Windstream 2007 Annual Report Download

Download and view the complete annual report

Please find the complete 2007 Windstream annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 172

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172

2007 ANNUAL REPORT
Proxy Statement and Form 10-K

Table of contents

  • Page 1
    2007 ANNUAL REPORT Proxy Statement and Form 10-K

  • Page 2
    ... net broadband additions again outpaced access line declines. Windstream had more than 871,000 broadband customers at the end of the year, a 28 percent increase year-over-year and a penetration rate of 27 percent of total access lines. We also continued to expand our digital TV customer base, ending...

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

  • Page 4

  • Page 5
    ... Stock of record at the close of business on March 14, 2008 are entitled to notice of and to vote at the meeting or at any adjournment or postponement thereof. Windstream's 2007 Annual Report, Proxy Statement, and Annual Report on Form 10-K accompany this Notice. By Order of the Board of Directors...

  • Page 6

  • Page 7
    ... Road Little Rock, Arkansas 72212 Telephone: (501) 748-7000 www.windstream.com PROXY STATEMENT This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Windstream Corporation ("Windstream") to be used at its 2008 Annual Meeting of Stockholders...

  • Page 8
    ... 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 14, 2008 has been fixed as the record date...

  • Page 9
    ...and into Valor. Valor was the surviving company in the merger, and it was renamed Windstream Corporation. PROPOSAL NO. 1 ELECTION OF DIRECTORS The number of directors that serve on the Windstream Board of Directors is currently set at nine and may be fixed from time to time in the manner provided in...

  • Page 10
    ... Committee of USTelecom, a telecom trade association that represents over 1,000 member companies. Jeffery R. Gardner, age 48, President and Chief Executive Officer of Windstream since July 2006. Mr. Gardner has been a director of Windstream since July 2006 and was a director of Alltel Holding Corp...

  • Page 11
    ... year in an amount representing less than $500,000 for the year in question; (4) The director or a member of the director's immediate family was a shareholder, executive officer or employee of an entity that made payments to, or received payments from, Windstream in any year in question that account...

  • Page 12
    ... rules of the Securities and Exchange Commission ("SEC"). The Compensation Committee held five meetings during 2007. The Compensation Committee assists the Windstream Board of Directors in fulfilling its oversight responsibility related to the compensation programs, plans, and awards for Windstream...

  • Page 13
    ... are also available to stockholders who submit a request to Windstream Corporation, ATTN: Investor Relations, 4001 Rodney Parham Rd, Little Rock, AR 72212. Stockholders and other interested parties may contact the Lead Director or the non-management directors of the Windstream Board of Directors by...

  • Page 14
    ... forth below is certain information, as of March 14, 2008, as to shares of Windstream common stock beneficially owned by each director, named executive officer who was serving as an executive officer at the end of 2007, and by all directors and executive officers of Windstream as a group. Except as...

  • Page 15
    ...to the Windstream Board of Directors that the "Compensation Discussion and Analysis" be included in Windstream Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and Windstream Corporation's Proxy Statement on Schedule 14A for the 2008 Annual Meeting of Stockholders...

  • Page 16
    ...'s Board of Directors that the audited consolidated financial statements for the year ended December 31, 2007 be included in Windstream Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for filing with the Securities and Exchange Commission. The Audit Committee...

  • Page 17
    ...'s fees and other retention terms. The Compensation Committee currently engages Watson Wyatt & Company to assist the Committee in the review and design of Windstream's executive compensation program, and to provide information on competitive market practices and survey data for both plan design...

  • Page 18
    ... salary; • Short-term (annual) cash incentive payments; and • Long-term incentives in the form of equity-based compensation. The compensation program for all executive officers also includes the Windstream 2007 Deferred Compensation Plan, the Windstream 401(k) Plan, a change-in-control agreement...

  • Page 19
    ... and the threshold for broadband, and Mr. Gardner received $774,474 in annual incentive compensation or approximately 86% of the target payout award for 2007. Equity-Incentive Awards. Windstream maintains an equity-based compensation program for executive officers to provide long-term incentives, to...

  • Page 20
    ... 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 21
    ... provide recommendations on the final terms of the agreement. Retirement Plans. Windstream maintains a defined benefit pension plan and a qualified 401(k) defined contribution plan for its executive officers and employees. Prior to 2007, Windstream also maintained a separate qualified profit sharing...

  • Page 22
    ... During 2007, 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, and (3) an annual grant of $60,000 in restricted stock under the Windstream 2006 Equity Incentive Plan...

  • Page 23
    ...Board of Directors on September 7, 2007. In connection with such appointment, Ms. Armitage was granted restricted stock that included a grant value of $80,000 representing her initial retainer and her pro-rated 2007 annual retainer of restricted stock under Windstream's director compensation program...

  • Page 24
    ... were not named executive officers for 2006. (2) All stock award amounts for restricted stock granted by Windstream reflect 2007 compensation expense calculated in accordance with SFAS 123(R) as described in the Annual Report on Form 10-K for fiscal year ended December 31, 2007. Amounts do not...

  • Page 25
    ... the Windstream 401(k) Plan, (iv) imputed income for value over $50,000 of life insurance coverage provided by the Company, (v) payment of initial or annual country club dues, and (vi) up to $5,000 in taxable dollars for reimbursement of financial planning and related expenses. Information On Plan...

  • Page 26
    ... named below as of December 31, 2007. All awards represent grants of restricted stock under Windstream's 2006 Equity Incentive Plan. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END Stock Awards (1) Time-Based Vesting Restricted Stock Market Value of Shares or Units of Stock That Have Not Vested...

  • Page 27
    ... years of vesting service as of December 31, 2005. Of our named executive officers, only Messrs. Gardner and Clancy and Ms. Bradley were eligible for continuing accruals under the Pension Plan as of the end of 2007. The Pension Plan's accrued benefit is payable in the form of a monthly life annuity...

  • Page 28
    ... The 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 Clancy and Ms. Bradley participated in the pension benefit of the BRP as of the end of 2007...

  • Page 29
    ... business day of the following calendar year, plus 200 basis points (i.e. 9.25% for 2007). Of our named executive officers, only Mr. Gardner is eligible for interest based on the prime rate + 2% ("1998 Fund"). The balance included in the 1998 Fund will be accelerated upon change of control. Payments...

  • Page 30
    ...of the Summary Compensation Table. 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...

  • Page 31
    ... which the Board of Directors is making a determination whether to terminate him for cause. Death or Disability Windstream would have been obligated to provide each of the executive officers listed below (or his beneficiary) with the following estimated payments, in a lump sum for bonus amounts...

  • Page 32
    ...officers solely as a result of a change-in-control (as defined under the heading "Qualifying Termination Following Change-in-Control" below). However, Mr. Gardner would receive a lump sum payment of his account balances maintained under the 1998 fund of the Windstream 2007 Deferred Compensation Plan...

  • Page 33
    ...and the acquiring or successor entity prior to receiving severance benefits under the agreement. Excise Tax Gross-Up. On or after a change-in-control, the named executive officers listed above may be subject to certain excise taxes pursuant to Section 4999 of the Internal Revenue Code. Windstream or...

  • Page 34
    ... 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 Sarbanes-Oxley Act of 2002 or other federal or state securities law, rule or regulation; (vi) the repeated use of...

  • Page 35
    ...Windstream Corporation" request the board of directors to adopt a policy that provides shareholders the opportunity at each annual shareholder meeting to vote on an advisory resolution, proposed by management, to ratify the compensation of the named executive officers ("NEOs") set forth in the proxy...

  • Page 36
    ... compensation by establishing an annual referendum process. The results of such a vote could provide our board with useful information about shareholders views on the company's senior executive compensation, as reported each year. We urge shareholders to vote for this proposal. BOARD OF DIRECTORS...

  • Page 37
    ...by the Corporate Secretary at 4001 Rodney Parham Road, Little Rock, Arkansas 72212, prior to December 1, 2008. Such proposals must meet the requirements set forth in the rules and regulations of the SEC in order to be eligible for inclusion in the proxy statement for Windstream's 2009 Annual Meeting...

  • Page 38
    ... transactions conducted by Windstream in the ordinary course of business and on terms generally available to employees or customers. A transaction also does not include an employment or service relationship involving a director or executive officer and any related compensation resulting from that...

  • Page 39
    ... "Audit Fees" for the fiscal years ended December 31, 2007 and 2006 were $732,000, and $861,900, respectively, which amounts were incurred for the following categories of services: 2007 2006 Audit of directory publishing business ...Review of post-merger supplemental financial information ...Totals...

  • Page 40
    ...form of proxy to holders of at least the percentage of Windstream's outstanding capital stock required to elect the nominee and/or (ii) otherwise to solicit proxies from stockholders in support of such nomination. The Bylaws also provide that no other business may be brought before an annual meeting...

  • Page 41
    ...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 42
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 43
    WINDSTREAM CORPORATION ANNUAL REPORT ON FORM 10-K

  • Page 44

  • Page 45
    ... 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 46

  • Page 47
    ... 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 48
    ... provide local telephone, high-speed Internet, long distance, network access, and video services in sixteen states. The following map reflects Windstream's service territories. The Company's web site address is www.windstream.com. Windstream files with, or furnishes to, the Securities and Exchange...

  • Page 49
    Windstream Corporation Form 10-K, Part I Item 1. Business Immediately after the consummation of the spin off, Alltel Holding Corp. merged with and into Valor, with Valor continuing as the surviving corporation. The merger was accounted for using the purchase method of accounting for business ...

  • Page 50
    ...Windstream operates its communications businesses in order to deliver one-stop shopping to customers for a full range of communications products and services. In addition to its wireline, high-speed Internet and long distance service offerings, Windstream also provides network access, video services...

  • Page 51
    ... calling cards and simplified one-rate plans. Data and special access services primarily consist of retail high-speed Internet services and the provision of special access dedicated circuits. We provide high-speed Internet access using digital subscriber line technology for a monthly fee. Windstream...

  • Page 52
    ...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 packet data network, which will support services such as high-speed Internet...

  • Page 53
    ... 2005 concluded that high-speed Internet services were an "information service". As a result, the FCC provided price-cap companies the option to deregulate, and rate-of-return companies the option to de-tariff, high-speed Internet services. In addition, a number of carriers have begun offering voice...

  • Page 54
    ...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 Missoula plan because the plan...

  • Page 55
    ... for IP-enabled services, it has required VoIP providers that terminate or receive calls from the public switched network to contribute into the federal universal service fund and to comply with the Communications Assistance for Law Enforcement Act, Customer Proprietary Network Information and...

  • Page 56
    ..., "information services" functionally integrated with a telecommunications component and no longer subject to a higher level of regulation as compared to cable modem service. The order further provides price cap companies the option to deregulate high-speed Internet and rate-of-return companies the...

  • Page 57
    ...this plan basic residential local service rates are capped for two years. In 2005, the legislature passed the Alabama Communications Reform Act of 2005. Under this Reform Act, only stand-alone basic service, network access services and certain calling features remain regulated after February 1, 2007...

  • Page 58
    ...-basic services and providing customer service agreements to end-users. The new law caps rates for intrastate switched access services and deems an electing utility's rates, charges, earnings, and revenues to be just and reasonable. Wholesale interconnection arrangements between or among companies...

  • Page 59
    .... Under this plan, basic service rates can be increased annually as long as the increase does not exceed $2.00. Legislation was enacted in May 2004 that regulates Windstream Communications Southwest (approximately 72 percent of access lines in Oklahoma) as a rural telephone company, thereby allowing...

  • Page 60
    ... in state universal service revenue. These payments are intended to provide additional support, beyond the federal universal service receipts, for the high cost of operating in rural markets. For the year ended December 31, 2007, Windstream received approximately $104.0 million from the Texas USF...

  • Page 61
    ... inventoried including switch modules, wired and wireless voice and data transport equipment, outside plant products and pole-line hardware, high-speed Internet modems, in-building wiring and jacks, VoIP telephone systems and local area networking products. Windstream Supply experiences substantial...

  • Page 62
    ...inter-carrier compensation and/or universal service reform proposals by the Federal Communications Commission or Congress that results in a significant loss of revenue to Windstream; the restrictions on certain financing and other activities imposed by the tax sharing agreement with Alltel; material...

  • Page 63
    ...local service areas. Sources of competition to our local service business include, but are not limited to, wireless communications providers, cable television companies, resellers of local exchange services, interexchange carriers, satellite transmission service providers, competitive access service...

  • Page 64
    ... cable and high-speed Internet technology will result in additional local telephone line losses for us if customers choose VoIP for their local telephone service. Additional access line loss will also likely occur as customers shift from dial-up data services, which are often on a second phone line...

  • Page 65
    ... 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 7 percent of our revenues for the year ended December 31, 2007. A portion of such fees are...

  • Page 66
    ... the event that we receive the prior written consent of Alltel or the Internal Revenue Service has granted a favorable ruling to Alltel or us as to the effect of such action on the tax-free status of the spin off and merger transactions. To the extent that the tax-free status of the transactions is...

  • Page 67
    ... disruptions due to capacity limitations if changes in our customers' usage patterns for our high-speed Internet services result in a significant increase in capacity utilization, such as through increased usage of video or peer-to-peer file sharing applications. Disruptions may cause interruptions...

  • Page 68
    ..., vehicles and other Total OTHER OPERATIONS PROPERTY Windstream also holds a $12.7 million gross investment in property used in its wireless business, consisting primarily of central office equipment. Item 3. Legal Proceedings On October 16, 2006, the Company received a negative ruling in a binding...

  • Page 69
    ...that wireline business with Valor. A partial, prorated dividend was declared by Valor for the period in the third quarter 2006 prior to the merger. As of February 22, 2008, the approximate number of holders of common stock, including an estimate for those holding shares in brokers' accounts, was 173...

  • Page 70
    ... this plan over this period, we will also review other opportunities to enhance shareholder returns as they become available. The calculation of average price paid per share does not include any fees, commissions or other costs associated with the repurchase of such shares. Set forth below is a line...

  • Page 71
    ...Equity Securities Set forth 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...

  • Page 72
    ...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. The following table sets forth information...

  • Page 73
    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-29 through F-30 of the Financial Supplement, which is incorporated by reference herein. Item 7. Management's Discussion and Analysis of ...

  • Page 74
    ... accepted accounting principles. Windstream's management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company's internal control over financial reporting that occurred during the period covered by this annual report, and...

  • Page 75
    .... For information pertaining to the Audit Committee, refer to "Audit Committee Report" in Windstream's Proxy Statement for its 2008 Annual Meeting of Stockholders, which is incorporated herein by reference. Executive officers of the Company are as follows: Name Jeffery R. Gardner Business Experience...

  • Page 76
    ...Principal Accountant Fees and Services For information pertaining to fees paid to the Company's principal accountant and the Audit Committee's pre-approval policy and procedures with respect to such fees, refer to "Audit and Non-Audit Fees" in Windstream's Proxy Statement for its 2008 Annual Meeting...

  • Page 77
    ..., thereunto duly authorized. Windstream Corporation Registrant By /s/ Jeffery R. Gardner Jeffery R. Gardner, President and Chief Executive Officer Date: February 29, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 78
    ... Board of Directors and Shareholders of Windstream Corporation: Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 29, 2008 appearing in this 2007 Annual Report on Form 10-K of the Company...

  • Page 79
    ... to the net operating loss carry forwards acquired from Valor. (D) Valuation allowance for deferred taxes was established related to expected realization of net operating losses assumed from Valor in the merger. (E) During 2007, the Company incurred total merger and integration costs of $5.6 million...

  • Page 80
    ... 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 Group, Inc...

  • Page 81
    ... Alltel Corporation, Alltel Holding Corp. and Valor Communications Group, Inc. (incorporated herein by reference to Exhibit 10.3 to the Corporation's Current Report on Form 8-K dated July 17, 2006). Amended and Restated Credit Agreement dated February 27, 2007 among Windstream Corporation, certain...

  • Page 82
    ... Agents. Director Compensation Program (incorporated by reference to Exhibit 10.6 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2006). Form of Restricted Shares Agreement (Non-Employee Directors) entered into between Windstream Corporation and non-employee directors...

  • Page 83
    ...Corporation's Current Report on Form 8-K dated January 4, 2008) Code of Ethics (Working with Integrity) of Windstream Corporation Listing of Subsidiaries. Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. Power of Attorney. Certification of Chief Executive Officer...

  • Page 84
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 85
    WINDSTREAM CORPORATION FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007

  • Page 86

  • Page 87
    ... Financial Data Management's Responsibility for Financial Statements Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Annual Financial Statements: Consolidated Statements of Income for the years ended December 31, 2007, 2006...

  • Page 88
    .... Executive Summary of 2007 Results Windstream is a customer-focused telecommunications company that provides local telephone, high-speed Internet, long distance, network access, video and wireless services to approximately 3.2 million customers primarily located in rural areas in 16 states...

  • Page 89
    ... of services provided. Acquisitions - Immediately after the consummation of the spin off, the Company merged with and into Valor, with Valor continuing as the surviving corporation and Alltel Holding Corp. serving as the accounting acquirer. The resulting company was renamed Windstream Corporation...

  • Page 90
    ... bundled services. As of August 31, 2007, high-speed Internet was available to 95 percent of CTC's access lines, 75 percent of which could offer speeds up to 10Mb. Disposition - On November 30, 2007, Windstream completed the split off of its directory publishing business (the "publishing business...

  • Page 91
    ... and wholesale telecommunications services, including local telephone, high-speed Internet, long distance, network access and video services. The product distribution segment consists of warehouse and logistics operations, and it procures and sells telecommunications infrastructure equipment to both...

  • Page 92
    ... to Alltel Restructuring charges Total costs and expenses Segment income Access lines in service (excludes high-speed Internet lines) (c) Residential Business Wholesale (d) Special circuits Total access lines in service Average access lines in service Average revenue per customer per month (e) High...

  • Page 93
    ... calls, 911 access and outgoing local calls for 10 cents a minute. Additionally, the Company announced in the first quarter of 2007 a multi-year extension of an agreement with EchoStar Communications Corporation to offer DISH Network digital satellite television service to residential customers...

  • Page 94
    ... services for a flat monthly recurring charge. As discussed above, increases in long distance packages were offset by decreases in voice service revenues related to expanded area calling packages. The Company continues to introduce long distance rate plans that provide customers with various billing...

  • Page 95
    ... access charges Other Total switched access and USF Increases in switched access and USF revenues in 2007 are due primarily to the acquisitions of Valor and CTC. Federal USF programs, including common line and high-cost support, provide federal subsidies to cover the costs of services in order...

  • Page 96
    ...-year contracts. A significant portion of these revenues are expected to decline during 2008 as Alltel transitions to their own network services. Partially offsetting these year-over-year increases were declines in service fees and charges for customer premise equipment rentals. Directory Publishing...

  • Page 97
    ... in 2007 and 2006, respectively, primarily due to high-speed Internet customer growth and pricing increases on long distance services as discussed above. Future growth in average revenue per customer per month will depend on the Company's success in sustaining growth in sales of high-speed Internet...

  • Page 98
    ...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...

  • Page 99
    ... the decline in revenues associated with the continued access line losses, partially offset by increases in high-speed Internet customers and the favorable effects of reduced depreciation rates, as discussed above. Merger and integration costs related to the wireline operations, which are triggered...

  • Page 100
    ... in state USF support. These payments are intended to provide additional support, beyond the federal universal service receipts, for the high cost of operating in rural markets. For the year ended December 31, 2007, Windstream received approximately $104.0 million from the Texas USF. In 2008, the...

  • Page 101
    ... the sale of wireless services and equipment, 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...

  • Page 102
    ... costs primarily include charges for accounting, legal, broker fees and other miscellaneous costs associated with the acquisitions of Valor and CTC and the disposition of the publishing business. Other merger and integration costs include signage and other costs to rebrand the Company's offices...

  • Page 103
    ... paid to Alltel, and increases in high-speed Internet customers. Other Income, Net Set forth below is a summary of other income, net for the years ended December 31: (Millions) Dividend income Interest income on cash and short-term investments Mark-to-market of interest rate swap agreement Other...

  • Page 104
    ... the Kentucky state income tax rate. The increase in income tax expense in 2006 is primarily due to the increase in income before income taxes, partially offset by a settlement received from the Internal Revenue Service ("IRS") during 2006 related to taxes paid during 1997 through 2003. The Company...

  • Page 105
    ...will be funded through borrowings available under the revolving line of credit. The Company's board of directors has adopted a current dividend practice for the payment of quarterly cash dividends at a rate of $0.25 per share of the Company's common stock. This practice can be changed at any time at...

  • Page 106
    ... in the billing and collection of accounts receivable, purchases of inventory, and the payment of trade payables and taxes. Cash Flows - Investing Activities During 2007, cash used in investing activities included $546.8 million in net cash used to acquire CTC. This cash outlay was funded primarily...

  • Page 107
    ... $2.4 billion of borrowings under its senior secured credit agreement. In conjunction with the merger with Valor, the Company issued $800.0 million of subsidiary debt due 2013. The proceeds from these offerings were used in part to pay the special dividend to Alltel, to repay $780.6 million of debt...

  • Page 108
    ... 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. Windstream's pension plan utilizes various investment managers...

  • Page 109
    ... Benefits" caption below in our discussion of critical accounting policies and estimates for the results of the sensitivity analysis. Foreign Currency Risk Although the Company does not operate in foreign countries, the Windstream pension plan invests in international securities. Windstream...

  • Page 110
    ... rules governing the minimum contribution requirements for funding a qualified pension plan on an annual basis without paying excise tax penalties. Among other requirements, the Act changed the assumptions used to calculate the minimum lump-sum benefit payments, applied benefit restrictions to plans...

  • Page 111
    ..., while a one percent decrease in the rate would reduce our allocation of postretirement benefit cost by approximately $1.0 million. See Notes 2 and 8 for additional information on Windstream's pension and other postretirement plans. Useful Lives of Assets - The calculation of depreciation and...

  • Page 112
    ... No. 158 required the Company to recognize the funded status of its defined benefit pension and postretirement plans in its consolidated balance sheet as of December 31, 2006. Future changes in the funded status will be recognized in the year in which the change occurs through other comprehensive...

  • Page 113
    ...(R) will change the accounting treatment for certain specific items, including acquisition costs, acquired contingent liabilities, restructuring costs, deferred tax asset valuation allowances and income tax uncertainties after the acquisition date. For calendar year companies like Windstream, SFAS...

  • Page 114
    ...inter-carrier compensation and/or universal service reform proposals by the Federal Communications Commission or Congress that results in a significant loss of revenue to Windstream; the restrictions on certain financing and other activities imposed by the tax sharing agreement with Alltel; material...

  • Page 115
    ... share Balance sheet data Total assets Total long-term debt (including current maturities) Total equity Notes to Selected Financial Information: • Explanations for significant events affecting Windstream's historical operating trends during the periods 2005 through 2007 are provided in Management...

  • Page 116
    ... sold to Convergys Information Management Group, Inc. certain assets and related liabilities, including selected customer contracts and internally developed software, associated with Windstream's telecommunications information services operations. In connection with this sale, Windstream recorded...

  • Page 117
    ... by Windstream Corporation's management and the Board of Directors. The internal auditors and the independent registered public accounting firm periodically meet alone with the Audit Committee and have access to the Audit Committee at any time. Dated February 29, 2008 Jeffery R. Gardner President...

  • Page 118
    ... the Company's internal control over financial reporting as of December 31, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Dated February 29, 2008 Jeffery R. Gardner President and Chief Executive...

  • Page 119
    ... and total revenues and sales represent approximately 8.6 percent and 2.0 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2007. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Little Rock, Arkansas February 29, 2008...

  • Page 120
    ... included below) Cost of products sold Selling, general, administrative and other Depreciation and amortization Royalty expense to Alltel Restructuring charges Merger and integration costs Total costs and expenses Operating income Other income, net Gain on sale of publishing business Loss on...

  • Page 121
    ...for sale Directory publishing assets held for sale Total current assets Goodwill 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 Advance payments and customer...

  • Page 122
    ... net income to net cash provided from operations: Gain on sale of publishing business Extraordinary item, net of income taxes Cumulative effect of accounting change, net of income taxes benefit Depreciation and amortization Provision for doubtful accounts Stock-based compensation expense Pension...

  • Page 123
    ... (loss), net of tax: (Note 11) Change in employee benefit plans Unrealized holding losses on interest rate swaps Comprehensive income Additional transfers from Alltel (Note 7) Stock-based compensation expense Common shares retired pursuant to split off of publishing business (Note 3) Repurchase...

  • Page 124
    ... and providing superior customer service. The Company's subsidiaries provide local telephone, high-speed Internet, long distance, network access and video services in sixteen states. Telecommunications products are also warehoused and sold by the Company's product distribution subsidiary. Basis of...

  • Page 125
    ...Summary of Significant Accounting Policies and Changes, Continued: consolidated balance sheet as of December 31, 2007. These assets are available for immediate sale in their present condition, and an active program to locate a buyer has been initiated. Management's intention is to complete the sale...

  • Page 126
    ...consists of central office equipment, office and warehouse facilities and software to support the business units in the distribution of telecommunications products and wireless services. The costs of additions, replacements and substantial improvements, including related labor costs, are capitalized...

  • Page 127
    ... interconnection, long distance and custom calling feature revenues are recognized monthly as services are provided. Sales of communications products including customer premise equipment and modems are recognized when products are delivered to and accepted by customers. The Company accounts for...

  • Page 128
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies and Changes, Continued: expense over the period that each award vests. This expense is included in cost of services and selling, general, administrative and other expenses in the accompanying consolidated ...

  • Page 129
    ...and a Windstream shareholder. The Company received $506.7 million in consideration in exchange for its publishing business (See Note 3). In connection with the announcement of the transaction, Anthony J. deNicola, a general partner of WCAS, resigned from the Windstream Board of Directors on December...

  • Page 130
    ... and other services, while Windstream will continue to provide local phone service, long distance and high-speed 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...

  • Page 131
    ... service to its customers. The effect of the change on depreciation rates in the operations discussed above resulted in a decrease in depreciation expense of $17.8 million and an increase in net income of $11.4 million during the year ended December 31, 2007. Effective January 1, 2006, the Company...

  • Page 132
    ... After Tax Effects The Company does not expect or anticipate a significant increase or decrease in the unrecognized tax benefits reported above over the next twelve months. The total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $0.8 million, net of...

  • Page 133
    ...years prior to 2004. The Company has identified state tax returns in Arkansas, Florida, Georgia, Kentucky, Nebraska, North Carolina and Texas as "major" taxing jurisdictions. During the quarter ended December 31, 2007, the Company and the Internal Revenue Service ("IRS") reached a settlement related...

  • Page 134
    ...of this accounting change in 2005 resulted in a non-cash charge of $7.4 million, net of income tax benefit of $4.6 million, and was included in net income for the year ended December 31, 2005. During 2007, Windstream negotiated new contract terms with several underlying service providers. Changes in...

  • Page 135
    ... Accounting Policies and Changes, Continued: expand the use of fair value measurements in financial statements. It emphasizes that fair value is a market-based measurement and not an entity-specific measurement, and that it should be based on an exchange transaction in which a company sells...

  • Page 136
    ... firm and Windstream shareholder. To facilitate the split off transaction, Windstream contributed the publishing business to a newly formed subsidiary ("Holdings"). Holdings paid a special cash dividend to Windstream in an amount of $40.0 million, issued additional shares of Holdings common stock to...

  • Page 137
    ... 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 to Alltel Holding Corp. in exchange for: (i) newly issued common stock of the Company (ii) the payment of a special dividend to Alltel in...

  • Page 138
    ... and liabilities transferred. In connection with the spin off, the Company and Alltel entered into a tax sharing agreement that allocates responsibility for (i) filing tax returns and preparing other tax-related information and (ii) the liability for payment and benefit of refund or other recovery...

  • Page 139
    ... Alltel and merger with Valor occurred as of January 1, 2005: (Millions, except per share amounts) Revenues and sales Income before extraordinary item and cumulative effect of accounting change Net income Earnings per share before extraordinary item and cumulative effect of accounting change: Basic...

  • Page 140
    ... to Valor deferred taxes Balance at December 31, 2007 Wireline $ 1,218.4 746.3 $ 1,964.7 255.1 4.1 $ 2,223.9 Product Distribution $ 0.3 $ 0.3 $ 0.3 Other $ $ 52.2 Totals $ 1,218.7 746.3 $ 1,965.0 307.3 4.1 $ 2,276.4 $ 52.2 As of January 1, 2007, the Company completed the annual impairment reviews...

  • Page 141
    ... customer list CTC wireless customer list Other wireline customer lists Cable franchise rights Amortization Methodology accelerated sum-of-years digits accelerated sum-of-years digits accelerated sum-of-years digits straight-line straight line Estimated Useful Life 9 years 9 years 7 years 10 years...

  • Page 142
    ... (28.4) 5,488.4 (32.2) Total long-term debt $ 5,331.2 $ 5,456.2 Weighted average interest rate 7.7% 7.8% Weighted maturity 7.4 years 7.8 years (a) Pursuant to the sale of its publishing business in November 2007, the Company retired $210.5 million of Tranche A senior secured debt under its credit...

  • Page 143
    ... of income for the year ended December 31, 2006. In order to mitigate the interest rate risk inherent in its variable rate senior secured credit facilities, the Company entered into four identical pay fixed, receive variable interest rate swap agreements totaling $1,600.0 million in notional...

  • Page 144
    ...Holding Corp. The Company recorded this non-cash transfer from Alltel as an adjustment to additional paid-in capital. Pursuant to the split off of the directory publishing business (See Note 3), Windstream and Holdings executed a non-cash debt-for-debt exchange whereby Windstream received securities...

  • Page 145
    ... and life insurance benefits for eligible employees. Employees share in, and the Company funds, the costs of these plans as benefits are paid. Employees of the publishing business began participating in the pension plan on January 1, 2005. As a result of the split off of the publishing business...

  • Page 146
    ...line basis over five years. Unrecognized actuarial gains and losses below the 17.5 percent corridor are amortized over the average remaining service life of active employees, which is approximately 11 years and 13 years for the pension and postretirement benefit plans, respectively. The Company uses...

  • Page 147
    ... 8. Employee Benefit Plans and Postretirement Benefits, Continued: Actuarial assumptions used to calculate the pension and postretirement expense were as follows for the years ended December 31: Pension Benefits 2007 2006 Discount rate Expected return on plan assets Rate of compensation increase...

  • Page 148
    ...the years ended December 31: Pension Benefits 2007 2006 Discount rate Expected return on plan assets Rate of compensation increase 6.36% 8.00% 3.50% 5.92% 8.50% 3.50% Postretirement Benefits 2007 2006 6.38% 5.90% - In developing the expected long-term rate of return assumption, Windstream evaluated...

  • Page 149
    ...deemed actuarially equivalent to the benefits provided under Medicare Part D. The Company sponsors an employee savings plan under section 401(k) of the Internal Revenue Code, which covers substantially all salaried employees and certain bargaining unit employees. Employees may elect to contribute to...

  • Page 150
    ...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, 2007, the balance...

  • Page 151
    ... or by January 1, 2008 for employees who remained with the Company. Non-vested Windstream restricted stock activity for the years ended December 31, 2007 and 2006 was as follows: (Thousands) Number of Shares Non-vested at July 17, 2006 Granted Assumed from Valor acquisition Vested Forfeited Non...

  • Page 152
    ... a component of compensation targets. Transaction costs primarily include charges for accounting, legal, broker fees and other miscellaneous costs associated with the acquisitions of Valor and CTC and the disposition of the publishing business. Other merger and integration costs include signage and...

  • Page 153
    ... Each of these payments will be funded through operating cash flows. Merger, integration and restructuring charges decreased net income $8.8 million, $36.0 million and $34.1 million for the years ended December 31, 2007, 2006 and 2005, respectively, giving consideration to tax benefits on deductible...

  • Page 154
    ...for the years ended December 31: (Millions) Net Income Other comprehensive income (loss): Change in net actuarial loss for employee benefit plans Amortization of transition obligation Recognition of net actuarial loss Amortization of prior service cost Income tax expense Unrealized holding losses on...

  • Page 155
    ...the years ended December 31: 2007 Statutory federal income tax rates Increase (decrease): State income taxes, net of federal benefit Adjustment of deferred taxes for legal entity restructuring Reversal of income tax contingency reserves Nontaxable gain on sale of publishing business Costs associated...

  • Page 156
    ... services, including local telephone, high-speed Internet, long distance, and other 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...

  • Page 157
    ... of its directory publishing business (See Note 3). Prior to the split off, the Company's publishing subsidiary coordinated advertising, sales, printing, and distribution for 356 telephone directory contracts in 34 states. Immediately after the consummation of the spin off and merger with Valor in...

  • Page 158
    ... for the years ended December 31: (Millions) Revenues and sales: Total business segments Less: affiliated eliminations (1) Total revenues and sales Income before income taxes: Total business segment income Merger and integration costs Other income, net Gain on sale of publishing business Loss on...

  • Page 159
    ... 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: Wireless Directory publishing Telecommunications information services Total...

  • Page 160
    ...: Cost of services Cost of products sold Selling, general, administrative and other Depreciation and amortization Merger, integration and restructuring charges Total costs and expenses Operating income Earnings from consolidated subsidiaries Other income, net Gain on sale of publishing business...

  • Page 161
    ... the Year Ended December 31, 2006 (Millions) Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services Cost of products sold Selling, general, administrative and other Depreciation and amortization Royalty expense to Alltel Merger, integration...

  • Page 162
    ...Alltel Merger, integration and restructuring charges Total costs and expenses Operating income Earnings from consolidated subsidiaries Other income, net Intercompany interest income (expense) Interest expense Income before income taxes and cumulative effect of accounting change Income taxes (benefit...

  • Page 163
    ... 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, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest...

  • Page 164
    ... and Shareholders' Equity Current Liabilities: Current maturities of long-term debt Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Liabilities related to publishing assets held for sale Total...

  • Page 165
    ... to net cash provided from operations: Gain on sale of publishing business Depreciation and amortization Provision for doubtful accounts Equity in earnings (losses) from subsidiaries Stock-based compensation expense Pension and postretirement benefits expense Deferred taxes Other, net Changes in...

  • Page 166
    ... Pension and postretirement benefits expense Deferred taxes Other, net Changes in operating assets and liabilities, net: Net cash provided from (used in) operations Cash Flows from Investing Activities: Additions to property, plant and equipment Cash acquired from Valor Other, net Net cash provided...

  • Page 167
    ... Activities: Dividends paid to Alltel prior to spin off Repayment of debt 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...

  • Page 168
    ... the split off of its directory publishing business in a tax-free transaction (See Note 3). As a result of completing this transaction, Windstream recorded a gain on the sale of its publishing business of $451.3 million in the fourth quarter of 2007. During the third quarter of 2006, the Company...

  • Page 169
    ... operating performance. Free cash flow is defined as net cash provided from operations less net cash used in the procurement of property, plant and equipment. The Company believes free cash flow provides the investor useful information about cash available to pay dividends. Dividend payout ratio is...

  • Page 170
    ... and sales from current businesses Free Cash Flow for the twelve months ended December 31, 2007 (Dollars in millions) Net cash provided from operations Additions to property, plant and equipment Free cash flow Dividends paid on common shares Dividend payout ratio Share repurchase plan (Dollars...

  • Page 171
    Jeff Gardner addresses stockholders at the company's inaugural annual meeting in Little Rock in May 2007. INVESTOR INFORMATION Corporate Headquarters Windstream 4001 Rodney Parham Road Little Rock, AR 72212 501-748-7000 www.windstream.com Executive Officers Jeffery R. Gardner President and Chief ...

  • Page 172
    4001 Rodney Parham Road Little Rock, AR 72212 windstream.com