Verizon Wireless 2006 Annual Report Download - page 36

Leveraged Leases
In July 2006, the FASB issued Staff Position No. FAS 13-2,
“Accounting for a Change or Projected Change in the Timing of
Cash Flows Relating to Income Taxes Generated by a Leveraged
Lease Transaction” (FSP 13-2). FSP 13-2 requires that changes in
the projected timing of income tax cash flows generated by a lever-
aged lease transaction be recognized as a gain or loss in the year in
which change occurs. We are required to adopt FSP 13-2 effective
January 1, 2007. The cumulative effect of initially adopting this FSP
will be recorded as an adjustment to opening retained earnings in
the year of adoption. We anticipate that any required adjustment
under the adoption of FSP 13-2 will not be material.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurement (SFAS No. 157). SFAS No. 157 expands disclosures
about fair value measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and establishes a hierarchy that
categorizes and prioritizes the sources to be used to estimate fair
value. We are required to adopt SFAS No. 157 effective January 1,
2008 on a prospective basis. We are currently evaluating the impact
this new standard will have on our future results of operations and
financial position.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Recent Developments
MCI Merger
On January 6, 2006, Verizon acquired 100% of the outstanding
common stock of MCI, Inc. (MCI) for a combination of Verizon
common shares and cash. MCI was a global communications com-
pany that provided Internet, data and voice communication services
to businesses and government entities throughout the world and
consumers in the United States.
On April 9, 2005, Verizon entered into a stock purchase agreement
with eight entities affiliated with Carlos Slim Helú to purchase 43.4
million shares of MCI common stock for $25.72 per share in cash
plus an additional cash amount of 3% per annum from April 9, 2005,
until the closing of the purchase of those shares. The transaction
closed on May 17, 2005. The total cash payment was $1,121 million
and the investment was originally accounted for as a cost invest-
ment. No payments were made under a provision that required
Verizon to pay an additional amount at the end of one year to the
extent that the price of Verizon’s common stock exceeded $35.52
per share. We received a special dividend of $5.60 per MCI share on
these 43.4 million MCI shares, or $243 million, on October 27, 2005.
Under the terms of the merger agreement, MCI shareholders
received .5743 shares of Verizon common stock ($5,050 million in
the aggregate) and cash of $2.738 ($779 million in the aggregate) for
each of their MCI shares. The merger consideration was equal to
$20.40 per MCI share, excluding the $5.60 per share special divi-
dend paid by MCI to its shareholders on October 27, 2005. There
was no purchase price adjustment.
Price Communications
In August 2002, Verizon Wireless and Price Communications Corp.
(Price) combined Price’s wireless business with a portion of Verizon
Wireless. The resulting limited partnership, Verizon Wireless of the
East LP (VZ East), is controlled and managed by Verizon Wireless. In
exchange for its contributed assets, Price received a limited partner-
ship interest in the new partnership which was exchangeable into
the common stock of Verizon Wireless if an initial public offering of
that stock occurred, or into the common stock of Verizon on the
fourth anniversary of the asset contribution date. On August 15,
2006, Verizon delivered 29.5 million shares of newly-issued Verizon
common stock to Price valued at $1,007 million in exchange for
Price’s limited partnership interest in VZ East. As a result of
acquiring Price’s limited partnership interest, Verizon recorded
goodwill of $345 million in the third quarter of 2006 attributable to its
Domestic Wireless segment.
Disposition of Businesses and Investments
Verizon Dominicana C. por A., Telecomunicaciones de Puerto Rico,
Inc., and Compañía Anónima Nacional Teléfonos de Venezuela
During the second quarter of 2006, we reached definitive agree-
ments to sell our interests in our Caribbean and Latin American
telecommunications operations in three separate transactions to
América Móvil, S.A. de C.V. (América Móvil), a wireless service
provider throughout Latin America, and a company owned jointly by
Teléfonos de México, S.A. de C.V. (Telmex) and América Móvil. We
agreed to sell our 100 percent indirect interest in Verizon Dominicana
C. por A. (Verizon Dominicana) and our 52 percent interest in
Telecomunicaciones de Puerto Rico, Inc. (TELPRI) to América Móvil.
An entity jointly owned by América Móvil and Telmex agreed to pur-
chase our indirect 28.5 percent interest in CANTV.
In accordance with SFAS No. 144 we have classified the results of
operations of Verizon Dominicana and TELPRI as discontinued
operations. CANTV continues to be accounted for as an equity
method investment.
On December 1, 2006, we closed the sale of Verizon Dominicana.
The transaction resulted in net pretax cash proceeds of $2,042 mil-
lion, net of a purchase price adjustment of $373 million. The U.S.
taxes that became payable and were recognized at the time the
transaction closed exceeded the $30 million pretax gain resulting in
an after-tax loss of $541 million (or $.18 per diluted share).
We expect to close the sale of our interest in TELPRI in 2007 subject
to the receipt of regulatory approvals and in accordance with the
terms of the definitive agreement. We expect that the sale will result
in approximately $900 million in net pretax cash proceeds.
During the second quarter of 2006, we entered into a definitive agree-
ment to sell our indirect 28.5% interest in CANTV to an entity jointly
owned by América Móvil and Telmex for estimated pretax proceeds of
$677 million. Regulatory authorities in Venezuela never commenced
the formal review of that transaction and the related tender offers for
the remaining equity securities of CANTV. On February 8, 2007, after
two prior extensions, the parties terminated the stock purchase agree-
ment because the parties mutually concluded that the regulatory
approvals would not be granted by the Government.
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV.
On February 12, 2007, we entered into a Memorandum of
Understanding (MOU) with the Republic. The MOU provides that the
Republic will offer to purchase all of the equity securities of CANTV
through public tender offers in Venezuela and the United States at a
price equivalent to $17.85 per ADS. If the tender offers are completed,
the aggregate purchase price for Verizon’s shares would be $572 mil-
lion. If the 2007 dividend that has been recommended by the CANTV
Board is approved by shareholders and paid prior to the closing of the
tender offers, this amount will be reduced by the amount of the divi-
dend. Verizon has agreed to tender its shares if the offers are
commenced. The Republic has agreed to commence the offers within
34
Management’s Discussion and Analysis
of Results of Operations and Financial Condition continued