Sprint - Nextel 2007 Annual Report Download - page 140

SPRINT NEXTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In the spin-off, we distributed pro rata to our shareholders one share of Embarq common stock for every
20 shares held 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 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.
Also, 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.
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:
Year Ended December 31,
2006(1) 2005
(in millions)
Net operating revenue .................................................... $2,503 $6,253
Income before income taxes ............................................... 568 1,615
Income tax expense ...................................................... 234 635
Income from discontinued operations ........................................ 334 980
(1) Includes results only through May 17, 2006.
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