Sprint - Nextel 2006 Annual Report Download - page 22

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 Embarq’s 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 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 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 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.
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:
kour marketing and sales and service delivery activities, and our credit and collection policies;
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