Windstream 2008 Annual Report Download

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2008 ANNUAL REPORT
Proxy Statement and Form 10-K

Table of contents

  • Page 1
    2008 ANNUAL REPORT Proxy Statement and Form 10-K

  • Page 2
    ..., as these speeds represented almost 70 percent of gross adds in the fourth quarter. We expanded our digital TV customer base in 2008 to approximately 274,000, or 15 percent of primary residential lines last year. Bundling the DISH TV product with Windstream phone and Internet services meaningfully...

  • 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
    ... materials. By Order of the Board of Directors, John P. Fletcher Secretary Little Rock, Arkansas March 23, 2009 WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE VOTE AS SOON AS POSSIBLE TO RECORD YOUR VOTE PROMPTLY. PRIOR TO THE MEETING YOU MAY VOTE ON THE INTERNET, BY TELEPHONE OR BY MAIL.

  • 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 2009 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 9, 2009 has been fixed as the record date...

  • Page 9
    Windstream's independent registered public accountants for 2009 and (ii) two stockholder proposals. By abstaining from voting for the foregoing, shares would not be voted either for or against, but would be counted for quorum purposes. Under the current rules of the New York Stock Exchange ("NYSE"),...

  • Page 10
    ... of the Board and of the Executive Committee of USTelecom, a telecom trade association. Jeffery R. Gardner, age 49, 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. from...

  • Page 11
    ...of Alltel Holding Corp. from June 2006 to July 2006. Mr. Montgomery also serves as Chairman of the Compensation Committee and is a member of the Governance Committee. Mr. Montgomery has been a private investor since 1999. From 1989 to 1999, Mr. Montgomery was Chief Executive Officer of SA-SO Company...

  • Page 12
    ..., 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 13
    .... 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 14
    ... six months all shares received, net of tax payment obligations, upon vesting of restricted stock or the exercise of stock options. Based on the foregoing, the table below sets forth the number of shares of Common Stock that each named executive officer is expected to own by the 2009 Annual Meeting...

  • Page 15
    ... DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information, as of March 9, 2009, 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 2008, and by all directors and executive officers...

  • Page 16
    ...COMMITTEE REPORT ON EXECUTIVE COMPENSATION This report provides information concerning the Compensation Committee of Windstream Corporation's Board of Directors. The Compensation Committee's Charter is available on the Investor Relations page of Windstream Corporation's website at www.windstream.com...

  • Page 17
    AUDIT COMMITTEE REPORT This report provides information concerning the Audit Committee of Windstream Corporation's Board of Directors. The Audit Committee's Charter is available on the Investor Relations page of Windstream Corporation's website at www.windstream.com/investors. The Audit Committee is...

  • Page 18
    ... 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 and compensation levels. During 2008, Watson Wyatt performed no other services for the Company outside of these services...

  • Page 19
    ...has also entered into an employment agreement with Mr. Gardner, and certain executive officers are eligible to participate, on a grandfathered-basis, in the Windstream Pension Plan and the related Windstream Benefit Restoration Plan. 2008 Compensation Philosophy. The Compensation Committee considers...

  • Page 20
    ... for country club memberships and financial planning thus resulting in a reduction in total direct compensation for all named executive officers. The Compensation Committee implemented these actions for 2009 based upon the recommendation of management of Windstream in response to the difficult...

  • Page 21
    ...to pay dividends on all unvested shares of restricted stock is to keep Windstream's compensation competitive with the equity pay practices of the rural local exchange carriers in Windstream's comparative group. For the periods for which public information is available, none of such peers have placed...

  • Page 22
    ... with key long-term company objectives and to preserve the deductibility of compensation related to awards under Section 162(m) of the Internal Revenue Code. As discussed above, Windstream has adopted minimum share ownership guidelines that apply to Mr. Gardner and all other executive officers. The...

  • Page 23
    .... Prior to 2009, the potential matching contribution was up to 6% of a participant's compensation. The Compensation Committee maintains the 401(k) plan in order to provide employees with an opportunity to save for retirement with pre-tax dollars. The 401(k) plan also allows Windstream to fund its...

  • Page 24
    ... During 2008, the primary perquisites available to Mr. Gardner and other named executive officers were the personal use of corporate aircraft, the payment of the initiation and ongoing fees at a country club, and the reimbursement of up to $5,000 in taxable dollars for financial planning and related...

  • Page 25
    ... for service as an executive officer and replacement and one-time grants in connection with the spin-off and merger. (2) Amount includes no above-market earnings on a deferred compensation balance of approximately $17.4 million. In the case of a change-in-control, Mr. Frantz would receive a lump sum...

  • Page 26
    ...was not a named executive officer in 2006 or 2007. (2) All stock award amounts for restricted stock granted by Windstream reflect 2008 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, 2008. (3) No options...

  • Page 27
    ...,000 228,000 Name Jeffery R. Gardner Brent Whittington John P. Fletcher Richard J. Crane Robert G. Clancy Estimated Future Payouts Under Equity Incentive Plan Awards (1) Target (#) (2) 327,272 40,909 27,272 17,045 11,363 All Other Stock Awards: Number of Shares of Stock or Units (#) (3) -040,909...

  • Page 28
    ... awards of stock options. (2) Market value calculated using the closing price of Windstream common stock on December 31, 2008, which was $9.20. (3) Performance-based shares vest ratably in annual one-third (1/3) increments over the three-year period ending August 1, 2009 if Windstream also achieves...

  • Page 29
    ... 2005, which will end on December 31, 2010. Of our named executive officers, only Messrs. Gardner, Clancy and Crane were eligible for continuing accruals under the Pension Plan as of the end of 2008. The Pension Plan's accrued benefit is payable in the form of a monthly life annuity following normal...

  • Page 30
    ... employees who attained age 40 with two years of vesting service as of December 31, 2005, which will end on December 31, 2010. Of Windstream's named executive officers, only Messrs. Gardner, Clancy and Crane participated in the pension benefit of the BRP as of the end of 2008. The pension benefit...

  • Page 31
    ... business day of the following calendar year, plus 200 basis points (i.e. 5.25% for 2008). 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 32
    ..." for 2008. 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...

  • Page 33
    ... is based on the closing price of Windstream's common stock on December 31, 2008 of $9.20 per share. Accelerated Vesting of Restricted Shares. In the event that an executive officer listed above died or became permanently disabled (as determined by the Compensation Committee in its sole discretion...

  • Page 34
    ... would provide benefits to the named executive 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...

  • Page 35
    ...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 36
    ... 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 37
    ...were prepared for Alltel Holding Corp in connection with the Alltel spin-off and Valor merger. Information regarding PwC's fees for 2007 and 2008 is provided below under the caption "Audit and Non-Audit Fees." Representatives of PwC are expected to be present at the 2009 Annual Meeting and will have...

  • Page 38
    ... Commission rules and stock exchange listing standards do not provide shareholders with sufficient mechanisms for providing input to boards on senior executive compensation. In contrast, in the United Kingdom, public companies allow shareholders to cast a vote on the "directors' remuneration report...

  • Page 39
    ... Fund. RESOLVED: The shareholders of Windstream Corporation ("Company") urge the Board of Directors to amend the Company's by laws, effective upon the expiration of current employment contracts, to require that an independent director - as defined by the rules of the New York Stock Exchange ("NYSE...

  • Page 40
    ... since the inception of Windstream in 2006. We also have an independent and active Lead Director who serves as Chair of the Governance Committee, presides over regular executive sessions of the independent directors that generally occur at the end of each regular Board meeting, and oversees the self...

  • Page 41
    ... the Corporate Secretary at 4001 Rodney Parham Road, Little Rock, Arkansas 72212, prior to November 23, 2009. 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 2010 Annual Meeting...

  • Page 42
    ... of internal control over financial reporting for the fiscal years ended December 31, 2008 and December 31, 2007, and the review of the financial statements included in Windstream's Forms 10-Q for each of such fiscal years were $2,676,919 and $3,461,157, respectively. Audit-Related Fees The...

  • Page 43
    ... or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, such stockholder or any such stockholder associated person with respect to any share of Windstream stock; and (3) as to the beneficial owner, if any, on...

  • Page 44
    ...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 45
    WINDSTREAM CORPORATION ANNUAL REPORT ON FORM 10-K

  • Page 46

  • Page 47
    ... 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 48

  • Page 49
    ... 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 50
    ... customer service. The Company's subsidiaries provide local telephone, high-speed Internet, long distance, network access, and video services in sixteen states. The shaded areas in the following map reflect Windstream's service territories. The Company's web site address is www.windstream.com...

  • Page 51
    ...competitive bundled services. The former CTC markets have high-speed Internet availability to 95 percent of its access lines, 75 percent of which can offer speeds up to 10Mb. As previously discussed, on July 17, 2006, Alltel Holding Corp. merged with and into Valor, with Alltel Holding Corp. serving...

  • Page 52
    ... related features, high-speed Internet service, long distance, data and special access, switched access and interconnection, and video services. The following table is a summary of the wireline segment operations for the years ended December 31: Wireline Segment Percent of wireline revenues to total...

  • Page 53
    .... 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's Greenstreak product offers high-speed...

  • Page 54
    ... channels, including customer service representatives and technicians, local retail stores, e-commerce, and telemarketing, supported by direct mail, mass media advertising (newspaper, television, and radio), bill inserts, community events and click through advertising on targeted websites. We...

  • Page 55
    ...high-speed Internet customers. This increased the Company's high-speed Internet customer base to over 978,000 customers at December 31, 2008, which represents a penetration rate of 32 percent of total access lines in service, and 44 percent of residential access lines in service. Although high-speed...

  • Page 56
    Windstream Corporation Form 10-K, Part I Item 1. Business Inter-carrier Compensation The Company's local exchange subsidiaries currently receive compensation from other telecommunications providers, including long distance companies, for origination and termination of interexchange traffic through ...

  • Page 57
    ...information service," rather than a cable service or a telecommunications service. This ruling was upheld by the United States Supreme Court. In addition, on September 23, 2005, the FCC released an order declaring Digital Subscriber Line ("DSL") offerings, as well as other high-speed Internet access...

  • Page 58
    ... entering new agreements containing exclusive video service rights for multi-dwelling units. Currently this order is being challenged in court, but assuming it goes into effect, the order expands Windstream's potential customer base for video, voice, and high-speed internet services in the near term...

  • Page 59
    ...-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 60
    .... 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 61
    ... in high cost rural areas and to qualifying low-income and disabled customers. By order of the Texas PUC, the Texas USF distributes support to eligible carriers serving areas identified as high cost, on a per-line basis. Texas USF support payments are based on the number of actual lines in service...

  • Page 62
    ... 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 competition throughout its non-affiliate customer base from other distribution companies and from direct sales by...

  • Page 63
    ... Five Years", the Company's wireless and publishing services have ceased. Windstream's telecommunications information services operations consisted solely of providing data processing and outsourcing services to Valor. At the time of the merger with Valor in 2006, the Company ceased providing these...

  • Page 64
    ... 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, electric utilities, competitive access...

  • Page 65
    ... voice and high-speed Internet products, subjects us to service quality, service reporting and other obligations, and exposes us to the reduction of revenue from changes to the universal service fund or the inter-carrier compensation system. As a provider of wireline communication services, we have...

  • Page 66
    ... 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 percent of our revenues for the year ended December 31, 2008. A portion of such fees are...

  • Page 67
    ... in 2010 for the January 1, 2009 valuation period to meet minimum funding requirements. Returns generated on plan assets have historically funded a large portion of the benefits paid under the Company's pension plan. Continued returns below our currently estimated long term rate of return of...

  • Page 68
    ... communications companies are material to its operations and their financial difficulties may adversely affect Windstream. Windstream originates and terminates calls for long distance carriers and other interexchange carriers over Windstream's network in exchange for access charges that represent...

  • Page 69
    ...the market price of Windstream's common stock by decreasing the after tax yield of holding the stock. Item 1B. Unresolved Staff Comments No reportable information under this item. Item 2. Properties The Company's properties do not provide a basis for description by character or location of principal...

  • Page 70
    ....6 Land Building and improvements Software, including internally developed Furniture, vehicles and other equipment Total Item 3. Legal Proceedings On August 14, 2008, Windstream Corporation, Windstream Nebraska, Inc., Windstream Systems of the Midwest, Inc., and Windstream Benefits Committee filed...

  • Page 71
    ... of Windstream's common stock are listed and traded on the New York Stock Exchange and trade under the symbol WIN. The following table reflects the range of high, low and closing prices of Windstream's common stock as reported by Dow Jones & Company, Inc. for each quarter in 2008 and 2007. Dividend...

  • Page 72
    ...day of public trading of Valor shares, 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: American Tower Corporation, AT&T Inc...

  • Page 73
    ...Equity and Related Stockholder Matters and Issuer Purchases of 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...

  • Page 74
    ... 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 about Windstream's equity compensation plans as of February 12, 2009...

  • Page 75
    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-33 through F-34 of the Financial Supplement, which is incorporated by reference herein. Item 7. Management's Discussion and Analysis of ...

  • Page 76
    ... 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 77
    ... Committee Report" in Windstream's Proxy Statement for its 2009 Annual Meeting of Stockholders, which is incorporated herein by reference. Executive officers of the Company as of December 31, 2008, were as follows: Name Jeffery R. Gardner Business Experience President and Chief Executive Officer...

  • Page 78
    Windstream Corporation Form 10-K, Part III Item 11. Executive Compensation For information pertaining to Executive Compensation, refer to "Compensation Committee Report on Executive Compensation" and "Management Compensation" in Windstream's Proxy Statement for its 2009 Annual Meeting of ...

  • Page 79
    ... duly authorized. Windstream Corporation Registrant By /s/ Jeffery R. Gardner Jeffery R. Gardner, President and Chief Executive Officer Date: February 19, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 80
    ... 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 19, 2009 appearing in this 2008 Annual Report on Form 10-K of the Company...

  • Page 81
    ...realization of net operating losses assumed from Valor in the merger. (F) The Company incurred merger and integration costs of $6.2 million related to the acquisition of CTC wireline operations during the twelve months ended December 31, 2008, primarily related to system conversion costs. During the...

  • Page 82
    ..., which consisted of severance and employee benefit costs related to a workforce reduction, and $11.2 million in investment banker, audit and legal fees associated with the announced split off of its directory publishing business. (L) Valor integration charges included in goodwill in the amount...

  • Page 83
    ... Enterprises Finance Corp., as Issuers, Valor Communications Group, Inc. and the other guarantors thereto, and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 to Quarterly Report of Valor Communications Group, Inc. on Form 10-Q for the quarter ended March 31...

  • Page 84
    .... (incorporated herein by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q of Valor Communications Group, Inc for the quarter ended March 31, 2005). Amended and Restated Credit Agreement dated February 27, 2007 among Windstream Corporation, certain lenders party thereto, JPMorgan Chase Bank...

  • Page 85
    ...Continued Number and Name 10.4 10.5 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...

  • Page 86
    ...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 87
    WINDSTREAM CORPORATION FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008

  • Page 88

  • Page 89
    WINDSTREAM CORPORATION INDEX TO FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008 Management's Discussion and Analysis of Financial Condition and Results of Operations Selected Financial Data Management's Responsibility for Financial Statements Management's ...

  • Page 90
    ... company that provides local telephone, high-speed Internet, long distance, network access, and video services to approximately 3.0 million customers primarily located in rural areas in 16 states. Among the highlights in 2008: • In the twelve month period ended December 31, 2008, the Company...

  • Page 91
    ... industry from cable television providers, wireless communications providers, and providers using other emerging technologies. The Company is also exposed to regulatory uncertainty in state and federal Universal Service Fund ("USF") programs and inter-carrier compensation. Pending regulatory...

  • Page 92
    ... 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. As...

  • Page 93
    ... distribution segments, and other operations. The Company's wireline segment consists of its retail 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...

  • Page 94
    ... 2007. The decrease in 2008 is primarily due to the sale of the Company's directory publishing business in the fourth quarter of 2007, as discussed above, and declines associated with continued access line losses, partially offset by increases in high-speed Internet customers and the acquisition of...

  • Page 95
    ... (Millions, access lines and customers in thousands) Revenues and sales: Voice service Long distance Data and special access Switched access and USF Miscellaneous Directory publishing rights Product sales Total revenues and sales Costs and expenses: Cost of services Cost of products sold Selling...

  • Page 96
    ... of an agreement with EchoStar Communications Corporation through mid-year 2010 to offer DISH Network digital satellite television service to residential customers as part of a bundled product offering. Digital television service bundled with Windstream voice and high-speed Internet service offers...

  • Page 97
    ... plans that offer a defined number of minutes or unlimited toll calling for a fixed monthly fee. Partially offsetting these increases were declines in billings on a per minute of use basis ("one plus calling") primarily attributable to customer migration to long distance packaged plans and wireless...

  • Page 98
    ... access revenues, which primarily represent monthly flat-rate end user charges for dedicated circuits, and virtual networking services. Increases in special access revenues were primarily attributable to strong demand from wireless and other carriers, while increases in next generation data services...

  • Page 99
    ...Millions) Due to Valor acquisition Due to CTC acquisition Due to increases in computer sales to residential high-speed Internet customers Due to increases in customer premise equipment sales to business customers Due to changes in high-speed Internet modem sales Other Total product sales F-11 $ 12...

  • Page 100
    ... high-speed Internet and other enhanced services to new and existing customers. Cost of Services Cost of services primarily consist of network operations costs, including salaries and wages, employee benefits, materials, contract services and information technology costs to support the network. Cost...

  • Page 101
    ...-speed Internet customers Due to changes in high-speed Internet modem sales Other Total cost of products sold $ 40% $ 55% Cost of products sold increased in 2008 primarily due to costs associated with computer sales to residential customers to promote the Company's high-speed Internet services...

  • Page 102
    ... from Alltel and merger with Valor, Windstream no longer incurs this charge as it discontinued the use of the Alltel brand name following a brief transitional rebranding period. Restructuring Charges The Company incurred $8.3 million in severance and employee-related costs in 2008, primarily related...

  • Page 103
    ... switched and special access rates and high-speed Internet service offerings and regulates the rates that ILECs may charge for the use of their local networks in originating or terminating interstate and international transmissions. State PSCs have jurisdiction over matters including local service...

  • Page 104
    ... were subject to rate-of-return regulation by the FCC. Inter-carrier Compensation On November 5, 2008, the FCC released an order affirming a prior decision regarding compensation payable to local exchange companies for the termination of dial-up Internet Service Provider bound traffic. Also...

  • Page 105
    ... the accompanying consolidated balance sheet related to this issue, which we expect to pay in the first quarter of 2009 (see Note 13). Texas USF Large Company High Cost Program Settlement The rules governing the Texas universal service fund provide for a review of the fund every three years. In the...

  • Page 106
    ...: Directory publishing Telecommunications information services Total revenues and sales Costs and expenses: Cost of services Cost of products sold Selling, general, administrative and other Depreciation and amortization Restructuring charges Total costs and expenses Segment income (loss) $ 2008...

  • Page 107
    ... quarter of 2008, the Company determined not to use certain software acquired in the CTC acquisition; therefore, we recognized a $5.4 million non-cash charge to abandon this asset, of which $0.8 million was related to the wireless business. Summary of Liability Activity Related to Both Merger and...

  • Page 108
    ... the sale of the Company's investments in non-consolidated cellular partnerships acquired through the merger with Valor in 2006. Additionally, the change in other income, net in 2008 and 2007 was a result of the change in fair value of the undesignated portion of an interest rate swap agreement, as...

  • Page 109
    ... net assets sold to the transaction price less costs to sell. Wireless business income before taxes was $9.7 million and $1.2 million in 2008 and 2007, respectively. Additionally, the Company made additional tax payments of $14.8 million related to the excess of consideration received over tax basis...

  • Page 110
    ... the 2006 Act on plans not meeting the 80 percent funding level. 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 the discretion...

  • Page 111
    ...These increases were partially offset by changes in working capital requirements, including timing differences in the billing and collections of accounts receivable, payment of trade payables and purchases of inventory. During 2008, the Company generated sufficient cash flows from operations to fund...

  • Page 112
    ...-speed Internet communication services. During each of the three years, the Company funded its capital expenditures through internally generated funds. Capital expenditures in 2008 were partially offset by $56.7 million and $17.8 million in net proceeds received on the sale of the wireless business...

  • Page 113
    ... $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 114
    ...A hypothetical increase of 100 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $6.3 million. Actual results may differ from this estimate. Equity Risk The Company utilizes various financial institutions to invest its cash on hand in short-term securities...

  • Page 115
    ...providing access to or usage of the Company's networks and facilities. 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. Sales of communications products, including customer premise equipment...

  • Page 116
    ... Act changed the 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 2006 Act changed the assumptions used to calculate the minimum lump-sum benefit payments, applied benefit...

  • Page 117
    ... fair value of its indefinite-lived intangible assets using a combination of cost-based and income-based approaches. The Company performs its impairment analysis on January 1st of each year. In addition, as a result of the sale of the publishing business, Windstream performed an impairment analysis...

  • Page 118
    ... 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 119
    ...and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Windstream is...

  • Page 120
    ... risk in plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. Upon implementation, Windstream will provide expanded disclosures in its December 31, 2009 Form 10-K. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and...

  • Page 121
    ... Extraordinary item Cumulative effect of accounting change Net income Dividends declared per common 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...

  • Page 122
    ... Asset Retirement Obligations". The cumulative effect of this accounting change resulted in a one-time non-cash charge of $7.4 million, net of income tax benefit of $4.6 million. Notes to Selected Financial Information, Continued: • During 2004, Windstream reorganized its operations and support...

  • Page 123
    ... Board of Directors, is composed entirely of independent 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...

  • Page 124
    ... the Company's internal control over financial reporting as of December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Dated February 19, 2009 Jeffery R. Gardner President and Chief Executive...

  • Page 125
    ...our audits provide a reasonable basis for our opinions. As described in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for pension and other post-retirement benefit costs in 2006. A company's internal control over financial reporting is a process...

  • Page 126
    ..., 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 127
    ... assets of discontinued operations Total Assets Liabilities and Shareholders' Equity Current Liabilities: Current maturities of long-term debt Current portion of interest rate swaps Accounts payable Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current...

  • Page 128
    ... of CT Communications, net of cash acquired Cash acquired from Valor Disposition of wireless business Disposition of directory publishing business Disposition of acquired assets held for sale Other, net Net cash used in investing activities Cash Flows from Financing Activities: Dividends paid on...

  • Page 129
    ... tax: (See 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 directory business (Note 3) Stock repurchase Other, net...

  • Page 130
    ... additional products and services 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...

  • Page 131
    ... in acquired assets held for sale in the accompanying consolidated balance sheet as of December 31, 2007. During 2008, Windstream received net proceeds of $17.3 million, which approximated the fair value at the date of acquisition, on the sale of the corporate headquarters building, a license...

  • Page 132
    ... removed from service. These asset retirement obligations, totaling $44.6 million and $45.2 million for the years ended December 31, 2008 and 2007, respectively, are included in other long term liabilities in the accompanying consolidated balance sheets. There was no significant activity related to...

  • Page 133
    ...in conjunction with issuing debt, Windstream entered into four identical pay fixed, receive variable interest rate swap agreements totaling $1,600.0 million in notional value in order to mitigate the interest rate risk inherent in its variable rate senior secured credit facilities. The four interest...

  • Page 134
    ... 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 135
    ... of its directory publishing business in a tax-free transaction with entities affiliated with Welsh, Carson, Anderson and Stowe ("WCAS"), a private equity investment firm and a Windstream shareholder. The Company received $506.7 million in consideration in exchange for its publishing business (see...

  • Page 136
    ...subsidiaries totaled $61.9 million in 2006. The cost of equipment sold to the wireline subsidiaries is included, principally, in wireline plant in the consolidated financial statements. Prior to its split off in 2007, the Company's directory publishing subsidiary, Windstream Yellow Pages, contracted...

  • Page 137
    ... to this new financial statement presentation. Discontinuance of the Application of SFAS No. 71 - Historically, the Company's incumbent local exchange carrier ("ILEC") operations, except for certain operations acquired in Kentucky and in Nebraska, followed the accounting for regulated enterprises...

  • Page 138
    ... entity's own assumptions would be considered the lowest level. See Note 6 for information and related disclosures regarding Windstream's fair value measurements. In February 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. ("FSP") FAS 157-2, "Effective Date of...

  • Page 139
    ... local income tax examinations by tax authorities for years prior to 2004. The Company has identified Arkansas, Florida, Georgia, Kentucky, Nebraska, North Carolina and Texas as "major" state taxing jurisdictions. During the year ended December 31, 2007, the Company and the Internal Revenue Service...

  • Page 140
    ...of the implementation of SFAS No. 158 requires companies to annually measure plan assets and obligations in order to determine the funded status of its plans as of the date of the company's fiscal year-end. Windstream has historically used its fiscal year-end of December 31st as the measurement date...

  • Page 141
    ..., including target allocation percentages, and significant concentrations of risk in plan assets. • • FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. Upon implementation, Windstream will provide expanded disclosures in its December 31, 2009 Form 10-K. F-53

  • Page 142
    .... The access lines and high-speed Internet customers added through the acquisition significantly increased Windstream's presence in North Carolina and provided the opportunity to generate significant operating efficiencies with contiguous Windstream markets. The transaction was accounted for as...

  • Page 143
    ... million of long-term debt that had been issued by the Company's wireline operating subsidiaries. Also in connection with the Contribution, the Company borrowed approximately $2.4 billion through a new senior secured credit agreement that was used to fund the special dividend and pay down a portion...

  • Page 144
    ... Company, and the shareholders of Valor owned the remaining approximately 15 percent of such equity interests. The merger was accounted for using the purchase method of accounting for business combinations in accordance with SFAS No. 141, with Alltel Holding Corp. serving as the accounting acquirer...

  • Page 145
    ... notes issued pursuant to the spin off and merger; the impact of income taxes on these pro forma adjustments utilizing Windstream's statutory tax rate of 39.35 percent for the year ended December 31, 2006; and the issuance of common shares to Valor shareholders. The unaudited pro forma results are...

  • Page 146
    ... to Valor and CTC deferred taxes Balance at December 31, 2008 Wireline $ 1,964.7 255.1 4.1 2,223.9 (26.0) $ 2,197.9 Product Distribution $ 0.3 0.3 $ 0.3 $ Wireless $ 52.2 (52.2) Totals $ 1,965.0 307.3 4.1 (52.2) 2,224.2 (26.0) $ 2,198.2 As of January 1, 2008, the Company completed the annual...

  • Page 147
    ... Valor wireline customer list CTC wireline customer list Other wireline customer lists Cable franchise rights Amortization Methodology accelerated sum-of-years digits accelerated sum-of-years digits straight-line straight-line Estimated Useful Life 9 years 9 years 10 years 15 years Amortization...

  • Page 148
    ... off of its directory publishing business. (c) During 2008, the Company incurred net borrowings of $50 million under the revolving line of credit in its senior secured credit facilities. The revolving line of credit's variable interest rates are based on LIBOR plus 125 basis points and ranged from...

  • Page 149
    ... 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 whose notional value totaled $1,281.2 million at December 31, 2008. See Note 2 for more information related to the...

  • Page 150
    ... the consolidated balance sheets. The Company's cash equivalents are primarily highly liquid, actively traded money market funds with next day access. The fair values of the interest rate swaps were determined based on the present value of expected future cash flows using LIBOR swap rates which are...

  • Page 151
    ... paid on January 14, 2009, January 15, 2008 and January 16, 2007, respectively. Pursuant to the split off of the publishing business (see Note 3), Windstream and Holdings executed a non-cash debt-for-debt exchange whereby Windstream received securities from Holdings valued at $210.5 million...

  • Page 152
    ... retirement benefits to a select group of management employees. Additionally, the Company provides postretirement healthcare and life insurance benefits for eligible employees. Employees share in, and the Company funds, the costs of these plans as benefits are paid. During 2008, Windstream...

  • Page 153
    ... FINANCIAL STATEMENTS 8. Employee Benefit Plans and Postretirement Benefits, Continued: The following table reflects the components of pension expense for the years ended December 31, 2008 and 2007 and the period following spin off in 2006 (including provision for executive retirement agreements...

  • Page 154
    ... the retirement plans and from Company assets. The estimated net actuarial loss and prior service costs for the pension plan, including executive retirement agreements, that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit expense (income) in 2009 are...

  • Page 155
    ... years ended December 31: Pension Benefits 2008 2007 6.18% 6.36% 8.00% 8.00% 3.44% 3.00% Postretirement Benefits 2008 2007 6.11% 6.38% - Discount rate Expected return on plan assets Rate of compensation increase In developing the expected long-term rate of return assumption, Windstream considered...

  • Page 156
    ..., and merged the plan assets into its employee savings plan. Prior to the spin off from Alltel, Windstream employees participated in the Alltel-sponsored plan and the amount of profit sharing contributions to the plan was determined by Alltel's Board of Directors. Following the spin off and merger...

  • Page 157
    ...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, 2008, the balance...

  • Page 158
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Stock-Based Compensation Plans, Continued: Non-vested Windstream restricted stock activity for the year ended December 31, 2008 was as follows: (Thousands) Number of Shares Non-vested at December 31, 2007 Granted Vested Forfeited Non-vested at December...

  • Page 159
    ... Company determined not to use certain software acquired in the CTC acquisition; therefore, we recognized a $5.4 million non-cash charge to abandon this asset, of which $0.8 million was related to the wireless business. Additionally in 2008, the Company incurred $8.5 million in restructuring costs...

  • Page 160
    ... benefit costs. The severance and related employee costs will be paid as the remaining employees are terminated in the first quarter of 2009. Valor lease payments will be made over the remaining term of the lease. Each of these payments will be funded through operating cash flows. Merger...

  • Page 161
    ...net periodic benefit cost: Amortization of transition obligation Amortization of prior service cost Recognition of net actuarial loss Income tax expense Change in postretirement plan Change in employee benefit plans Unrealized holding loss on interest rate swaps Income tax benefit Unrealized holding...

  • Page 162
    ...(decrease) State income taxes, net of federal benefit Adjustment of deferred taxes for legal entity restructuring Reversal in income tax contingency reserves Nontaxable gain on sale of publishing business Costs associated with spin off of Company Other items, net Effective income tax rates 2008 2007...

  • Page 163
    ... amounts through 2025. These loss carryforwards were acquired in conjunction with the Company's merger with Valor. The decrease in 2008 represents the amount utilized for the year. At December 31, 2008 and 2007, the Company had state net operating loss carryforwards of approximately $693.7 million...

  • Page 164
    ... products and services. The Company's wireline segment consists of Windstream's retail and wholesale telecommunications 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...

  • Page 165
    ...and merger with Valor in July 2006, the telecommunications information services operations no longer earned revenues or incurred expenses for providing data processing and outsourcing services as Valor was its sole external customer. The Company accounts for affiliated sales at current market prices...

  • Page 166
    ... financial statements was as follows 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...

  • Page 167
    ... accounting. Condensed Consolidated Statement of Income For the Year Ended December 31, 2008 NonGuarantors Guarantors Eliminations Consolidated (Millions) Parent Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services Cost of products sold...

  • Page 168
    ...: Cost of services Cost of products sold Selling, general, administrative and other Depreciation and amortization Merger, integration and restructuring Total costs and expenses Operating income Earnings from consolidated subsidiaries Other income (expense), net Gain on sale of publishing business...

  • Page 169
    ... discontinued operations Total Assets Liabilities and Shareholders' Equity Current Liabilities: Current maturities of long-term debt Current portion of interest rate swaps Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest...

  • Page 170
    ... discontinued operations Total Assets Liabilities and Shareholders' Equity Current Liabilities: Current maturities of long-term debt Current portion of interest rate swaps Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest...

  • Page 171
    ..., plant and equipment Disposition of wireless business Disposition of acquired assets held for sale Other, net Net cash from (used in) investing activities Cash Flows from Financing Activities: Dividends paid on common shares Dividends received from (paid to) subsidiaries Stock repurchase Repayment...

  • Page 172
    ... and equipment Acquisition of CT Communications, net of cash acquired Disposition of directory publishing business Other, net Net cash used in investing activities Cash Flows from Financing Activities: Dividends paid on common shares Dividends received from (paid to) subsidiaries Stock repurchase...

  • Page 173
    ... Stock-based compensation expense Pension and postretirement benefits expense Deferred taxes Other, net Changes in operating assets and liabilities, net Net cash provided from operations Cash Flows from Investing Activities: Additions to property, plant and equipment Cash acquired from Valor...

  • Page 174
    ... as discontinued operations in the accompanying consolidated statements of income. Certain shared costs previously allocated to the wireless business totaling $2.3 million for the twelve months ended December 31, 2008, have been reallocated to the wireline segment. The following table summarizes...

  • Page 175
    ..., 2007, Windstream completed 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. Total $3,245.9 $1,149...

  • Page 176
    ... cash available to pay dividends. Dividend payout ratio is defined as dividends paid on common shares divided by free cash flow. The Company believes the dividend payout ratio provides the investor useful information about its remaining investable funds after the payment of dividends to shareholders...

  • Page 177
    ... the twelve months ended December 31: (Dollars in millions) $3,171.5 - - $3,171.5 $3,245.9 93.9 (120.9) $3,218.9 $(47.4) -1.5% 2008 2007 Net cash provided from operations Additions to property, plant and equipment Free cash flow Dividends paid on common shares Dividend payout ratio Common stock...

  • Page 178
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  • Page 179
    Jeff Gardner addresses shareholders at the company's annual meeting in Little Rock in May 2008. 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 Executive ...

  • Page 180
    4001 Rodney Parham Road Little Rock, AR 72212 windstream.com