Windstream 2006 Annual Report Download - page 126

However, an extension of the average useful life of our property, plant and equipment and finite-lived intangible assets
of one year would decrease depreciation and amortization expense by approximately $27.3 million per year, while a
reduction in the average useful life of one year would increase depreciation and amortization expense by approximately
$32.8 million per year.
In accordance with SFAS No. 142, we test our goodwill and other indefinite-lived intangible assets for impairment at
least annually, which requires us to determine the fair value of these intangible assets, as well as the fair value of our
reporting units. For purposes of testing goodwill, fair value of the reporting units is determined utilizing a combination
of the discounted cash flows of the reporting units and calculated market values of comparable public companies. Fair
value of the other indefinite-lived intangible assets is determined based on the discounted cash flows of the related
business segment. During 2006 and 2005, no write-downs in the carrying values of either goodwill or indefinite-lived
intangible assets were required based on their calculated fair values. In addition, reducing the calculated fair values of
goodwill and the other indefinite-lived intangible assets by 10 percent and the franchise rights by 5 percent would not
have resulted in an impairment of the carrying value of the related assets in either 2006 or 2005. However, decreasing
the calculated fair value of the franchise rights by 10 percent would have resulted in an impairment charge of
approximately $13.0 million in 2006. Changes in the key assumptions used in the discounted cash flow analysis due to
changes in market conditions could adversely affect the calculated fair values of goodwill and other indefinite-lived
intangible assets, materially affecting the carrying value of these assets and our future consolidated operating results.
Our estimates of income taxes and the significant items resulting in the recognition of deferred tax assets and liabilities
are disclosed in Note 12 to the consolidated financial statements and reflect our assessment of future tax consequences
of transactions that have been reflected in our financial statements or tax returns for each taxing authority in which we
operate. Actual income taxes to be paid could vary from these estimates due to future changes in income tax law or the
outcome of audits completed by federal, and state taxing authorities. Included in the calculation of our annual income
tax expense are the effects of changes, if any, to our income tax contingency reserves. We maintain income tax
contingency reserves for potential assessments from the IRS or other taxing authorities. The reserves are determined
based upon our judgment of the probable outcome of the tax contingencies and are adjusted, from time to time, based
upon changing facts and circumstances. Changes to the tax contingency reserves could materially affect our future
consolidated operating results in the period of change.
Legal Proceedings
On October 16, 2006, the Company received a negative ruling in a binding arbitration proceeding previously brought
against Valor Communications Southwest LLC and Valor Communications Group, Inc., by former employees
regarding stock option award agreements. The arbitrator awarded the former employees a collective interim award of
$6.2 million for the value of options that the Company asserts were without value immediately prior to Valor’s initial
public offering in February 2005. The basis for the interim award was the arbitrator’s finding that these particular
claimants’ options were extended past the initial public offering date. On January 8, 2007, the arbitrator entered a final
award in favor of the claimants totaling $7.2 million. The Company previously established a liability in the amount of
approximately $9.4 million through a charge to goodwill to reflect the interim award and other potential damages that
could have been part of the final award. The Company has reduced this liability and the related charge to goodwill by
approximately $2.2 million to reflect the actual amount of the final award. The claimants have filed separate
complaints to confirm the award in Oklahoma federal district court. The Company has filed motions in Oklahoma to
dismiss, or alternatively to transfer, the complaints to Texas federal district court and also filed a separate motion to
vacate the arbitrator’s award in Texas federal district court. The Company intends to vigorously assert and defend its
position in the matter.
The Company is party to various other legal proceedings. Although the ultimate resolution of these various proceedings
cannot be determined at this time, management of the Company does not believe that such proceedings, individually or
in the aggregate, will have a material adverse effect on the future consolidated results of operations, cash flows or
financial condition of the Company.
In addition, management of the Company is currently not aware of any environmental matters that, individually or in
the aggregate, would have a material adverse effect on the consolidated financial condition or results of operations of
the Company.
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