Sprint - Nextel 2006 Annual Report Download - page 95

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.
We incurred $123 million of net costs for 2006 in connection with the spin-off of Embarq, which have been
classified as discontinued operations. These costs include broker fees and transition costs. Also included in
discontinued operations is $43 million in gains, after tax, realized from the change in fair value of certain
derivatives that were entered into in anticipation of the issuance by Embarq of the senior notes.
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. The transition services
primarily include billing, field support, information technology and real estate services. 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 20 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.
The results of operations of the local communications business were as follows:
2006
(1)
2005 2004
Year Ended December 31,
(in millions)
Net operating revenue ............................................ $2,503 $6,253 $6,140
Income before income taxes ........................................ 568 1,615 1,641
Income tax expense .............................................. 234 635 647
Income from discontinued operations ................................. 334 980 994
(1) Includes results only through May 17, 2006.
F-18
SPRINT NEXTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)