WIN » Topics » Notes:

These excerpts taken from the WIN 10-K filed Feb 19, 2009.

Notes:

  (A) Accounts charged off net of recoveries of amounts previously written off.

 

  (B) Net valuation allowance adjustment through goodwill in 2008 primarily due to a purchase accounting adjustment for a revision in the limitation associated with the federal net operating loss carry forward acquired from the merger with Valor.

 

  (C) Valuation allowance for deferred taxes was established through goodwill related to expected realization of net operating losses assumed from the acquisition of CTC.

 

  (D) Adjustment through goodwill to the net operating loss carry forwards acquired from Valor.

 

  (E) Valuation allowance for deferred taxes was established through goodwill related to expected realization of net operating losses assumed from Valor in the merger.

 

  (F) The Company incurred merger and integration costs of $6.2 million related to the acquisition of CTC wireline operations during the twelve months ended December 31, 2008, primarily related to system conversion costs. During the second quarter of 2008, the Company determined not to use certain software acquired in the CTC acquisition; therefore, we recognized a $5.4 million non-cash charge to abandon this asset, of which $0.8 million was related to the wireless business. Additionally in 2008, the Company incurred $8.5 million in restructuring costs primarily related to the announced workforce reduction in the fourth quarter of 2008 to control expenses in a challenging economy and to realign certain information technology, network operations and business sales functions.

 

  (G) Includes cash outlays of $5.0 million for merger, integration and restructuring costs charged to expense, and $11.5 million in cash outlays for CTC and Valor transaction costs charged to goodwill.

 

  (H) During 2007, the Company incurred total merger and integration costs of $5.6 million to complete the acquisition of CTC, and incurred $3.7 million in transaction costs to complete the split off of its directory publishing business. Additionally in 2007, the Company incurred $4.6 million in restructuring costs from a workforce reduction plan and the announced realignment of its business operations and customer service functions intended to improve overall support to its customers.

 

  (I) CTC transaction charges included in goodwill in the amount of $25.3 million consisted primarily of capitalized transaction and employee-related costs.

 

  (J) Includes cash outlays of $32.4 million for merger, integration and restructuring costs charged to expense, and $21.0 million in cash outlays for CTC and Valor transaction costs charged to goodwill.

 

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  (K) During 2006, the Company incurred $26.8 million of incremental costs, principally consisting of rebranding costs, consulting and legal fees, and system conversion costs related to the spin off of the Alltel wireline telecommunication business and merger with Valor. These costs do not include a $0.8 million non-cash charge related to the accelerated vesting of employees’ Alltel restricted stock, which was recorded against paid-in capital. Windstream also incurred $10.6 million in restructuring charges, which consisted of severance and employee benefit costs related to a workforce reduction, and $11.2 million in investment banker, audit and legal fees associated with the announced split off of its directory publishing business.

 

  (L) Valor integration charges included in goodwill in the amount of $17.8 million consisted primarily of severance and lease termination penalties.

 

  (M) Includes cash outlays of $28.4 million for merger, integration and restructuring costs charged to expense, and $9.1 million in cash outlays for Valor integration charged to goodwill.

See Note 10, “Merger, Integration and Restructuring Charges”, to the consolidated financial statements on pages F-71 to F-72 in the Financial Supplement, which is incorporated herein by reference, for additional information regarding the merger, integration and restructuring charges recorded by the Company in 2008, 2007 and 2006.

 

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Notes:






 (A)Accounts charged off net of recoveries of amounts previously written off.

 






 (B)Net valuation allowance adjustment through goodwill in 2008 primarily due to a purchase accounting adjustment for a revision in the limitation associated with the federal net
operating loss carry forward acquired from the merger with Valor.

 






 (C)Valuation allowance for deferred taxes was established through goodwill related to expected realization of net operating losses assumed from the acquisition of CTC.

 






 (D)Adjustment through goodwill to the net operating loss carry forwards acquired from Valor.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (E)Valuation allowance for deferred taxes was established through goodwill related to expected realization of net operating losses assumed from Valor in the merger.

 






 (F)The Company incurred merger and integration costs of $6.2 million related to the acquisition of CTC wireline operations during the twelve months ended December 31, 2008,
primarily related to system conversion costs. During the second quarter of 2008, the Company determined not to use certain software acquired in the CTC acquisition; therefore, we recognized a $5.4 million non-cash charge to abandon this asset, of
which $0.8 million was related to the wireless business. Additionally in 2008, the Company incurred $8.5 million in restructuring costs primarily related to the announced workforce reduction in the fourth quarter of 2008 to control expenses in a
challenging economy and to realign certain information technology, network operations and business sales functions.

 






 (G)Includes cash outlays of $5.0 million for merger, integration and restructuring costs charged to expense, and $11.5 million in cash outlays for CTC and Valor transaction costs
charged to goodwill.

 






 (H)During 2007, the Company incurred total merger and integration costs of $5.6 million to complete the acquisition of CTC, and incurred $3.7 million in transaction costs to complete
the split off of its directory publishing business. Additionally in 2007, the Company incurred $4.6 million in restructuring costs from a workforce reduction plan and the announced realignment of its business operations and customer service
functions intended to improve overall support to its customers.

 






 (I)CTC transaction charges included in goodwill in the amount of $25.3 million consisted primarily of capitalized transaction and employee-related costs.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (J)Includes cash outlays of $32.4 million for merger, integration and restructuring costs charged to expense, and $21.0 million in cash outlays for CTC and Valor transaction costs
charged to goodwill.

 


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 (K)During 2006, the Company incurred $26.8 million of incremental costs, principally consisting of rebranding costs, consulting and legal fees, and system conversion costs related to
the spin off of the Alltel wireline telecommunication business and merger with Valor. These costs do not include a $0.8 million non-cash charge related to the accelerated vesting of employees’ Alltel restricted stock, which was recorded against
paid-in capital. Windstream also incurred $10.6 million in restructuring charges, which consisted of severance and employee benefit costs related to a workforce reduction, and $11.2 million in investment banker, audit and legal fees associated with
the announced split off of its directory publishing business.

 






 (L)Valor integration charges included in goodwill in the amount of $17.8 million consisted primarily of severance and lease termination penalties.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (M)Includes cash outlays of $28.4 million for merger, integration and restructuring costs charged to expense, and $9.1 million in cash outlays for Valor integration charged to
goodwill.

See Note 10, “Merger, Integration and Restructuring Charges”, to the consolidated financial statements on pages F-71 to
F-72 in the Financial Supplement, which is incorporated herein by reference, for additional information regarding the merger, integration and restructuring charges recorded by the Company in 2008, 2007 and 2006.

STYLE="margin-top:0px;margin-bottom:0px"> 


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Notes:

  (a) Excludes $26.1 million of unamortized discounts (net of premiums) included in long-term debt at December 31, 2008.

 

  (b) Variable rates on tranches A and B of the senior secured credit facilities are calculated in relation to LIBOR, which was 4.55 percent at December 31, 2008.

 

  (c) Purchase obligations include open purchase orders not yet receipted and amounts payable under noncancellable contracts. The portion attributable to noncancellable contracts primarily represents agreements for network capacity and software licensing.

 

  (d) Other long-term liabilities primarily consist of deferred tax liabilities, pension and other postretirement benefit obligations and interest rate swaps.

 

  (e) Excludes $7.4 million of reserves for uncertain tax positions, including interest and penalties, that were included in other liabilities at December 31, 2008 for which the Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities will occur.

 

  (f) Includes $40.5 million and $15.4 million in current portion of interest rate swaps and postretirement benefit obligations, respectively that were included in current portion of interest rate swaps and other current liabilities at December 31, 2008.

 

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  (g) Includes approximately $24.0 million, net of tax benefit, for expected pension funding contributions in 2010. Although additional contributions may be required in years 2010 and beyond, due to the uncertainties inherent in the pension funding calculation, the amount and timing of the remaining contributions are unknown and therefore have been reflected as due in more than 5 years.

Under our long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, or breach of certain other conditions set forth in the borrowing agreements. At December 31, 2008, we were in compliance with all of our debt covenants. There are no provisions within any of our leasing agreements that would trigger acceleration of future lease payments. See Notes 2, 5, 6, 8, 12, 13 and 15 for additional information regarding certain of the obligations and commitments listed above.

Notes:





  (a)Excludes $26.1 million of unamortized discounts (net of premiums) included in long-term debt at December 31, 2008.
STYLE="font-size:12px;margin-top:0px;margin-bottom:0px"> 





  (b)Variable rates on tranches A and B of the senior secured credit facilities are calculated in relation to LIBOR, which was 4.55 percent at December 31, 2008.

 





  (c)Purchase obligations include open purchase orders not yet receipted and amounts payable under noncancellable contracts. The portion attributable to noncancellable contracts
primarily represents agreements for network capacity and software licensing.

 





  (d)Other long-term liabilities primarily consist of deferred tax liabilities, pension and other postretirement benefit obligations and interest rate swaps.
STYLE="font-size:12px;margin-top:0px;margin-bottom:0px"> 





  (e)Excludes $7.4 million of reserves for uncertain tax positions, including interest and penalties, that were included in other liabilities at December 31, 2008 for which the
Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities will occur.

 





  (f)Includes $40.5 million and $15.4 million in current portion of interest rate swaps and postretirement benefit obligations, respectively that were included in current portion of
interest rate swaps and other current liabilities at December 31, 2008.

 


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  (g)Includes approximately $24.0 million, net of tax benefit, for expected pension funding contributions in 2010. Although additional contributions may be required in years 2010 and
beyond, due to the uncertainties inherent in the pension funding calculation, the amount and timing of the remaining contributions are unknown and therefore have been reflected as due in more than 5 years.
STYLE="margin-top:12px;margin-bottom:0px">Under our long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, or breach
of certain other conditions set forth in the borrowing agreements. At December 31, 2008, we were in compliance with all of our debt covenants. There are no provisions within any of our leasing agreements that would trigger acceleration of
future lease payments. See Notes 2, 5, 6, 8, 12, 13 and 15 for additional information regarding certain of the obligations and commitments listed above.

SIZE="2">MARKET RISK

Market risk is comprised of three elements: foreign currency risk, interest rate risk and equity risk. As further discussed
below, the Company is exposed to market risk from changes in interest rates. The Company does not directly own significant marketable equity securities other than highly liquid cash equivalents, nor does it operate in foreign countries. However, the
Company’s pension plan invests in marketable equity securities, including marketable debt and equity securities denominated in foreign currencies.

SIZE="2">Interest Rate Risk

The Company is exposed to market risk through changes in interest rates, primarily as it relates to the variable
interest rates it is charged under its senior secured credit facilities. Under its current policy, the Company enters into interest rate swap agreements to obtain a targeted mixture of variable and fixed interest rate debt such that the portion of
debt subject to variable rates does not exceed 25 percent of Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap
activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and
implements strategies to manage the exposure.

Due to the interest rate risk inherent in its variable rate senior secured credit facilities, the Company
entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006 to convert variable interest rate payments to fixed. The counterparty for each of the swap agreements is
a bank with a current credit rating at or above A+. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,281.2 million as of
December 31, 2008. The variable rate received by Windstream on these swaps is the three-month LIBOR (London-Interbank Offered Rate), which was 4.55 percent at December 31, 2008. The weighted-average fixed rate paid by Windstream is 5.60
percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133,
“Accounting for Derivative Financial Instruments and Hedging Activities”, as amended.

After the completion of a refinancing transaction in
February 2007, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge as the portion of the Company’s senior secured credit facility
that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which has an unamortized notional value of $105.0 million as of December 31, 2008, are recognized in net income, including a $5.8
million loss in the consolidated statement of income in 2008. Changes in the market value of the designated portion of the swaps are recognized in other comprehensive income.

FACE="Times New Roman" SIZE="2">As of December 31, 2008, the unhedged portion of the Company’s variable rate senior secured credit facilities was $636.1 million, or approximately 11.9 percent of its total outstanding long-term debt.
Windstream has estimated its interest rate risk using a sensitivity analysis. For variable rate debt instruments, market risk is defined as the potential change in earnings resulting from a hypothetical adverse change in interest rates. A
hypothetical increase of 100 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $6.3 million. Actual results may differ from this estimate.

FACE="Times New Roman" SIZE="2">Equity Risk

The Company utilizes various financial institutions to invest its cash on hand in short-term securities.
These financial institutions are generally a party to the existing Windstream credit facility. Windstream has maintained an average cash balance of approximately $119.8 million during the twelve months ended December 31, 2008. These monies have
been invested in both taxable funds as well as tax-exempt municipal funds, and monies will often be moved between these two types of securities depending on their respective yields. These monies are all invested in AAA rated funds with same day
access, and thus are highly liquid.

 


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In addition, the Company has exposure to market risk through the Company’s pension plan investments. The fair market
value of these investments, totaling $654.0 million at December 31, 2008, declined 34.7 percent from approximately $1,001.0 million at December 31, 2007, due to benefit payments as well as a 28.9 percent decline in the market value of
assets held. Primarily as a result of the decline in the market value of pension assets, the Company will recognize pension expense of $90.4 million in 2009 as compared to a benefit of $1.6 million in 2008.

STYLE="margin-top:12px;margin-bottom:0px">Windstream’s pension plan utilizes various investment managers, five of whom invest in fixed income securities. As of December 31, 2008, these five managers
collectively manage approximately 60 percent of Windstream’s pension assets, totaling approximately $393.5 million. Of this amount, approximately $46.3 million, is invested in collateralized mortgage obligations (“CMO’s”) and
asset backed securities (“ABS”), of which approximately $6.8 million are sub-prime securities. These investments, totaling 7.1 percent of pension assets, are substantially all in funds that currently hold an investment grade rating.
Windstream’s pension assets have no exposure to either collateralized loan obligations or collateralized debt obligations. Of the CMO exposure, the investment managers have focused on prime mortgage holdings and securities with relatively short
terms, all of which are securitized by mortgages. Furthermore, the vast majority of these investments relate to the most senior secured tranches, which are the highest rated and the highest priority for retirement.

STYLE="margin-top:12px;margin-bottom:0px">As previously discussed in Liquidity and Capital Resources, management estimates that the Company will be required to contribute approximately $24.0 million, net of tax
benefit, to the pension plan in 2010. See the “Pension and Other Postretirement Benefits” caption below in our discussion of critical accounting policies and estimates for the results of the sensitivity analysis.

STYLE="margin-top:12px;margin-bottom:0px">Foreign Currency Risk

Although the Company does not operate in
foreign countries, the Windstream pension plan invests in international securities. Windstream has a well diversified pension plan, with a target asset allocation for international investments of 15 to 20 percent of the total pension assets. As of
December 31, 2008 approximately $96.1 million or 14.7 percent of total pension assets are invested in debt or equity securities denominated in foreign currencies. The investments are diversified in terms of country, industry and company risk,
limiting the overall foreign currency exposure.

These excerpts taken from the WIN 10-K filed Feb 29, 2008.

Notes:

  (a) Excludes $27.4 million of unamortized discounts (net of premiums) included in long-term debt at December 31, 2007.

 

  (b) Variable rates are calculated in relation to LIBOR, which was 5.21 percent at December 31, 2007.

 

  (c) Purchase obligations represent amounts payable under noncancellable contracts and primarily represent agreements for network capacity and software licensing.

 

  (d) Other long-term liabilities primarily consist of net deferred tax liabilities and other postretirement benefit obligations.

 

  (e) Excludes $8.9 million of reserves for uncertain tax positions, including interest and penalties, that were included in other liabilities at December 31, 2007 for which the Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities will occur.

Under our long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, or breach of certain other conditions set forth in the borrowing agreements. At December 31, 2007, we were in compliance with all of our debt covenants. There are no provisions within any of our leasing agreements that would trigger acceleration of future lease payments. See Notes 2, 3, 5, 6, 8, 10, 12, 13 and 15 for additional information regarding certain of the obligations and commitments listed above.

 

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Notes:






 (a)Excludes $27.4 million of unamortized discounts (net of premiums) included in long-term debt at December 31, 2007.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (b)Variable rates are calculated in relation to LIBOR, which was 5.21 percent at December 31, 2007.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (c)Purchase obligations represent amounts payable under noncancellable contracts and primarily represent agreements for network capacity and software licensing.

 






 (d)Other long-term liabilities primarily consist of net deferred tax liabilities and other postretirement benefit obligations.
STYLE="font-size:6px;margin-top:0px;margin-bottom:0px"> 






 (e)Excludes $8.9 million of reserves for uncertain tax positions, including interest and penalties, that were included in other liabilities at December 31, 2007 for which the
Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities will occur.

Under our long-term
debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, or breach of certain other conditions set forth in the borrowing agreements. At December 31, 2007, we
were in compliance with all of our debt covenants. There are no provisions within any of our leasing agreements that would trigger acceleration of future lease payments. See Notes 2, 3, 5, 6, 8, 10, 12, 13 and 15 for additional information regarding
certain of the obligations and commitments listed above.

 


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