Sprint - Nextel 2005 Annual Report Download - page 33

affecting local communications businesses. Moreover, our strategy of developing our higher growth wireless
business may conflict with the strategy and interests of Embarq, particularly as customers are increasingly
choosing between wireline and wireless services.
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 have received a private letter ruling from the Internal Revenue Service, or IRS, that the spin-off of Embarq
will qualify for tax-free treatment under Code Sections 355 and 361. In addition, we intend to obtain opinions of
counsel from each of Cravath, Swaine & Moore LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP that the
spin-off will so qualify. The IRS ruling relies, and the opinions will rely, on certain representations, assumptions
and undertakings, including those relating to the past and future conduct of Embarq’s and our business, and
neither the IRS ruling nor the opinions would be valid if such representations, assumptions and undertakings
were incorrect. Moreover, the IRS private letter ruling does not address all the issues that are relevant to
determining whether the distribution will qualify for tax-free treatment. Notwithstanding the IRS private letter
ruling and opinions, 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 Embarq’s
equity securities (i.e., Embarq’s 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 distribute on the distribution date plus the fair market value of the senior notes received by us.
Furthermore, subsequent events could cause us to recognize gain on the distribution. For example, even minimal
acquisitions of our equity securities or Embarq’s 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.
We will be subject to restrictions on acquisitions involving our stock and other stock issuances and possibly
other corporate opportunities in order to enable the contemplated spin-off of Embarq to qualify for tax-free
treatment.
The contemplated 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 contemplated spin-off. Because the 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, until the completion of the spin-off
(and for some period thereafter), we will be 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. At this time, it is not
possible to determine how long these restrictions will apply. In addition, it is not possible to determine whether
these limitations will have a material impact on us.
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 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
manner in which these restrictions will be addressed is not currently known.
The arrangements with the remaining five 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 geographic areas. Several of these PCS Affiliates have commenced litigation against us asserting that
actions that we have taken or may take in the future in connection with our integration efforts are inconsistent
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