following table provides information about the shares of
common stock, Series 1, that may be issued upon exercise of
awards as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued
|
|
|
Weighted-average
|
|
|
Future Issuance Under
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by shareholders of common stock, Series 1
|
|
|
116,870,231
|
(1)
|
|
$
|
25.43
|
(2)
|
|
|
119,666,415
|
(3)(4)(5)(6)
|
Equity compensation plans not
approved by shareholders of common stock, Series 1
|
|
|
63,743,620
|
(7)
|
|
$
|
20.20
|
(8)
|
|
|
49,382,450
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
180,613,851
|
|
|
|
|
|
|
|
169,048,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 74,248,536 options and 8,667,079 restricted stock
units outstanding under the 1997 Program and 33,193,692 options
outstanding under the MISOP. Also includes 4,147 shares of
common stock issuable under the 1997 Program as a result of the
purchase of those shares by directors with fourth quarter 2006
fees and purchase rights to acquire 756,777 shares of
common stock accrued at December 31, 2006 under the ESPP.
Under the ESPP, each eligible employee may purchase common stock
at quarterly intervals at a purchase price per share equal to
90% of the market value on the last business day of the offering
period. |
|
(2) |
|
The weighted average exercise price does not take into
account the shares of common stock issuable upon vesting of
restricted stock units issued under the 1997 Program. These
restricted stock units have no exercise price. The weighted
average price also does not take into account the
4,147 shares of common stock issuable as a result of the
purchase of those shares by directors with fourth quarter 2006
fees; the purchase price of these shares was $19.05 for each
share. The weighted average purchase price also does not take
into account the 756,777 shares of common stock issuable as
a result of the purchase rights accrued under the ESPP; the
purchase price of these shares was $17.14 for each share. |
|
(3) |
|
Of these shares, 97,294,764 shares of common stock were
available under the 1997 Program. Although it is not our
intention to do so, all of the shares, plus any shares that
become available due to forfeiture of outstanding awards, could
be issued in a form other than options, warrants or rights. |
|
(4) |
|
Includes 22,371,651 shares of common stock available for
issuance under the ESPP after issuance of the
756,777 shares purchased in the fourth quarter 2006
offering. See note 1 above. |
|
(5) |
|
Under the 1997 Program, the number of shares increases on
January 1 of each year by 1.5% of the common stock outstanding
on that date. No awards may be granted after April 15,
2007. |
|
(6) |
|
No new options may be granted under the MISOP and therefore
this figure does not include any shares of our common stock that
may be issued under the MISOP. Most options outstanding under
the MISOP, however, grant the holder the right to receive
additional options to purchase our common stock if the holder,
when exercising a MISOP option, makes payment of the purchase
price using shares of previously owned stock. The additional
option gives the holder the right to purchase the number of
shares of our common stock utilized in payment of the purchase
price and tax withholding. The exercise price for this option is
equal to the market price of the stock on the date the option is
granted, and this option becomes exercisable one year from the
date the original option is exercised. This option does not
include a right to receive additional options. |
|
(7) |
|
Consists of 63,239,468 options and 504,152 deferred shares
outstanding under the Nextel Equity Plan. |
|
(8) |
|
The weighted average exercise price does not take 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. Although it is not our intention to do so,
all of the shares, plus any shares that become available due to
forfeiture of outstanding awards, could be issued in a form
other than |
65
|
|
|
|
|
options, warrants or rights. No awards may be granted
pursuant to the Nextel Equity Plan after July 13, 2015. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to the information set forth under the captions
Certain Relationships and Other 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 the information set forth under the caption
Ratification of Independent Registered Public Accounting
Firm in our proxy statement relating to our 2007 annual
meeting of shareholders, which will be filed with the SEC.
66
Part IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(a) 1. |
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.
|
|
|
|
|
2.
|
The financial statement schedule of Sprint Nextel filed as part
of this report is listed in the Index to Consolidated Financial
Statements and Financial Statement Schedule. All other financial
statement schedules are not required under the related
instructions, or are inapplicable and therefore have been
omitted.
|
|
|
3.
|
The following exhibits are filed as part of this report:
|
|
|
|
|
(2)
|
Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession
|
|
|
|
|
2.1
|
Separation and Distribution Agreement by and between Sprint
Nextel Corporation and Embarq Corporation dated as of
May 1, 2006 (filed as Exhibit 2.1 to Amendment
No. 4 to Form 10 of Embarq Corporation (File
No. 001-32732)
filed May 2, 2006 and incorporated herein by reference).*
|
|
|
|
|
(3)
|
Articles of Incorporation and Bylaws:
|
|
|
|
|
3.1
|
Amended and Restated Articles of Incorporation (filed as
Exhibit 3.1 to Sprint Nextels Current Report on
Form 8-K
filed August 18, 2005 and incorporated herein by reference).
|
|
|
|
|
3.2
|
Amended and Restated Bylaws (filed as Exhibit 3 to Sprint
Nextels Current Report on
Form 8-K
filed February 28, 2007 and incorporated herein by
reference).
|
|
|
|
|
(4)
|
Instruments defining the Rights of Sprint Nextel Security
Holders:
|
|
|
|
|
4.1
|
The rights of Sprint Nextels equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth Articles of
Sprint Nextels Articles of Incorporation. See
Exhibit 3.1.
|
|
|
4.2
|
Provision regarding Kansas Control Share Acquisition Act is in
Article 2, Section 2.5 of the Bylaws. Provisions
regarding Stockholders Meetings are set forth in
Article 3 of the Bylaws. See Exhibit 3.2.
|
|
|
|
|
4.3.1
|
Second Amended and Restated Rights Agreement between Sprint
Corporation and UMB Bank, n.a., as Rights Agent, dated as of
March 16, 2004 and effective as of April 23, 2004
(filed as Exhibit 1 to Amendment No. 5 to Sprint
Nextels Registration Statement on
Form 8-A
relating to Sprint Nextels Rights, filed April 12,
2004, and incorporated herein by reference).
|
|
|
4.3.2
|
Amendment dated June 17, 2005 to Second Amended and
Restated Rights Agreement between Sprint Corporation and UMB
Bank, n.a., as Rights Agent, effective August 12, 2005
(filed as Exhibit 4(d) to Sprint Nextels Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2005 and incorporated herein
by reference).
|
|
|
|
|
4.4
|
Indenture, dated as of October 1, 1998, among Sprint
Capital Corporation, Sprint Corporation and Bank One, N.A., as
Trustee (filed as Exhibit 4(b) to Sprint Nextels
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 1998, and incorporated
herein by reference), as supplemented by the First Supplemental
Indenture, dated as of January 15, 1999, among Sprint
Capital Corporation, Sprint Corporation and Bank One, N.A., as
Trustee (filed as Exhibit 4(b) to Sprint Nextels
Current Report on
Form 8-K
filed February 3, 1999 and incorporated herein by
reference), and as supplemented by the Second Supplemental
Indenture dated as of October 15, 2001, among Sprint
Capital Corporation, Sprint Corporation and Bank One, N.A. as
Trustee (filed as Exhibit 99 to Sprint Nextels
Current Report on Form
8-K/A filed
October 29, 2001 and incorporated herein by reference).
|
67
|
|
|
|
(10)
|
Material Agreements:
|
|
|
|
|
10.1
|
Registration Rights Agreement, dated as of November 23,
1998, among Sprint Corporation, TCI Telephony Services, Inc.,
Cox Communications, Inc., and Comcast Corporation (filed as
Exhibit 10.2 to Amendment No. 1 to Sprint
Nextels Registration Statement
No. 333-64241
on
Form S-3
and incorporated herein by reference).
|
|
|
10.2.1
|
Letter Agreement between Motorola, Inc. and Nextel dated
November 4, 1991 (filed November 15, 1991 as
Exhibit 10.47 to Nextels Registration Statement
No. 33-43415
on
Form S-1
and incorporated herein by reference).**
|
|
|
10.2.2
|
iDEN Infrastructure {**} Supply Agreement between Motorola and
Nextel dated April 13, 1999 (filed as Exhibit 10.2 to
Nextels Quarterly Report on
Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein
by reference).**
|
|
|
10.2.3
|
Term Sheet for Subscriber Units and Services Agreement dated
December 31, 2003 between Nextel and Motorola (filed as
Exhibit 10.1.2 to Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference).**
|
|
|
10.2.4
|
Second Extension Amendment to the iDEN Infrastructure
5-Year
Supply Agreement, dated December 14, 2004, between
Motorola, Inc. and Nextel Communications, Inc. (filed as
Exhibit 10.1.20 to Nextels Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
|
|
|
10.2.5
|
Amendment Seven to the Term Sheet for Subscriber Units and
Services Agreement, dated December 14, 2004, between
Motorola, Inc. and Nextel Communications, Inc. (filed as
Exhibit 10.1.21 to Nextels Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).**
|
|
|
10.3
|
Credit Agreement, 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 Nextels Current Report on
Form 8-K
filed December 21, 2005 and incorporated herein by
reference).
|
|
|
|
|
(10)
|
Executive Compensation Plans and Arrangements:
|
|
|
|
|
10.4
|
Sprint Nextel Short-Term Incentive Plan (filed as
Exhibit 10.4 to Sprint Nextels Annual Report on
Form 10-K
for the year ended December 31, 2005 and incorporated
herein by reference).
|
|
|
10.5
|
Summary of 2007 Short-Term Incentive Plan.
|
|
|
10.6
|
Sprint Nextel
2006-2007
Integration Overachievement Plan (filed as Exhibit 10.1 to
Sprint Nextels Current Report on
Form 8-K
filed February 22, 2006 and incorporated herein by
reference).
|
|
|
10.7
|
Sprint Nextel 1997 Long-Term Stock Incentive Program, as amended
(filed as Exhibit 10(aa) to Sprint Nextels Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
|
|
|
10.8
|
Form of 2004 Award Agreement (awarding stock options and
restricted stock units) with Messrs. Forsee and Lauer
(filed as Exhibit 10(a) to Sprint Nextels Quarterly
Report on Form
10-Q for the
quarter ended September 30, 2004 and incorporated herein by
reference).
|
|
|
10.9
|
Form of 2004 Award Agreement (awarding stock options and
restricted stock units) with other Executive Officers (filed as
Exhibit 10(b) to Sprint Nextels Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004 and incorporated
herein by reference).
|
68
|
|
|
|
10.10
|
Form of 2004 Award Agreement (awarding restricted stock units)
with Directors (filed as Exhibit 10(c) to Sprint
Nextels Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004 and incorporated
herein by reference).
|
|
|
10.11
|
Form of 2005 Award Agreement (awarding restricted stock units)
with Directors (filed as Exhibit 10.2 to Sprint
Nextels Current Report on
Form 8-K
filed February 14, 2005 and incorporated herein by
reference).
|
|
|
10.12
|
Form of 2005 Award Agreement (awarding stock options and
restricted stock units) with Messrs. Forsee and Lauer
(filed as Exhibit 10(dd) to Sprint Nextels Annual
Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
|
|
|
10.13
|
Form of 2005 Award Agreement (awarding stock options and
restricted stock units) with other Executive Officers (filed as
Exhibit 10(ff) to Sprint Nextels Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
|
|
|
10.14
|
Form of Award Agreement (awarding stock options and restricted
stock units) with Messrs. Forsee and Lauer (filed as
Exhibit 10.2 to Sprint Nextels Current Report on
Form 8-K
filed March 15, 2005 and incorporated herein by reference).
|
|
|
10.15
|
Form of 2006 Award Agreement (awarding stock options) with
Mr. Donahue (filed as Exhibit 10.1 to Sprint
Nextels Current Report on
Form 8-K
filed February 10, 2006 and incorporated herein by
reference).
|
|
|
10.16
|
Form of 2006 Award Agreement (awarding stock options) with
Messrs. Forsee and Lauer (filed as Exhibit 10.2 to
Sprint Nextels Current Report on
Form 8-K
filed February 10, 2006 and incorporated herein by
reference).
|
|
|
10.17
|
Form of Award Agreement for Restricted Stock Unit Awards under
the 1997 Long-Term Stock Incentive Program for 2006 for
non-employee directors of Sprint Nextel (filed as Exhibit 10.1
to Sprint Nextels Current Report of
Form 8-K
filed June 16, 2006 and incorporated herein by reference).
|
|
|
10.18
|
Form of Award Agreement for Restricted Stock Unit Awards under
the 1997 Long-Term Stock Incentive Program for 2006 for Timothy
M. Donahue (filed as Exhibit 10.2 to Sprint Nextels
Current Report of
Form 8-K
filed June 16, 2006 and incorporated herein by reference).
|
|
|
10.19
|
Form of Award Agreement for Restricted Stock Unit Awards under
the 1997 Long-Term Stock Incentive Program for 2006 for Gary D.
Forsee and Len J. Lauer (filed as Exhibit 10.3 to Sprint
Nextels Current Report on
Form 8-K
filed June 16, 2006 and incorporated herein by reference).
|
|
|
10.20
|
Form of Award Agreement for Restricted Stock Unit Awards under
the 1997 Long-Term Stock Incentive Program for 2006 for the
other executive officers with Nextel employment agreements
(filed as Exhibit 10.4 to Sprint Nextels Current
Report on
Form 8-K
filed June 16, 2006 and incorporated herein by reference).
|
|
|
10.21
|
Form of Award Agreement for Restricted Stock Unit Awards under
the 1997 Long-Term Stock Incentive Program for 2006 for other
executive officers (filed as Exhibit 10.5 to Sprint
Nextels Current Report on
Form 8-K
filed June 16, 2006 and incorporated herein by reference).
|
|
|
10.22
|
Form of Award Agreement for Restricted Stock Units Award under
the 1997 Long-Term Stock Incentive Program for retention awards
made to certain executive officers (filed as Exhibit 10.2
to Sprint Nextels Current Report on
Form 8-K
filed July 27, 2006 and incorporated herein by reference).
|
|
|
10.23
|
Summary of 2007 Long-Term Incentive Plan.
|
69
|
|
|
|
10.24
|
Form of Award Agreement (awarding stock options and restricted
stock units) under the 1997 Long-Term Stock Incentive Program
for 2007 for Gary D. Forsee.
|
|
|
10.25
|
Form of Award Agreement (awarding stock options and restricted
stock units) under the 1997 Long-Term Stock Incentive Program
for 2007 for executive officers with Nextel employment
agreements.
|
|
|
10.26
|
Form of Award Agreement (awarding stock options and restricted
stock units) under the 1997 Long-Term Stock Incentive Program
for 2007 for other executive officers.
|
|
|
10.27
|
Nextel Amended and Restated Incentive Equity Plan (filed as
Annex J to the joint proxy statement/prospectus included as
part of Sprint Nextels Registration Statement No.
333-123333
on
Form S-4,
as filed on June 10, 2005, and incorporated herein by
reference).
|
|
|
10.28
|
Form of Deferred Share Agreement Recognition Award
under the Nextel Amended and Restated Incentive Equity Plan
(filed as Exhibit 10.1 to Nextels Current Report on
Form 8-K
filed March 2, 2005 and incorporated herein by reference).
|
|
|
10.29
|
Form of Nonqualified Stock Option Agreement (Employee Form)
under the Nextel Amended and Restated Incentive Equity Plan
(filed as Exhibit 10.3 to Nextels Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004 and incorporated
herein by reference).
|
|
|
10.30
|
Form of Nonqualified Stock Option Agreement (Non-Affiliate
Director Form) under the Nextel Amended and Restated Incentive
Equity Plan (filed as Exhibit 10.4 to Nextels
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004 and incorporated
herein by reference).
|
|
|
10.31
|
Management Incentive Stock Option Plan, as amended (filed as
Exhibit 10(d) to Sprint Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference).
|
|
|
10.32.1
|
Employment Agreement dated as of March 19, 2003, by and
among Sprint Corporation, Sprint/United Management Company and
Gary D. Forsee (filed as Exhibit 10(c) to Sprint
Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2003 and incorporated
herein by reference)
|
|
|
10.32.2
|
Amendment No. 1, dated as of December 15, 2004, to the
Employment Agreement dated as of March 19, 2003 by and
among Sprint Corporation, Sprint/United Management Company and
Gary D. Forsee (filed as Exhibit 10 to Sprint Nextels
Current Report on
Form 8-K
filed December 17, 2004 and incorporated herein by
reference).
|
|
|
10.32.3
|
Amendment No. 2, dated as of March 15, 2005, to the
Employment Agreement dated as of March 19, 2003, as amended
by Amendment No. 1, by and among Sprint Corporation,
Sprint/United Management Company and Gary D. Forsee (filed as
Exhibit 10(c) to Sprint Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005 and incorporated
herein by reference).
|
|
|
10.33.1
|
Employment Agreement, effective as of July 1, 2003, by and
between Nextel Communications, Inc. and Timothy M. Donahue
(filed as Exhibit 10.1 to Nextels Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 and incorporated herein
by reference).
|
|
|
10.33.2
|
Letter dated December 15, 2004, from Timothy M. Donahue to
Nextel Communications, Inc. (filed as Exhibit 10.1 to
Nextels Current Report on
Form 8-K
filed December 17, 2004 and incorporated herein by
reference).
|
|
|
10.33.3
|
Amendment No. 1, dated as of March 15, 2005, to the
Employment Agreement dated as of July 1, 2003, by and among
Nextel Communications, Inc. and Timothy M. Donahue (filed as
Exhibit 10.1 to Nextels Current Report on
Form 8-K
filed March 15, 2005 and incorporated herein by reference).
|
70
|
|
|
|
10.34.1
|
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-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 as Exhibit 10.1 to Sprint
Nextels Current Report on
Form 8-K
filed November 1, 2006 and incorporated herein by
reference).
|
|
|
10.35
|
Employment Agreement dated April 1, 2004, between Paul N.
Saleh and Nextel Communications, Inc. (filed as Exhibit 10.2.2
to Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference).
|
|
|
10.36
|
Employment Agreement between Sprint Corporation and Timothy E.
Kelly (filed as Exhibit 10(h) to Sprint Nextels
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004 and incorporated
herein by reference).
|
|
|
10.37
|
Employment Agreement with Kathryn A. Walker (filed as
Exhibit 10(x) to Sprint Nextels Annual Report on
Form 10-K
for the year ended December 31, 2003 and incorporated
herein by reference).
|
|
|
10.38.1
|
Employment Agreement dated April 1, 2004, between Barry J.
West and Nextel Communications, Inc. (filed as
Exhibit 10.2.3 to Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference).
|
|
|
10.38.2
|
First Amendment to the Employment Agreement of Barry J. West,
dated July 25, 2006 (filed as Exhibit 10.3 to Sprint
Nextels Current Report on
Form 8-K
filed July 27, 2006 and incorporated herein by reference).
|
|
|
10.39
|
Employment Agreement dated as of March 15, 2005, by and
among Nextel Communications, Inc. and Richard LeFave (filed as
Exhibit 10.32 to Sprint Nextels Annual Report on
Form 10-K
for the year ended December 31, 2005 and incorporated
herein by reference).
|
|
|
10.40
|
Employment Agreement dated April 1, 2004, between Leonard
J. Kennedy and Nextel Communications, Inc. (filed as
Exhibit 10.2.4 to Nextels Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference).
|
|
|
10.41
|
Employment Agreement dated as of March 15, 2005, by and
among Nextel Communications, Inc. and William G. Arendt (filed
as Exhibit 10.2 to Nextels Current Report on
Form 8-K
filed March 15, 2005 and incorporated herein by reference).
|
|
|
10.42
|
Employment Agreement dated as of February 12, 2007, between
Sprint Nextel Corporation and Mark Angelino.
|
|
|
10.43
|
Employment Agreement dated as of February 6, 2007, between
Sprint Nextel Corporation and Richard Lindahl.
|
|
|
10.44
|
Sprint Nextel Deferred Compensation Plan, amended and restated
effective May 17, 2006 (filed as Exhibit 10.7 to
Sprint Nextels Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 and incorporated herein
by reference).
|
|
|
10.45
|
Sprint Executive Deferred Compensation Plan, as amended,
including summary of certain Amendments to the Executive
Deferred Compensation Plan (filed as Exhibit 10.2 to Sprint
Nextels Current Report on
Form 8-K
filed October 12, 2004 and incorporated herein by
reference).
|
71
|
|
|
|
10.46
|
Amended and Restated Centel Directors Deferred Compensation Plan
(filed as Exhibit 10(c) to Sprint Nextels Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference).
|
|
|
10.47
|
Directors Deferred Fee Plan, as amended (filed as
Exhibit 10.1 to Sprint Nextels Current Report on
Form 8-K
filed February 14, 2005 and incorporated herein by
reference).
|
|
|
10.48
|
Nextel Amended and Restated Cash Compensation Deferral Plan
(filed as Exhibit 10.1 to Nextels Current Report on
Form 8-K
filed December 13, 2004 and incorporated herein by
reference).
|
|
|
10.49
|
Sprint Nextel Corporation Change in Control Severance Plan dated
January 1, 2007, in which all of our executive officers,
except Gary Forsee, participate.
|
|
|
10.50.1
|
Nextel Change of Control Retention Bonus and Severance Pay Plan
dated July 14, 1999 (filed as Exhibit 10.12 to
Nextels Annual Report on
Form 10-K
for the year ended December 31, 2000 and incorporated
herein by reference).
|
|
|
10.50.2
|
First Amendment, dated September 19, 2002, to Nextels
Change of Control Retention Bonus and Severance Pay Plan (filed
as Exhibit 10.1 to Nextels Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2002 and incorporated
herein by reference).
|
|
|
10.50.3
|
Second Amendment, dated August 12, 2005, to Nextels
Change of Control Retention Bonus and Severance Pay Plan (filed
as Exhibit 99.6 to Sprint Nextels 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 Nextels Annual Report on
Form 10-K/A
for the year ended December 31, 2001 and incorporated
herein by reference). Summary of Amendments to the Sprint
Supplemental Executive Retirement Plan (filed as Exhibit 10(ee)
to Sprint Nextels Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
|
|
|
10.52
|
Retirement Plan for Directors, as amended (filed as
Exhibit 10(u) to Sprint Nextels Annual Report on
Form 10-K
for the year ended December 31, 1996 and incorporated
herein by reference).
|
|
|
10.53
|
Certain Benefits and Fees for Named Executive Officers and
Directors.
|
|
|
10.54
|
Summary of Director Communications Benefit (filed as
Exhibit 10.1 to Sprint Nextels Current Report on
Form 8-K
filed July 27, 2006 and incorporated herein by reference).
|
|
|
10.55
|
Form of Indemnification Agreement between Sprint Nextel and its
Directors and Officers.
|
|
|
10.56
|
Embarq Corporation 2006 Equity Incentive Plan (filed as
Exhibit 10.13 to Amendment No. 4 to the Form 10
of Embarq Corporation (File
No. 001-32732)
filed May 2, 2006 and incorporated herein by reference).
|
|
|
|
|
12
|
Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
|
|
|
21
|
Subsidiaries of Registrant.
|
|
|
23
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
|
31.1
|
Certification of Chief Executive Officer Pursuant to Securities
Exchange Act of 1934
Rule 13a-14(a).
|
|
|
31.2
|
Certification of Chief Financial Officer Pursuant to Securities
Exchange Act of 1934
Rule 13a-14(a).
|
72
|
|
|
|
32.1
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Schedules
and/or
exhibits not filed will be furnished to the SEC upon request. |
|
** |
|
Portions of this exhibit 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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPRINT NEXTEL CORPORATION
(Registrant)
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 of the registrant and in the capacities indicated on
the 1st day of March, 2007.
Gary D. Forsee
Chairman, Chief Executive Officer and President
Paul N. Saleh
Chief Financial Officer
William G. Arendt
Senior Vice President & Controller
Principal Accounting Officer
74
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. Forsee, Chairman
|
|
/s/ V.
Janet
Hill V.
Janet Hill, Director
|
|
|
|
/s/ Keith
J.
Bane Keith
J. Bane, Director
|
|
/s/ Irvine
O. Hockaday,
Jr. Irvine
O. Hockaday, Jr., Director
|
|
|
|
/s/ Robert
R.
Bennett Robert
R. Bennett, Director
|
|
/s/ William
E.
Kennard William
E. Kennard, Director
|
|
|
|
Gordon
M. Bethune, Director
|
|
/s/ Linda
K.
Lorimer Linda
K. Lorimer, Director
|
|
|
|
Frank
M. Drendel, Director
|
|
/s/ William
H.
Swanson William
H. Swanson, Director
|
|
|
|
/s/ James
H. Hance,
Jr. James
H. Hance, Jr., Director
|
|
|
75
SPRINT
NEXTEL CORPORATION
Index to
Consolidated Financial Statements and Financial Statement
Schedule
|
|
|
|
|
|
|
Page
|
|
|
Reference
|
|
Consolidated Financial
Statements
|
|
|
|
|
Management Report
|
|
|
F-2
|
|
Reports of KPMG LLP, Independent
Registered Public Accounting Firm
|
|
|
F-3
|
|
Consolidated Balance Sheets as of
December 31, 2006 and 2005
|
|
|
F-5
|
|
Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and
2004
|
|
|
F-6
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
F-7
|
|
Consolidated Statements of
Shareholders Equity for the years ended December 31,
2006, 2005 and 2004
|
|
|
F-8
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-9
|
|
Financial Statement
Schedule
|
|
|
|
|
Schedule II
Valuation and Qualifying Accounts for the years ended
December 31, 2006, 2005 and 2004
|
|
|
F-63
|
|
F-1
MANAGEMENT
REPORT
Our management is responsible for the integrity and objectivity
of the information contained in this document. Management is
responsible for the consistency of reporting this information
and for ensuring that accounting principles generally accepted
in the United States are used.
In discharging this responsibility, management maintains a
comprehensive system of internal controls and supports an
extensive program of internal audits, has made organizational
arrangements providing appropriate divisions of responsibility
and has established communication programs aimed at assuring
that its policies, procedures and principles of business conduct
are understood and practiced by its employees.
The consolidated financial statements included in this document
have been audited by KPMG LLP, independent registered public
accounting firm. All audits were conducted using standards of
the Public Company Accounting Oversight Board (United States)
and KPMGs reports and consents are included herein.
The Board of Directors responsibility 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 Sprint Nextels internal auditors
and independent registered public accounting firm, both with and
without management present, to assure that their respective
responsibilities are being fulfilled. The internal auditors and
independent registered public accounting firm have full access
to the Audit Committee to discuss auditing and financial
reporting matters.
/s/ Gary
D. Forsee
Gary
D. Forsee
Chairman, Chief Executive Officer and President
/s/ Paul
N. Saleh
Paul
N. Saleh
Chief Financial Officer
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Sprint Nextel Corporation:
We have audited the accompanying consolidated balance sheets of
Sprint Nextel Corporation and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, cash flows and shareholders
equity for each of the years in the three-year period ended
December 31, 2006. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedule, Schedule II
Valuation and Qualifying Accounts. These consolidated financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Sprint Nextel Corporation and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in note 17 to the consolidated financial
statements, the Company changed its method of quantifying errors
in 2006. As discussed in note 1 to the consolidated
financial statements, the Company adopted the provisions of FASB
Interpretation No. 47, 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 Corporations internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 1, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
McLean, Virginia
March 1, 2007
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Sprint Nextel Corporation:
We have audited managements assessment, included in
Managements Report on Internal Control over Financial
Reporting, appearing in Item 9A. Controls and Procedures,
that Sprint Nextel Corporation maintained effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Sprint Nextel
Corporations management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting 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 and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Sprint Nextel
Corporation maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, Sprint Nextel Corporation
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Sprint Nextel Corporation acquired Nextel Partners, Inc. in June
2006, and management excluded from its assessment of the
effectiveness of Sprint Nextel Corporations 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 included in
the consolidated financial statements of Sprint Nextel
Corporation and subsidiaries as of and for the year ended
December 31, 2006. Our audit of internal control over
financial reporting of Sprint Nextel Corporation also excluded
an evaluation of the internal control over financial reporting
of Nextel Partners, Inc.
We also have audited, in accordance 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, 2006 and 2005, and the
related consolidated statements of operations, cash flows and
shareholders equity for each of the years in the
three-year period ended December 31, 2006, and our report
dated March 1, 2007 expressed an unqualified opinion on
those consolidated financial statements.
McLean, Virginia
March 1, 2007
F-4
SPRINT
NEXTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions, except share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,046
|
|
|
$
|
8,903
|
|
Marketable securities
|
|
|
15
|
|
|
|
1,763
|
|
Accounts receivable, net
|
|
|
4,595
|
|
|
|
4,166
|
|
Inventories
|
|
|
1,176
|
|
|
|
776
|
|
Deferred tax assets
|
|
|
923
|
|
|
|
1,789
|
|
Prepaid expenses and other current
assets
|
|
|
1,549
|
|
|
|
779
|
|
Current assets of discontinued
operations
|
|
|
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,304
|
|
|
|
19,092
|
|
Investments
|
|
|
253
|
|
|
|
2,543
|
|
Property, plant and equipment, net
|
|
|
25,868
|
|
|
|
23,329
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
30,904
|
|
|
|
21,288
|
|
FCC licenses
|
|
|
19,519
|
|
|
|
18,023
|
|
Customer relationships, net
|
|
|
7,256
|
|
|
|
8,651
|
|
Other intangible assets, net
|
|
|
2,378
|
|
|
|
1,345
|
|
Other assets
|
|
|
679
|
|
|
|
632
|
|
Non-current assets of
discontinued operations
|
|
|
|
|
|
|
7,857
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,161
|
|
|
$
|
102,760
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,463
|
|
|
$
|
3,562
|
|
Accrued expenses and other
liabilities
|
|
|
5,192
|
|
|
|
4,622
|
|
Current portion of long-term debt
and capital lease obligations
|
|
|
1,143
|
|
|
|
5,045
|
|
Current liabilities of discontinued
operations
|
|
|
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,798
|
|
|
|
14,051
|
|
Long-term debt and capital lease
obligations
|
|
|
21,011
|
|
|
|
19,969
|
|
Deferred tax
liabilities
|
|
|
10,095
|
|
|
|
10,405
|
|
Pension and other postretirement
benefit obligations
|
|
|
244
|
|
|
|
1,385
|
|
Other liabilities
|
|
|
2,882
|
|
|
|
2,753
|
|
Non-current liabilities of
discontinued operations
|
|
|
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
44,030
|
|
|
|
50,576
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
Seventh series redeemable
preferred shares
|
|
|
|
|
|
|
247
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
|
|
|
|
|
|
Voting, par value $2.00 per share,
6.500 billion shares authorized, 2.951 billion shares
issued and 2.897 billion shares outstanding and
2.923 billion shares issued and outstanding
|
|
|
5,902
|
|
|
|
5,846
|
|
Non-voting, par value $0.01 per
share, 100 million shares authorized, 0 shares issued
and outstanding and 38 million shares issued and outstanding
|
|
|
|
|
|
|
|
|
Paid-in capital
|
|
|
46,664
|
|
|
|
46,136
|
|
Retained earnings
|
|
|
1,638
|
|
|
|
681
|
|
Treasury shares, at cost
|
|
|
(925
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(148
|
)
|
|
|
(726
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
53,131
|
|
|
|
51,937
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,161
|
|
|
$
|
102,760
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
SPRINT
NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions, except per share amounts)
|
|
|
Net operating
revenues
|
|
$
|
41,028
|
|
|
$
|
28,789
|
|
|
$
|
21,647
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of services and products
(exclusive of depreciation included below)
|
|
|
16,567
|
|
|
|
12,489
|
|
|
|
9,838
|
|
Selling, general and administrative
|
|
|
12,178
|
|
|
|
8,916
|
|
|
|
6,459
|
|
Severance, lease exit costs and
asset impairments
|
|
|
207
|
|
|
|
43
|
|
|
|
3,691
|
|
Depreciation
|
|
|
5,738
|
|
|
|
3,864
|
|
|
|
3,651
|
|
Amortization
|
|
|
3,854
|
|
|
|
1,336
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,544
|
|
|
|
26,648
|
|
|
|
23,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
2,484
|
|
|
|
2,141
|
|
|
|
(1,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,533
|
)
|
|
|
(1,294
|
)
|
|
|
(1,218
|
)
|
Interest income
|
|
|
301
|
|
|
|
236
|
|
|
|
60
|
|
Equity in (losses) earnings of
unconsolidated investees, net
|
|
|
(6
|
)
|
|
|
107
|
|
|
|
(41
|
)
|
Realized gain on sale or exchange
of investments
|
|
|
205
|
|
|
|
62
|
|
|
|
15
|
|
Other, net
|
|
|
32
|
|
|
|
39
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
(850
|
)
|
|
|
(1,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
1,483
|
|
|
|
1,291
|
|
|
|
(3,244
|
)
|
Income tax (expense)
benefit
|
|
|
(488
|
)
|
|
|
(470
|
)
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
995
|
|
|
|
821
|
|
|
|
(2,006
|
)
|
Discontinued operations, net
|
|
|
334
|
|
|
|
980
|
|
|
|
994
|
|
Cumulative effect of change in
accounting principle, net
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
1,329
|
|
|
|
1,785
|
|
|
|
(1,012
|
)
|
Earnings allocated to
participating securities
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Preferred shares dividends
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to
common shareholders
|
|
$
|
1,327
|
|
|
$
|
1,778
|
|
|
$
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.40
|
|
|
$
|
(1.40
|
)
|
Discontinued operations
|
|
|
0.11
|
|
|
|
0.48
|
|
|
|
0.69
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.45
|
|
|
$
|
0.87
|
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common
shares outstanding
|
|
|
2,950
|
|
|
|
2,033
|
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.40
|
|
|
$
|
(1.40
|
)
|
Discontinued operations
|
|
|
0.11
|
|
|
|
0.48
|
|
|
|
0.69
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.45
|
|
|
$
|
0.87
|
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common
shares outstanding
|
|
|
2,972
|
|
|
|
2,054
|
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
SPRINT
NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,329
|
|
|
$
|
1,785
|
|
|
$
|
(1,012
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
(334
|
)
|
|
|
(980
|
)
|
|
|
(994
|
)
|
Provision for losses on accounts
receivable
|
|
|
656
|
|
|
|
388
|
|
|
|
318
|
|
Depreciation and amortization
|
|
|
9,592
|
|
|
|
5,200
|
|
|
|
3,658
|
|
Deferred income taxes
|
|
|
468
|
|
|
|
798
|
|
|
|
(749
|
)
|
Share-based compensation expense
|
|
|
338
|
|
|
|
254
|
|
|
|
85
|
|
Gain on sale or exchange of equity
investments
|
|
|
(205
|
)
|
|
|
(62
|
)
|
|
|
(15
|
)
|
Losses on impairment of assets
|
|
|
69
|
|
|
|
44
|
|
|
|
3,538
|
|
Other, net
|
|
|
(70
|
)
|
|
|
108
|
|
|
|
249
|
|
Changes in assets and liabilities,
net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(582
|
)
|
|
|
(364
|
)
|
|
|
(540
|
)
|
Inventories and other current assets
|
|
|
(254
|
)
|
|
|
23
|
|
|
|
(86
|
)
|
Accounts payable and other current
liabilities
|
|
|
(1,024
|
)
|
|
|
380
|
|
|
|
7
|
|
Increase in communications towers
lease liability
|
|
|
|
|
|
|
1,195
|
|
|
|
|
|
Non-current assets and liabilities,
net
|
|
|
72
|
|
|
|
(114
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
|
10,055
|
|
|
|
8,655
|
|
|
|
4,478
|
|
Net cash provided by discontinued
operations
|
|
|
903
|
|
|
|
2,024
|
|
|
|
2,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
10,958
|
|
|
|
10,679
|
|
|
|
6,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(7,556
|
)
|
|
|
(5,057
|
)
|
|
|
(3,980
|
)
|
Expenditures relating to FCC
licenses and other intangibles
|
|
|
(822
|
)
|
|
|
(150
|
)
|
|
|
(35
|
)
|
Proceeds from spin-off of local
communications business, net
|
|
|
1,821
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Embarq notes
|
|
|
4,447
|
|
|
|
|
|
|
|
|
|
Cash acquired in Nextel merger, net
of cash paid
|
|
|
|
|
|
|
1,183
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(10,481
|
)
|
|
|
(1,371
|
)
|
|
|
|
|
Purchases of marketable securities
|
|
|
(527
|
)
|
|
|
(821
|
)
|
|
|
(542
|
)
|
Cash collateral for securities loan
agreements
|
|
|
(866
|
)
|
|
|
|
|
|
|
|
|
Proceeds from maturities and sales
of marketable securities
|
|
|
1,657
|
|
|
|
808
|
|
|
|
444
|
|
Proceeds from sales of assets and
investments
|
|
|
842
|
|
|
|
648
|
|
|
|
77
|
|
Distributions from unconsolidated
investees, net
|
|
|
|
|
|
|
167
|
|
|
|
(20
|
)
|
Other, net
|
|
|
93
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(11,392
|
)
|
|
|
(4,724
|
)
|
|
|
(4,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under bank credit
facilities
|
|
|
|
|
|
|
3,200
|
|
|
|
|
|
Retirement of bank credit facilities
|
|
|
(3,700
|
)
|
|
|
(3,200
|
)
|
|
|
|
|
Purchase and retirements of debt
|
|
|
(4,342
|
)
|
|
|
(1,170
|
)
|
|
|
(1,884
|
)
|
Proceeds from issuance of debt
securities
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
Net issuances and maturities of
commercial paper
|
|
|
514
|
|
|
|
|
|
|
|
|
|
Proceeds from securities loan
agreements
|
|
|
866
|
|
|
|
|
|
|
|
|
|
Retirement of redeemable preferred
shares
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
Purchase of common shares
|
|
|
(1,643
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
shares
|
|
|
405
|
|
|
|
432
|
|
|
|
1,874
|
|
Dividends paid
|
|
|
(296
|
)
|
|
|
(525
|
)
|
|
|
(670
|
)
|
Other, net
|
|
|
28
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(6,423
|
)
|
|
|
(1,228
|
)
|
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(6,857
|
)
|
|
|
4,727
|
|
|
|
1,897
|
|
Cash and cash equivalents,
beginning of period
|
|
|
8,903
|
|
|
|
4,176
|
|
|
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of period
|
|
$
|
2,046
|
|
|
$
|
8,903
|
|
|
$
|
4,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-7
SPRINT
NEXTEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
Common Shares
|
|
|
Paid-in
|
|
|
Treasury Shares
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares(1)
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
Total
|
|
|
Balance, January 1,
2004
|
|
|
1,939
|
|
|
$
|
2,844
|
|
|
$
|
10,084
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
906
|
|
|
$
|
(721
|
)
|
|
$
|
13,113
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,012
|
)
|
|
|
(1,012
|
)
|
|
|
|
|
|
|
(1,012
|
)
|
Other comprehensive income (loss),
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
realized gains on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on
qualifying cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for
losses on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares, net
|
|
|
54
|
|
|
|
106
|
|
|
|
1,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,961
|
|
Common shares
dividends(2)
|
|
|
|
|
|
|
|
|
|
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
(663
|
)
|
Preferred shares dividends
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Conversion of PCS common shares
into FON or voting common shares
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
1,475
|
|
|
|
2,950
|
|
|
|
11,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
(716
|
)
|
|
|
13,521
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,785
|
|
|
|
1,785
|
|
|
|
|
|
|
|
1,785
|
|
Other comprehensive income (loss),
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
realized gains on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for
losses on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued to Nextel
shareholders
|
|
|
1,452
|
|
|
|
2,829
|
|
|
|
32,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,645
|
|
Issuance of common shares, net
|
|
|
34
|
|
|
|
67
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525
|
|
Common shares dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518
|
)
|
|
|
|
|
|
|
(518
|
)
|
Preferred shares dividends
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302
|
|
Conversion of Nextel vested
share-based awards upon merger
|
|
|
|
|
|
|
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
639
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
2,961
|
|
|
|
5,846
|
|
|
|
46,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681
|
|
|
|
(726
|
)
|
|
|
51,937
|
|
Cumulative effect of adopting
SAB No. 108(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
(50
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,329
|
|
|
|
1,329
|
|
|
|
|
|
|
|
1,329
|
|
Other comprehensive income (loss),
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net periodic pension
and other postretirement benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
realized gains on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on
qualifying cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148
|
)
|
|
|
|
|
|