Windstream 2006 Annual Report Download - page 164

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Income Taxes, Continued:
At December 31, 2006, the Company had federal and state net operating loss carryforwards of approximately
$288.0 million and $91.0 million, respectively, which expire annually in varying amounts through 2025. These
loss carryforwards were acquired in conjunction with the Company’s merger with Valor. The Company is limited
in its ability to use these loss carryforwards on an annual basis due to the ownership change caused by the
merger. As a result, a portion of these loss carryforwards will not be utilized before they expire. The Company
establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized.
As of December 31, 2006, the Company recorded a valuation allowance of $10.6 million related to federal and
state loss carryforwards, which are expected to expire and not be utilized.
13. Commitments and Contingencies:
Lease Commitments – Minimum rental commitments for all non-cancelable operating leases, consisting
principally of leases for network facilities, real estate, office space, and office equipment were as follows as of
December 31, 2006:
Year (Millions)
2007 $ 22.4
2008 19.8
2009 16.2
2010 12.7
2011 8.0
Thereafter 2.8
Total $ 81.9
Rental expense totaled $18.7 million in 2006, $7.3 million in 2005 and $5.3 million in 2004.
Litigation – 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 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 income, 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.
14. Business Segments:
The Company disaggregates its business operations based upon differences in products and services. The
Company’s wireline segment consists of Windstream’s retail and wholesale telecommunications services,
including local, long distance, network access, video services and broadband products and data services in 16
states. The Company does not have separate segment managers overseeing its retail and wholesale
telecommunications services. Therefore, in assessing operating performance and allocating resources, the chief
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