Verizon Wireless 2007 Annual Report Download - page 55

Notes to Consolidated Financial Statements continued
53
Rural Cellular Corporation
In late July 2007, Verizon Wireless announced that it had entered into an
agreement to acquire Rural Cellular Corporation (Rural Cellular), for $45
per share in cash (or approximately $757 million). As a result of the acqui-
sition, Verizon Wireless will assume Rural Cellular’s outstanding debt. The
total value of the transaction is approximately $2.7 billion. Rural Cellular
has more than 700,000 customers in markets adjacent to Verizon Wireless’s
existing customer service areas. Rural Cellular’s networks are located in
the states of Maine, Vermont, New Hampshire, New York, Massachusetts,
Alabama, Mississippi, Minnesota, North Dakota, South Dakota, Wisconsin,
Kansas, Idaho, Washington, and Oregon. Rural Cellular’s shareholders
approved the transaction on October 4, 2007. The acquisition, which
is subject to regulatory approvals, is expected to close in the first half
of 2008.
In a related transaction, on December 3, 2007, Verizon Wireless signed a
definitive exchange agreement with AT&T. Under the terms of the agree-
ment, Verizon Wireless will receive cellular operating markets in Madison
and Mason, KY, and 10MHz PCS licenses in Las Vegas, NV; Buffalo, NY;
Sunbury-Shamokin and Erie, PA; and Youngstown, OH. Verizon Wireless
will also receive minority interests held by AT&T in three entities in which
Verizon Wireless also holds an interest plus a cash payment. In exchange,
Verizon Wireless will transfer to AT&T six cellular operating markets in
Burlington, Franklin and the northern portion of Addison, VT; Franklin, NY;
and Okanogan and Ferry, WA; and a cellular license for the Kentucky-6
market. The operating markets Verizon Wireless is exchanging are among
those it is to acquire from Rural Cellular. The exchange with AT&T is subject
to regulatory approvals and is expected to close in the first half of 2008.
Other Acquisitions
In July 2007, Verizon acquired a security-services firm for $435 million,
resulting in goodwill of $343 million and other intangible assets of $81
million. This acquisition was made to enhance our managed information
security services to large business and government customers world-
wide. This acquisition was integrated into the Wireline segment.
On November 29, 2006, we were granted thirteen 20MHz licenses we
won in an FCC auction that concluded on September 18, 2006. We paid a
total of $2,809 million for the licenses, which cover a population of nearly
200 million.
Pro Forma Information
The following unaudited pro forma consolidated results of operations
assume that the MCI merger was completed as of January 1 for the
periods shown below:
(dollars in millions, except per share amounts)
Years Ended December 31, 2006 2005
Operating revenues $ 88,409 $ 85,781
Income before discontinued operations and cumulative
eect of accounting change 5,480 6,724
Net income 6,197 8,176
Basic earnings per common share:
Income before discontinued operations and cumulative
eect of accounting change 1.88 2.30
Net income 2.13 2.79
Diluted earnings per common share:
Income before discontinued operations and cumulative
eect of accounting change 1.88 2.28
Net income 2.12 2.76
The unaudited pro forma information presents the combined operating
results of Verizon and the former MCI, with the results prior to the acqui-
sition date adjusted to include the pro forma impact of: the elimination
of transactions between Verizon and the former MCI; the adjustment of
amortization of intangible assets and depreciation of fixed assets based
on the purchase price allocation; the elimination of merger expenses
incurred by the former MCI; the elimination of the loss on the early
redemption of MCI’s debt; the adjustment of interest expense reflecting
the redemption of all of MCI’s debt and the replacement of that debt
with $4 billion of new debt issued in February 2006 at Verizon’s weighted
average borrowing rate; and to reflect the impact of income taxes on the
pro forma adjustments utilizing Verizon’s statutory tax rate of 40%. The
unaudited pro forma results for 2005 include $82 million for discontinued
operations that were sold by MCI during the first quarter of 2005. The
unaudited pro forma results for 2005 include approximately $300 million
of net tax benefits resulting from tax reserve adjustments recognized by
the former MCI primarily during the third and fourth quarters of 2005,
including audit settlements and other activity.
The unaudited pro forma consolidated basic and diluted earnings per
share for 2006 and 2005 are based on the consolidated basic and diluted
weighted average shares of Verizon and the former MCI. The historical
basic and diluted weighted average shares of the former MCI were
converted for the actual number of shares issued upon the closing of
the merger.
The unaudited pro forma results are presented for illustrative purposes
only and do not reflect the realization of potential cost savings, or
any related integration costs. Certain cost savings may result from the
merger; however, there can be no assurance that these cost savings will
be achieved. Cost savings, if achieved, could result from, among other
things, the reduction of overhead expenses, including employee levels
and the elimination of duplicate facilities and capital expenditures. These
pro forma results do not purport to be indicative of the results that would
have actually been obtained if the merger occurred as of the beginning
of each of the periods presented, nor does the pro forma data intend to
be a projection of results that may be obtained in the future.