Windstream 2006 Annual Report Download

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Table of contents

  • Page 1
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  • Page 2
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  • Page 3
    WINDSTREAM CORPORATION Table of Contents Proxy Statement Annual Report Form 10-K Information Regarding Non-GAAP Financial Measures Corporate Information

  • Page 4
    ... Only holders of Common Stock of record at the close of business on March 16, 2007 are entitled to notice of and to vote at the meeting or at any adjournment or postponement thereof. Windstream's 2006 Annual Report, Proxy Statement, and Annual Report on Form 10-K accompany this Notice. By Order of...

  • Page 5
    ... Streets, Little Rock, Arkansas 72201 on Wednesday, May 9, 2007 at 11:00 a.m. (local time). TABLE OF CONTENTS Page No. Proxy Statement ...1 Voting Information ...2 Alltel Spin-Off and Valor Merger ...3 Proposal No. 1 - Election of Directors ...3 Board and Board Committee Matters ...5 Stock Ownership...

  • Page 6
    ... of Windstream, by execution and delivery of a later proxy or by voting the shares in person at the Annual Meeting. If not revoked, all shares represented by properly executed proxies will be voted as specified therein. The close of business on March 16, 2007 has been fixed as the record date for...

  • Page 7
    ...17, 2006, Valor Communications Group Inc. ("Valor"), Alltel Corporation ("Alltel") and Alltel Holding Corp., then a wholly-owned subsidiary of Alltel (also referred to herein as "Spinco"), consummated the spin-off of Spinco, which held Alltel's wireline telecommunications business, and the merger of...

  • Page 8
    Jeffery R. Gardner, age 47, President and Chief Executive Officer of Windstream since July 2006. Mr. Gardner has been a director of Windstream since July 2006 and of Alltel Holding Corp. since December 2005. Alltel appointed Mr. Gardner in December 2005 to serve as President and Chief Executive ...

  • Page 9
    ..., Compensation, and Governance Committees is set forth below. The Windstream Corporate Governance Board Guidelines specify that the independent directors of the Board must meet at regularly scheduled executive sessions without management and that an independent director selected from time to time by...

  • Page 10
    .... Windstream's Corporate Governance Board Guidelines, its code of ethics policy entitled "Working With Integrity", and the charters for the Audit, Compensation and Governance Committees are available on the Investor Relations page of the Windstream Corporation website at www.windstream.com/investors...

  • Page 11
    ... incumbent executive officers as of November 2006, until the date of the 2009 Annual Meeting of Stockholders), to meet the applicable ownership guidelines and, thereafter, one year to meet any increased ownership requirements resulting from changes in stock price, annual base fee, annual base salary...

  • Page 12
    ... beneficial ownership of shares with respect to which voting or investment power may be deemed to be directly or indirectly controlled. Accordingly, the shares shown in the foregoing table include shares owned directly, shares held in such person's accounts under the Windstream 401(k) Plan, unvested...

  • Page 13
    ... any person known to Windstream to be the beneficial owner of more than 5% of any class of Windstream's voting securities, all of which are shares of Common Stock: Name and Address of Beneficial Owner Morgan Stanley (1) 1585 Broadway New York, New York 10036 Amount and Nature of Beneficial Ownership...

  • Page 14
    ... on the Investor Relations page of Windstream Corporation's website at www.windstream.com/investors. The Compensation Committee is comprised entirely of independent directors, as defined and required by applicable New York Stock Exchange listing standards. The Compensation Committee has reviewed...

  • Page 15
    ...'s Board of Directors that the audited consolidated financial statements for the year ended December 31, 2006 be included in Windstream Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for filing with the Securities and Exchange Commission. The Audit Committee...

  • Page 16
    ... from the Board of Directors of Windstream to avoid potential conflicts between the interests of WCAS and Windstream as a result of the pending split-off transaction. Alltel Employee Benefits Agreement. As part of the spin-off and merger, the compensation program for the executive officers of Spinco...

  • Page 17
    ...Alltel. Alltel funded and made these payments to Messrs. Frantz and Gardner in July 2006 following the closing of the spin-off. The following discussion and analysis does not address the amounts received during 2006 by Windstream executive officers under Alltel's long-term performance incentive plan...

  • Page 18
    ... also entered into an employment agreement with Mr. Gardner, and certain executive officers are eligible to participate in the Windstream Pension Plan and the related Windstream Benefit Restoration Plan. The Compensation Committee considers the total compensation of each executive officer, including...

  • Page 19
    ...either restricted stock or performancebased restricted stock under the Windstream 2006 Equity Incentive Plan. Windstream has not issued any stock options or other forms of equity compensation to its directors, executive officers or other employees. The Compensation Committee believes that restricted...

  • Page 20
    ...of equity compensation awards to executive officers: • Annual Awards - Each officer receives a portion of his or her total direct annual compensation for a given year in the form of long-term incentive compensation. During 2006, the Compensation Committee approved an award of restricted stock, and...

  • Page 21
    ... that executive officers retain the shares of Windstream common stock (net of shares required to pay applicable taxes) that the officers receive upon the vesting of equity compensation awards. In addition, under Windstream's insider trading compliance policy, directors and executive officers are...

  • Page 22
    ... years of service and bargaining unit employees, and the Windstream pension plan continued this freeze. Except for Messrs. Frantz and Gardner, no Windstream named executive officer continued to accrue benefits under the pension plan in 2006. Prior to 2007, Windstream maintained a profit sharing plan...

  • Page 23
    ...4999 of the Internal Revenue Code as a result of the foregoing payments if the payments exceed 110% of the greatest amount payable to the executive without triggering excise taxes. Deferred Compensation Plans. Under the terms of the Employee Benefits Agreement with Alltel, Windstream was required to...

  • Page 24
    ...all Windstream non-employee directors received the following compensation: (1) an annual cash retainer of $60,000, (2) a cash fee of $1,750 for each Board and committee meeting attended, (3) an initial grant of $60,000 in restricted stock under the Windstream 2006 Equity Incentive Plan in connection...

  • Page 25
    ... per share of $12.60 of Windstream common stock, which was the closing stock price on the date of grant of the restricted stock. All stock awards include the 2006 compensation expense related to the $60,000 initial retainer and $34,991 for the pro-rated amount of the 2006 annual retainer for service...

  • Page 26
    ...) that the Compensation Committee determines provides substantially similar retiree medical coverage as the former group health insurance plan. Compensation of Named Executive Officers At the effective time of the merger of Spinco into Valor on July 17, 2006, the officers of Valor resigned and the...

  • Page 27
    ...,605 Name and Principal Position Year Salary ($) (1) 700,000 Bonus ($) (2) 315,362 Stock Awards ($) (3)(4) 1,050,537 Non-Equity Incentive Plan Compensation ($) (5) 1,292,845 All Other Compensation ($) (7)(8) 130,003 Total ($) 3,794,352 Jeffery R. Gardner President and CEO Brent Whittington...

  • Page 28
    ..., compensation of Windstream's employee pilots and other general charges related to ownership of the aircraft, (iv) termination payments made to Valor executives pursuant to severance arrangements agreed to by Valor, (v) company matching contributions under the Alltel or Windstream 401(k) Plan...

  • Page 29
    ... Windstream Board of Directors through August 1, 2009. An award of 119,047 shares to Mr. Frantz is subject to one-time cliff vesting if he remains on the Windstream Board through August 1, 2009. (4) Grant date fair value calculated using the closing price of Windstream common stock on August 2, 2006...

  • Page 30
    ... restricted stock under Windstream's 2006 Equity Incentive Plan or, with respect to Mr. Raney, grants of restricted stock under the 2005 Valor Long-Term Equity Incentive Plan. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END Stock Awards (1) Equity Incentive Plan Awards: Number of Unearned Shares, Units...

  • Page 31
    ...named executive officers, only Messrs. Gardner and Frantz were eligible for continuing accruals under the Pension Plan as of the end of 2006. The Pension Plan's accrued benefit is payable in the form of a monthly life annuity following normal retirement at age 65 (or, if later, five years of service...

  • Page 32
    ...Windstream Benefit Restoration Plan ("BRP") contains an unfunded, unsecured pension benefit for a group of highly compensated employees. Of Windstream's named executive officers, only Messrs. Gardner and Frantz participated in the pension benefit of the BRP as of the end of 2006. The pension benefit...

  • Page 33
    ... in good faith compliance with the new rules, as permitted by current IRS guidance. The following table shows certain information regarding benefits under the Windstream Pension Plan as of December 31, 2006 for the individuals named below. PENSION BENEFITS Number of Years Credited Service...

  • Page 34
    ... highly compensated employees. The BRP was established to administer the benefits assumed by Windstream from the Alltel Corporation Benefit Restoration Plan in connection with the spin-off. Of the named executive officers, only Messrs. Gardner and Frantz participated in the BRP as of the end of 2006...

  • Page 35
    ... investments offered by Windstream under the Profit-Sharing Plan. For 2006, the investments included a diversified portfolio of cash, stocks, bonds, Alltel and Windstream stock, and other publicly available and externally managed investment funds such as mutual funds. The earnings rate for 2006 was...

  • Page 36
    ... spin-off. Potential Payments Upon Termination or Change-in-Control Windstream has entered into certain agreements and maintains certain plans and arrangements that require Windstream or its successors to pay or provide certain compensation and benefits to its named executive officers in the event...

  • Page 37
    ... on the closing price of Windstream's common stock on December 29, 2006 of $14.22 per share. Accelerated Vesting of Restricted Shares. In the event that an executive officer listed above (other than Mr. Raney) died or became permanently disability (as determined by the Compensation Committee in its...

  • Page 38
    .... Gardner and Frantz would receive a lump sum payment of his account balances maintained under the Windstream Executive Deferred Compensation Plan and the Windstream Management Deferred Compensation Plan (which balances are now part of the Windstream 2007 Deferred Compensation Plan) upon a change-in...

  • Page 39
    ... by (ii) the closing price of Windstream's common stock on December 29, 2006 of $14.22 per share. Change-in-Control Agreements. Windstream has a Change-in-Control Agreement with certain of its executive officers, including its executive officers listed in the above table. The agreements provide that...

  • Page 40
    ... by the executive of the corporate governance board guidelines and code of ethics of Windstream or any affiliate; (v) a material violation by the executive of the requirements of the SarbanesOxley Act of 2002 or other federal or state securities law, rule or regulation; (vi) the repeated use of...

  • Page 41
    ... with Windstream for "good reason": • With respect to Mueller and Ojile, a cash payment equal to two times (1.5 times for Mr. Vaughn) the sum of the executive's base salary and target bonus, a portion of which was payable in July 2006 and the remainder in January 2007. Health care benefits under...

  • Page 42
    ... the number of unvested shares as of July 17, 2006, multiplied by (ii) the closing price of Windstream's common stock on that date, which was $11.50 per share. Consulting Agreement. In connection with the merger, John J. Mueller entered into a consulting agreement with Windstream. Under the terms of...

  • Page 43
    ... the Internal Revenue Code. Nothing contained in the Plan shall be deemed to affect the authority of Windstream or the Compensation Committee to grant annual or long-term bonuses or other benefits to employees. Eligibility and Participation. Participation in the Plan will be available to officers or...

  • Page 44
    ..., performance objectives or the related minimum acceptable level of achievement, in whole or in part, as the Compensation Committee deems appropriate and equitable (i) to reflect a change in the business, operations, corporate structure or capital structure of Windstream or its subsidiaries, the...

  • Page 45
    ... after the close of the Plan year, but in no event later than 75 days after the end of such year. The Compensation Committee may, in its sole discretion and upon such terms and conditions as it may establish, direct that payments to the participants (other than "covered employees") be made...

  • Page 46
    ... Internal Revenue Code. Plan Benefits Future benefits to be received by a person or group under the Plan are not determinable at this time and will depend on individual and corporate performance. Actual awards under the Plan to named executive officers for 2006 are reported in this proxy statement...

  • Page 47
    ...the Fund. RESOLVED: The shareholders of Windstream Corporation ("Company") urge the Executive Compensation committee of the Board of Directors (the "Committee") to adopt a policy requiring that senior executives and directors retain at least 75 percent of net after tax shares acquired through equity...

  • Page 48
    ... contemplated by New York Stock Exchange Listing standards. The Guidelines provide that during his or her service on the Windstream Board, each director who is not an executive officer is expected to maintain beneficial ownership of Windstream common stock valued at least five times the annual cash...

  • Page 49
    ... of our executive officers and directors with the long-term interests of stockholders, while allowing Windstream to use equity-based compensation as an incentive in a balanced approach that supports the recruitment and retention of qualified individuals. Board Recommendation THE BOARD OF DIRECTORS...

  • Page 50
    ... an address and receiving multiple copies of Windstream's proxy statement and Annual Report who wish to share a single copy of those documents in the future should also notify Windstream at: Vice President-Investor Relations, Windstream Corporation, 4001 Rodney Parham Road, Little Rock, Arkansas...

  • Page 51
    ... directory publishing business Review of post-merger supplemental financial information Totals Tax Fees Windstream incurred no fees for tax compliance, tax consulting and tax planning services by PwC for the fiscal year ended December 31, 2006. All Other Fees Windstream incurred no fees during 2006...

  • Page 52
    ... the completion of the filing of the Quarterly Report on Form 10-Q of Windstream (formerly Valor) for the quarterly period ending June 30, 2006, Windstream engaged PwC as its new independent registered public accounting firm. During the fiscal years ended December 31, 2004 and December 31, 2005 and...

  • Page 53
    ...principal executive offices of Windstream at 4001 Rodney Parham Road, Little Rock, Arkansas 72212. Windstream will bear the cost of solicitation of proxies. In addition to the use of the mail, proxies may be solicited by officers, directors, and employees of Windstream, personally or by telephone or...

  • Page 54
    ... ALL SHARES BE VOTED PROMPTLY. THEREFORE, STOCKHOLDERS ARE URGED TO FILL IN, DATE, SIGN, AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE, OR VOTE ON THE INTERNET OR BY TELEPHONE IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH ON THE PROXY CARD. Dated: March 30, 2007 By Order of the Board of...

  • Page 55
    ... INCENTIVE COMPENSATION PLAN WINDSTREAM CORPORATION (AS SUCCESSOR TO ALLTEL HOLDING CORP.) PERFORMANCE INCENTIVE COMPENSATION PLAN RECITALS Pursuant to Section 7.01(a)(2) of the Employee Benefits Agreement by and between ALLTEL Corporation and ALLTEL Holding Corp. (the "Company") dated as...

  • Page 56
    ... Date" shall mean the day after the Distribution Date as defined in the Employee Benefits Agreement. k. "Eligible Employee" shall mean any officer or key management employee of the Company or a Subsidiary who is a regular full-time employee of the Company or a Subsidiary. A director of the Company...

  • Page 57
    ..., "Vesting Years of Service" shall have the meaning given it under the terms of the ALLTEL Holding Corp. Pension Plan. r. "Subsidiary" shall mean a corporation of which fifty percent (50%) or more of the issued and outstanding voting stock is owned (directly or indirectly) by the Company. III...

  • Page 58
    ... Formulas, Performance Objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable (i) to reflect a change in the business, operations, corporate structure or capital structure of the Company or its Subsidiaries, the manner...

  • Page 59
    ... after the close of the Plan Year, but in no event later than 75 days after the end of the Plan Year to which the Awards relate. Notwithstanding the foregoing, the Committee may, in its sole discretion and upon such terms and conditions as it may establish, direct that payments to the Participants...

  • Page 60
    ... Participant shall receive any right to be granted an Award hereunder. No Award shall be considered as compensation under any employee benefit plan of the Company or a Subsidiary, except as may be otherwise provided in such employee benefit plan. No reference in the Plan to any other plan or program...

  • Page 61
    ...to assume this Plan. This Plan shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by sale, merger...

  • Page 62
    EXHIBIT A Francis X. Frantz Jeffery R. Gardner A-8

  • Page 63
    WINDSTREAM CORPORATION ANNUAL REPORT ON FORM 10-K

  • Page 64
    ... WINDSTREAM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 4001 Rodney Parham Road, Little Rock, Arkansas (Address of principal executive offices) Registrant's telephone number, including area code Securities...

  • Page 65
    ... 14. Directors, Executive Officers, and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Part IV...

  • Page 66
    ... communities in the United States, and based on the number of telephone lines we have in service, we are the fifth largest local telephone company in the country. Windstream owns subsidiaries that provide local, long distance, network access, video services and broadband and high speed data services...

  • Page 67
    ...the Publishing Business to a newly formed subsidiary ("Holdings"). Holdings will then pay a special dividend to Windstream in an amount equal to Windstream's tax basis in the Publishing Business (currently estimated to be approximately $30.0 million), issue additional shares of Holdings common stock...

  • Page 68
    ... businesses in order to deliver one-stop shopping to customers for a full range of communications products and services. In addition to its wireline and long distance service offerings, Windstream also provides network access, video services, broadband products and services ("DSL"), and cable...

  • Page 69
    ... America providing local telephone service to more than 3.2 million customers located in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, Nebraska, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina and Texas. The Company's subsidiaries also offer...

  • Page 70
    ... telephone network, to digital packet-switched technology, which forms the basis of the Internet Protocols ("IP") used over the Internet. Windstream is addressing this challenge with a strategy of providing data service to both business and residential customers through the deployment of an IP...

  • Page 71
    ... and the related earnings are subject to regulation by state Public Service Commissions ("PSCs"). The FCC has primary jurisdiction over interstate switched and special access rates and broadband service offerings and regulates the rates that ILECs may charge for the use of their local networks in...

  • Page 72
    ... than "bill and keep". In summary, the Missoula plan seeks to reduce rates carriers charge one another to originate and terminate calls between networks, increase end user retail rates and create additional funding through an expanded universal service program. The Company supports the proposed...

  • Page 73
    ... on universal service support. The FCC is also considering proposals regarding the contribution methodology, which could change the types of service providers required to contribute to the fund (i.e. local exchange providers, wireless providers, long-distance providers, etc.) and the basis on...

  • Page 74
    ... as compared to cable modem service. The order further provides price cap companies the option to deregulate DSL, de-tariff DSL or keep DSL regulated as it is today. The Company elected to deregulate its broadband services in its price-cap properties effective October 2006 and will benefit from the...

  • Page 75
    Windstream Corporation Form 10-K, Part I Item 1. Business Customer Proprietary Network Information Customer Proprietary Network Information ("CPNI") includes information such as the phone numbers dialed, frequency of calls, duration of calls and services purchased by a customer. The 96 Act requires ...

  • Page 76
    ...if rates are increased more than 10% in twelve consecutive months or in response to a formal complaint signed by at least 2% of affected subscribers. On April 1, 2006, the New Mexico PSC began regulating Windstream pursuant to rules that will govern its retail prices and service quality. These rules...

  • Page 77
    ... the support received by Valor prior to the merger. The purpose of the Texas USF is to assist telecommunications providers in providing basic local telecommunications services at reasonable rates to customers in high cost rural areas and to qualifying low-income and disabled customers. By order of...

  • Page 78
    ...sale. Certain of these products are inventoried including switch modules, wired and wireless voice and data transport equipment, outside plant products and pole-line hardware, broadband modems, in-building wiring and jacks, VoIP telephone systems and local area networking products. Windstream Supply...

  • Page 79
    ... by the tax sharing agreement with Alltel; the failure to successfully complete the contemplated split-off of our directory publishing business, Windstream Yellow Pages, in what Windstream expects to be a tax-free transaction to affiliates of Welsh, Carson, Anderson & Stowe; material changes in the...

  • Page 80
    ... to provide basic voice services to any person regardless of the profitability of such customer. We may not be able to compete successfully with cable companies in either the offering of broadband or voice services. Competition from wireless carriers is likely to continue to cause access line losses...

  • Page 81
    ...to our existing agreement with EchoStar Communications Corporation to offer DISH Network satellite television service to Windstream customers throughout its 16-state territory. We expect to continue to offer additional bundled services such as DSL, long distance and second lines with our basic voice...

  • Page 82
    ... our profitability. We receive state and federal USF revenues to support the high cost of providing affordable telecommunications services in rural markets. Such support payments constituted approximately 8% of the Company revenues for the year ended December 31, 2006. A portion of such fees are...

  • Page 83
    ...existing customers to reduce their purchases of our basic and enhanced services and make it difficult for us to obtain new customers. Adverse developments in our relationship with our employees could adversely affect our business, financial condition or results of operations. As of December 31, 2006...

  • Page 84
    ... consists primarily of land and buildings, central office equipment, outside plant and related equipment. Outside communications plant includes aerial and underground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheral equipment. The gross investment by...

  • Page 85
    ...Software, including internally developed Furniture, fixtures, vehicles and other Total Windstream also holds a $22.0 million gross investment in property used in its publishing business. These assets are included in "Assets held for sale" in the December 31, 2006 consolidated balance sheet pursuant...

  • Page 86
    ... Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities (a) The outstanding shares of Windstream's Common Stock are listed and traded on the New York Stock Exchange and trade under the symbol WIN. Prior to the merger with Valor on July 17, 2006, the Company's common stock...

  • Page 87
    ... since February 9, 2005, of total cumulative stockholder returns on Windstream common stock, along with the returns on the Standards & Poor's ("S&P") 500 Stock Index and the S&P Telcom Index. The S&P Telcom Index consists of the following companies: Alltel Corporation, AT&T Inc., CenturyTel Inc...

  • Page 88
    ... below is a line graph showing quarterly comparisons of stockholder returns since July 18, 2006, the initial day of trading following the spin-off from Alltel and merger with Valor. The graph includes the total cumulative stockholder returns on Windstream common stock, and comparative returns on the...

  • Page 89
    ...based compensation plans, Windstream may issue restricted stock and other equity securities to directors, officers and other key employees. The maximum number of shares available for issuance under the Windstream 2006 Equity Incentive Plan is 10.0 million shares. As of December 31, 2006, the balance...

  • Page 90
    Windstream Corporation Form 10-K, Part II Item 6. Selected Financial Data For information pertaining to Selected Financial Data of Windstream, refer to pages F-28 through F-30 of the Financial Supplement, which is incorporated by reference herein. Item 7. Management's Discussion and Analysis of ...

  • Page 91
    ... accounting principles. Immediately following the creation of Windstream Corporation from the merger of Valor Communications Group, Inc. and Alltel Holding Corp., which was effective on July 17, 2006, Valor's internal control over financial reporting was replaced by a new internal control structure...

  • Page 92
    ...'s Proxy Statement for its 2007 Annual Meeting of Stockholders, which is incorporated herein by reference. Executive officers of the Company are as follows: Name Jeffery R. Gardner Business Experience President and Chief Executive Officer of Windstream since July 17, 2006 and of Alltel Holding Corp...

  • Page 93
    ... Consolidated Financial Statements of Windstream Corporation and subsidiaries for the year ended December 31, 2006, included in the Financial Supplement, which is incorporated by reference herein: Financial Supplement Page Number Report of Independent Registered Public Accounting Firm Consolidated...

  • Page 94
    ... duly authorized. Windstream Corporation Registrant By /s/ Jeffery R. Gardner Jeffery R. Gardner, President and Chief Executive Officer Date: March 1, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of...

  • Page 95
    ... the Board of Directors and Shareholders of Windstream Corporation: Our audits of the consolidated financial statements, referred to in our report dated March 1, 2007 appearing in this 2006 Annual Report on Form 10-K of the Company also included an audit of the financial statement schedule listed in...

  • Page 96
    ...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...

  • Page 97
    ... Corporation and Alltel Holding Corp. (incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K of Alltel Corporation dated December 9, 2005). Agreement and Plan of Merger, dated as of December 8, 2005, among Alltel Corporation, Alltel Holding Corp., and Valor Communications...

  • Page 98
    ...17, 2006 between Alltel Corporation and Alltel Holding Corp. (incorporated herein by reference to Exhibit 10.2 to the Corporation's Current Report on Form 8-K dated July 17, 2006). Tax Sharing Agreement dated July 17, 2006 among Alltel Corporation, Alltel Holding Corp. and Valor Communications Group...

  • Page 99
    ... Windstream Corporation and its directors and executive officers (incorporated herein by reference to Exhibit 10.13 to the Corporation's Current Report on Form 8-K dated July 17, 2006). Form of Restricted Shares Agreement (Officers: Performance-Based Restricted Stock) entered into between Windstream...

  • Page 100
    EXHIBIT INDEX, Continued Number and Name 32(a) 32(b) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to ...

  • Page 101
    WINDSTREAM CORPORATION FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

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    WINDSTREAM CORPORATION INDEX TO FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006 Management's Discussion and Analysis of Financial Condition and Results of Operations Selected Financial Data Management's Responsibility for Financial Statements Report of ...

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    ...of 2006 Results Windstream is a customer-focused telecommunications company that provides local telephone, long distance, network access, video services, broadband and high-speed data services to over 3.2 million residential and business customers primarily located in rural areas in 16 states. Among...

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    ...and related businesses of Alltel. Pursuant to the plan of Distribution and immediately prior to the effective time of the Merger with Valor described below, Alltel contributed all of its wireline assets in exchange for: (i) newly issued Company common stock, (ii) the payment of a special dividend to...

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    ...the Publishing Business to a newly formed subsidiary ("Holdings"). Holdings will then pay a special dividend to Windstream in an amount equal to Windstream's tax basis in the Publishing Business (currently estimated to be approximately $30.0 million), issue additional shares of Holdings common stock...

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    ...access line losses due to increasing levels of competition across all Windstream service areas. This competition is driven largely by the technological development of alternative voice providers including wireless, cable, Voice over Internet Protocol ("VoIP"), and Competitive Local Exchange Carriers...

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    valued its share-based payment transactions using a Black-Scholes valuation model. Under the modified prospective transition method, the Company recognizes compensation cost in its consolidated financial statements for all awards granted after January 1, 2006 and for all existing awards for which ...

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    ... in 2006 due to customers migrating from expanded calling area rate plans to packaged and unlimited long distance plans. Also, during 2006 Universal Service Fund ("USF") revenues declined $15.4 million due to an increase in the national average cost per loop, combined with Windstream's cost control...

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    ... allocations received from Alltel related to services that Alltel provided for the Company for periods prior to the spin-off under a shared services arrangement, partially offset by a gradual increase in direct expenses associated with Windstream's new corporate cost structure. The 2005 increase was...

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    ...in severance and employee-related expenses, and all of the employee reductions had been completed. In connection with the spin-off from Alltel and merger with Valor, the Company incurred $31.2 million of incremental costs during the fourth quarter of 2005, principally representing accrued investment...

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    ... received from the Internal Revenue Service ("IRS") during 2006 related to taxes paid during 1997 through 2003. The increase in income tax expense in 2005 was due primarily to the non-deductible expenses incurred related to the spin-off, as previously discussed. The Company's effective tax rate...

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    ... the sales of data services increased during 2006, which partially offset the adverse effects on wireline revenues resulting from the loss of access lines. In addition, during the fourth quarter of 2005, we began offering DISH Network digital satellite television service to our residential customers...

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    ... long distance calls. Special access represents dedicated circuits, including circuits used to provide broadband service, while end user charges are monthly flat-rate charges assessed on access lines. Network access and interconnection revenues increased $103.5 million, or 10 percent in 2006...

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    ... conjunction with offering DISH Network digital satellite television service to our residential customers as discussed above. In addition, during the third quarter of 2006, Windstream began providing certain network management services to Alltel pursuant to multi-year contracts entered into as part...

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    ...Windstream's new corporate cost structure. Prior to the spin, under a shared services arrangement, Alltel provided certain functions on the Company's behalf, including but not limited to accounting, marketing, customer billing, information technology, legal, human resources, and engineering services...

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    ...Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri, Nebraska, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, and Texas. The Company continues to evaluate alternative regulation options in Mississippi and New York where the local and intrastate services provided by its...

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    ...from revenues associated with publishing directories for affiliated and non-affiliated local exchange carriers and charges to non-affiliated telecommunications companies for information services (primarily customer billing). Revenues and sales attributable to the Company's other operations decreased...

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    ...years also reflected changes involving capital requirements, including timing differences in billing and collections of accounts receivable, purchases of inventory, and the payment of trade payables, interest and taxes. During 2006, the Company generated sufficient cash flows from operations to fund...

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    ... through the date of the merger on July 17, 2006. The Company's Board of Directors has adopted a current dividend policy for the payment of cash quarterly dividends at a rate of $0.25 per share on the Company's common stock. The Company's Board of Directors can change this policy at any time at its...

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    ... of long-term debt in connection with the Contribution and the Merger. As discussed above, on December 12, 2006, Windstream announced that it would split off its directory publishing business in what Winstream expects to be a tax-free transaction with entities affiliated with WCAS, a private equity...

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    ... its borrowings, and the Company's access to the public capital markets could be adversely affected. A downgrade in Windstream's current short or long-term credit ratings would not accelerate scheduled principal payments of Windstream's existing long-term debt. The terms of our senior secured credit...

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    ... to hold the assets of its employee benefit plans. The Valor plan was merged into the Windstream plan effective December 31, 2006. In addition, Windstream has entered into individual retirement agreements with certain retired executives providing for unfunded supplemental pension benefits. For...

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    ... Act changed the rules governing the minimum contribution requirements for funding a qualified defined benefit pension plan on an annual basis without paying excise tax penalties. Among other requirements, the Act changed the interest rates used to calculate lump-sum benefit payments and eliminated...

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    ... due in less than 1 year include a $5.9 million required contribution to the Windstream Pension Plan, which is included in other assets in the consolidated balance sheet. Under our long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt...

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    ...variable rate received by Windstream is the three month LIBOR (London-Interbank Offered Rate). The weighted average variable rate received by the Company was 5.37 percent at December 31, 2006. A hypothetical increase of 100 basis points in variable interest rates would reduce annual pre-tax earnings...

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    ... 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...

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    ... relevant information and applying current conventions. FIN 48 also sets forth new disclosure requirements regarding unrecognized tax benefits and clarifies the financial statement classification of tax-related interest and penalties. Consistent with Windstream's past practices, interest charges on...

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    ... by the tax sharing agreement with Alltel; the failure to successfully complete the contemplated split-off of our directory publishing business, Windstream Yellow Pages, in what Windstream expects to be a tax-free transaction to affiliates of Welsh, Carson, Anderson & Stowe; material changes in the...

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    ... per share Balance sheet data Total assets Total equity Total long-term debt (including current maturities) Cash flows provided by (used in) Operating activities Investing activities Financing activities Statistical data Wireline access lines Long distance customers Broadband customers Capital...

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    ... and increase in net income of $11.4 million. D. During 2003, Windstream recorded a restructuring charge of $7.0 million consisting of severance and employee benefit costs related to a planned workforce reduction, primarily resulting from the closing of certain call center locations. Windstream also...

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    ... agreements and lease termination fees incurred with the closing of certain call center and product distribution locations. In exiting the competitive service operations, Windstream also incurred $2.2 million of costs to disconnect and remove switching and other transmission equipment from central...

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    ... directors (as defined by the New York Stock Exchange). The Audit Committee meets periodically with management, the independent registered public accounting firm, and the internal auditors to review matters relating to the Company's financial statements and financial reporting process, annual...

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    ... in which it accounts for share based compensation and pension and other post-retirement benefit costs in 2006. Additionally, as discussed in Note 3, the Company changed the way it accounts for conditional asset retirement obligations in 2005. /s/ PricewaterhouseCoopers LLP Little Rock, AR March...

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    ... STATEMENTS OF INCOME For the years ended December 31, (Millions, except per share amounts) Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services (excluding depreciation of $383.8, $415.8 and $445.1 in 2006, 2005 and 2004, respectively...

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    ... sale Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities Commitments and Contingencies (See Note 13) Shareholders' Equity: Common stock, $0.0001 par value, 1,000 shares authorized, 476.8 shares issued and outstanding at December 31, 2006 Parent company...

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    ...in advances to Alltel prior to spin-off Other Net cash used in financing activities Effect of exchange rate changes on cash and short-term investments Increase (decrease) in cash and short-term investments Cash and Short-term Investments: Beginning of the year End of the year $ 2006 $ 545.3 449.6 18...

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    ... on interest rate swaps Comprehensive income (loss) Dividends paid to Alltel Net change in advances to Alltel Issuance of exchange notes to Alltel Payment of special dividend to Alltel pursuant to spin-off Valuation of common stock held by Valor shareholders (See Note 2) Stock-based compensation for...

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    ... customer service. The Company's subsidiaries provide local telephone, long distance, network access, video services and high-speed data services in sixteen states. Telecommunications products are warehoused and sold by the Company's distribution subsidiary. A subsidiary also publishes telephone...

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    ...to provide local phone service, long distance and broadband Internet service as well as certain network management services to Alltel, all at negotiated rates. In addition, Windstream and Alltel entered into a tax-sharing agreement that generally requires Alltel to indemnify Windstream for any taxes...

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    ... to Alltel. The Company received dividend income of $11.4 million in 2005 and $11.8 million in 2004 related to its investment in the RTB Class C stock, which is included in other income, net in the accompanying consolidated statements of income. All other investments are accounted for using the cost...

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    ... TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, Continued: future. The Company's intangible assets with finite lives are amortized over their estimated useful lives, which are 9 to 10 years for customer lists and 15 years for cable television franchise rights...

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    ..., long distance and custom calling feature revenues are recognized monthly as services are provided. Due to varying customer billing cycle cut-off times, the Company must estimate service revenues earned but not yet billed at the end of each reporting period. Included in accounts receivable are...

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    ...Company's net income would have been reduced to the following pro forma amounts for the years ended December 31: (Millions) Net income as reported Deduct stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects Pro forma net income Basic...

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    ...of the net income and numbers of shares used in computing basic and diluted earnings per share was as follows for the years ended December 31: (Millions, except per share amounts) Basic earnings per share: Income before extraordinary item and cumulative effect of accounting change Extraordinary item...

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    ... Alltel subsidiaries, which provided customers with local, long distance, network access, and Internet services. These subsidiaries also sold and warehoused telecommunications products, published telephone directories for affiliates and other independent telephone companies, and provided billing...

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    ... presented are for Alltel Holding Corp. Based on the closing price of our common stock of $11.50 on the New York Stock Exchange ("NYSE") on July 17, 2006, the aggregate transaction value of the Merger was $2,050.5 million, consisting of the consideration for the acquired Valor shares ($815.9 million...

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    ... CONSOLIDATED FINANCIAL STATEMENTS 2. Spin-off of Company from Alltel Corporation and Merger with Valor Communications Group, Inc., Continued: The following table summarizes the allocation of the cost of the Merger to the assets acquired and liabilities assumed and related deferred income taxes as...

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    ...access line losses due to increasing levels of competition across all Windstream service areas. This competition is driven largely by the technological development of alternative voice providers including wireless, cable, Voice over Internet Protocol ("VoIP"), and competitive local exchange carriers...

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    ... steps. Step one was effective for Windstream beginning with our fiscal year ended on December 31, 2006 and required the Company to recognize on the consolidated balance sheet the over-funded or under-funded amount of the defined benefit postretirement plans. This amount is defined as the difference...

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    ... information has been restated to conform to this new financial statement presentation. 4. Goodwill and Other Intangible Assets: Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired through various business combinations. The Company...

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    ... Assets, Continued: The Valor customer list is amortized on an accelerated sum-of-the-years digits methodology over its estimated useful life of 9 years. Other customer lists are amortized on a straight-line basis over their estimated useful lives of 10 years. Cable franchise rights subject to...

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    ... of the previously announced split-off of its directory publishing business; and make other specified changes. 6. Financial Instruments: The Company's financial instruments consist primarily of cash and short-term investments, accounts receivable, accounts payable and long-term debt. The carrying...

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    ...balance sheet. The Company also maintains supplemental executive retirement plans that provide unfunded, non-qualified supplemental retirement benefits to a select group of management employees. As of December 31, 2006, Windstream recognized a pension obligation of $13.1 million related to executive...

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    ...Company uses a December 31 measurement date for its employee benefit plans. Actuarial assumptions used to calculate the pension and postretirement expense were as follows for the years ended December 31: Pension Benefits 2006 Discount rate Expected return on plan assets Rate of compensation increase...

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    ... FINANCIAL STATEMENTS 8. Employee Benefit Plans and Postretirement Benefits, Continued: A summary of plan assets, projected benefit obligation and funded status of the plans not accounted for under APB No. 12 were as follows at December 31: (Millions) Fair value of plan assets at beginning of year...

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    ... used to calculate the projected benefit obligations were as follows for the years ended December 31: Pension Benefits Postretirement Benefits 2006 2006 2005 Discount rate Expected return on plan assets Rate of compensation increase 5.92% 8.50% 3.50% 5.90% 5.70% - In developing the expected long...

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    ... Services issued final federal regulations related to the federal subsidy. These final rules did not have a material effect on the Company's benefit costs or accumulated postretirement benefit obligation. Windstream sponsors a non-contributory defined contribution plan in the form of profit-sharing...

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    ...the Windstream 2006 Equity Incentive Plan is 10.0 million shares. As of December 31, 2006, the balance available for grant was approximately 6.9 million shares. In August 2006, the Windstream Board of Directors approved three grants of restricted stock awards to officers and employees of the Company...

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    ... Valor restricted shares assumed amounted to $0.6 million and has a remaining weighted average vesting period of one year. Set forth below is certain information related to stock options outstanding under Alltel's stock-based compensation plans relating to the Company's employees: (Thousands) Number...

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    ... TO CONSOLIDATED FINANCIAL STATEMENTS 9. Stock-Based Compensation Plans, Continued: Non-vested Alltel stock options relating to the Company's employees as of December 31, 2006 and changes during the twelve months ended December 31, 2006 were as follows: (Thousands) Number of Shares 1,039.2 (402...

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    ... and Other Charges, Continued: During 2006, the Company incurred $27.6 million of costs in connection with its spin-off from Alltel and merger with Valor. These costs consisted of $7.9 million of consulting and legal fees, $13.8 million of signage and other costs to rebrand the Company's offices and...

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    ... $9.4 million related to fees resulting from the split-off of the publishing business were included in accounts payable in the consolidated balance sheet. As discussed above, cash outlays for the remaining unpaid liabilities will be disbursed over the next 12 months and will be funded from operating...

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    ... income taxes, were as follows for the years ended December 31: 2006 Statutory federal income tax rates Increase (decrease): State income taxes, net of federal benefit Reversal of income tax contingency reserves Costs associated with spin off of Company Other items, net Effective income tax rates 35...

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    ...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...

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    ... and telecommunications information services. The Company's publishing subsidiary coordinates advertising, sales, printing, and distribution for 378 telephone directory contracts in 35 states. On December 12, 2006, Windstream announced that it would split off its directory publishing business (see...

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    ...amortization Total costs and expenses Segment income Assets Capital expenditures A reconciliation of the total business segments to the applicable amounts in the Company's consolidated financial statements was as follows for the years ended December 31: (Millions) Revenues and sales: Total business...

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    ... 14. Business Segments, Continued: Supplemental information pertaining to the other operations segment was as follows as of and for the years ended December 31: (Millions) Revenues and sales from unaffiliated customers: Directory publishing Telecommunications information services Total Intercompany...

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    ... held by the parent company and have been presented using the equity method of accounting. Consolidated Statement of Income For the Year Ended December 31, 2006 (Millions) Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services (excluding...

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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Supplemental Guarantor Information, Continued: Consolidated Statement of Income For the Year Ended December 31, 2005 (Millions) Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services (excluding ...

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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Supplemental Guarantor Information, Continued: Consolidated Statement of Income For the Year Ended December 31, 2004 (Millions) Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services (excluding ...

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    ... sale Total current assets Investments Goodwill and other intangibles Net property, plant and equipment Other assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt Accounts payable Affiliates payable Advance payments and customer deposits...

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    ...for sale Total current assets Investments Goodwill and other intangibles Net property, plant and equipment Other assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt Accounts payable Affiliate payable Advance payments and customer deposits...

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    ... Repayments of borrowings Debt issued Changes in advances to Alltel prior to spin-off Other, net Net cash used in financing activities Increase (decrease) in cash and short-term investments Cash and Short-term Investments: Beginning of the year End of the year Parent $ 545.3 (688.5) 14.5 1.5 (837...

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    ...: Dividends paid to Alltel prior to spin-off Repayments of borrowings Changes in advances to Alltel prior to spin-off Net cash used in financing activities Increase (decrease) in cash and short-term investments Cash and Short-term Investments: Beginning of the year End of the year $ $ Parent...

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    ... Changes in advances to Alltel prior to spin-off Net cash used in financing activities Effect of exchange rate changes on cash and short-term investments Increase (decrease) in cash and short-term investments Cash and Short-term Investments: Beginning of the year End of the year $ $ Parent...

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    ... business (See Note 10). B. During the third quarter of 2006, the Company incurred $15.3 million of incremental costs, principally consisting of rebranding costs, consulting and legal fees, system conversion costs and employee-related costs related to the spin-off from Alltel and merger with Valor...

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    ... charges, which consisted of severance and employee benefit costs related to a planned workforce reduction (See Note 10). F. 17. Pending Transactions: On December 12, 2006, Windstream announced that it would split off its directory publishing business (the "Publishing Business") in what Windstream...

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    ... working capital adjustment pursuant to which the parties will make cash payments to each other to the extent that the working capital of the Publishing Business is less than or greater than a specified target working capital amount at the time of the first-step closing. The Share Exchange Agreement...

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    ... in this Annual Report unaudited pro forma results from current businesses, which include results from Valor's businesses for periods prior to the merger, and excludes various non-recurring items related to the transaction and to the discontinuation of Statement of Financial Accounting Standards...

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    ... Pro forma OIBDA from current businesses from July 17, 2006 through December 31, 2006 Reconciliation of the Leverage Ratio for the twelve months ended December 31: (Dollars in millions) Long-term debt, including current maturities Cash and short-term investments Net debt Pro forma OIBDA from current...

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