Verizon Wireless 2013 Annual Report Download - page 49

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
customary for companies maintaining an investment grade credit rating.
An event of default for either series of the Verizon Notes may result in
acceleration of the entire principal amount of all debt securities of that
series. Beginning two years after the closing of the Wireless Transaction,
Verizon may redeem all or any portion of the outstanding Verizon Notes
held by Vodafone or any of its aliates for a redemption price of 100%
of the principal amount plus accrued and unpaid interest. The Verizon
Notes may only be transferred by Vodafone to third parties in specied
amounts during specied periods, commencing January 1, 2017. The
Verizon Notes held by third parties will not be redeemable. Verizon has
agreed to le a registration statement with respect to the Verizon Notes
at least three months prior to the Verizon Notes becoming transferable.
Other Consideration
Included in the other consideration paid to Vodafone is the indirect
assumption of long-term obligations with respect to 5.143% Class D and
Class E cumulative preferred stock (Preferred Stock) issued by one of the
Purchased Entities. Both the Class D (825,000 shares outstanding) and
Class E shares (825,000 shares outstanding) are mandatorily redeemable
in April 2020 at $1,000 per share plus any accrued and unpaid dividends.
Dividends accrue at 5.143% per annum and will be treated as interest
expense. Both the Class D and Class E shares will be classied as liability
instruments and will be recorded at fair value as determined at the
closing of the Wireless Transaction.
Pro Forma Information
The unaudited pro forma information presents the combined operating
results of Verizon and the Vodafone Interest, with the results prior to
the Wireless Transaction closing date adjusted to include the pro forma
impact of: the elimination of the historical equity in earnings, net of tax,
related to the investment in Omnitel; an adjustment to reect interest
expense associated with the additional indebtedness incurred and
expected to be incurred in connection with the Wireless Transaction and
outstanding as of the closing of the Wireless Transaction; an adjustment
for the dividends on the Preferred Stock; an adjustment for the amorti-
zation of certain debt incurrence costs based on the contractual life of
the underlying indebtedness; an adjustment to reect changes in the
provision for income taxes associated with the additional income attrib-
utable to Verizon and the benet associated with the additional interest
expense; the elimination of the historical net income attributable to non-
controlling interests, representing the noncontrolling interest in Verizon
Wireless; and an adjustment to reect the sum of all other adjustments
to the pro forma condensed consolidated statements of income on net
income attributable to Verizon.
The unaudited pro forma results are presented for illustrative purposes
only. These pro forma results do not purport to be indicative of the results
that would have actually been obtained if the Wireless Transaction had
occurred as of January 1, 2012, nor does the pro forma data intend to be
a projection of results that may be obtained in the future.
The following unaudited pro forma consolidated results of operations
assume that the Wireless Transaction was completed as of January 1, 2012:
(dollars in millions)
Years ended December 31, 2013 2012
Net income attributable to Verizon $ 17,058 $ 4,449
Spectrum License Transactions
Since 2012, we have entered into several strategic spectrum transactions
including:
• During the third quarter of 2012, after receiving the required regula-
tory approvals, Verizon Wireless completed the following previously
announced transactions in which we acquired wireless spectrum that
will be used to deploy additional 4G LTE capacity:
o Verizon Wireless acquired Advanced Wireless Services (AWS) spec-
trum in separate transactions with SpectrumCo and Cox TMI Wireless,
LLC for which it paid an aggregate of $3.9 billion at the time of the
closings. Verizon Wireless has also recorded a liability of $0.4 billion
related to a three-year service obligation to SpectrumCo’s members
pursuant to commercial agreements executed concurrently with the
SpectrumCo transaction.
o Verizon Wireless completed license purchase and exchange
transactions with Leap Wireless, Savary Island Wireless, which is
majority owned by Leap Wireless, and a subsidiary of T-Mobile
USA, Inc. (T-Mobile USA). As a result of these transactions, Verizon
Wireless received an aggregate $2.6 billion of AWS and Personal
Communication Services (PCS) licenses at fair value and net cash
proceeds of $0.2 billion, transferred certain AWS licenses to T-Mobile
USA and a 700 megahertz (MHz) lower A block license to Leap
Wireless, and recorded an immaterial gain.
• During the rst quarter of 2013, we completed license exchange trans-
actions with T-Mobile License LLC and Cricket License Company, LLC,
a subsidiary of Leap Wireless, to exchange certain AWS licenses. These
non-cash exchanges include a number of intra-market swaps that we
expect will enable Verizon Wireless to make more ecient use of the
AWS band. As a result of these exchanges, we received an aggregate
$0.5 billion of AWS licenses at fair value and recorded an immaterial gain.
• During the third quarter of 2013, after receiving the required regulatory
approvals, Verizon Wireless sold 39 lower 700 MHz B block spectrum
licenses to AT&T Inc. (AT&T) in exchange for a payment of $1.9 billion
and the transfer by AT&T to Verizon Wireless of AWS (10 MHz) licenses
in certain markets in the western United States. Verizon Wireless also
sold certain lower 700 MHz B block spectrum licenses to an investment
rm for a payment of $0.2 billion. As a result, we received $0.5 billion of
AWS licenses at fair value and we recorded a pre-tax gain of approxi-
mately $0.3 billion in Selling, general and administrative expense on
our consolidated statement of income for the year ended December
31, 2013.
• During the fourth quarter of 2013, we entered into license exchange
agreements with T-Mobile USA to exchange certain AWS and PCS
licenses. These non-cash exchanges, which are subject to approval by
the FCC and other customary closing conditions, are expected to close
in the rst half of 2014. The exchange includes a number of swaps that
we expect will result in more ecient use of the AWS and PCS bands. As
a result of these agreements, $0.9 billion of Wireless licenses are classi-
ed as held for sale and included in Prepaid expenses and other on our
consolidated balance sheet at December 31, 2013. Upon completion of
the transaction, we expect to record an immaterial gain.