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proxy statement and form 10-k
2010 annual report
windstream

Table of contents

  • Page 1
    windstream 2010 annual report proxy statement and form 10-k

  • Page 2
    ... various sizes. This acquisition meets an increasing demand for data center and managed hosting services from our current business clients, and Hosted's resources, combined with our expansive network, enable Windstream to act as an end-to-end communications and technology solutions provider. Also on...

  • 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
    ... TO RECORD YOUR VOTE PROMPTLY. PRIOR TO THE MEETING YOU MAY VOTE ON THE INTERNET, BY TELEPHONE OR BY MAIL. Important notice regarding the availability of proxy materials for the 2011 Annual Meeting of Stockholders to be held on May 4, 2011. Windstream's Proxy Statement and Annual Report to security...

  • Page 6

  • Page 7
    ... Board of Directors of Windstream Corporation ("Windstream") to be used at its 2011 Annual Meeting of Stockholders. The meeting will be held at the Capital Hotel, 111 West Markham, Little Rock, Arkansas 72201 on Wednesday, May 4, 2011 at 11:00 a.m. (local time). TABLE OF CONTENTS Page No. Internet...

  • Page 8
    ...proxy statement and our annual report. The notice also instructs you on how to access your proxy card to vote through the Internet or by telephone. This process is designed to expedite stockholders' receipt of proxy materials, lower the cost of the annual meeting, and help conserve natural resources...

  • Page 9
    ... as a vote "AGAINST" each item. In order to minimize the number of broker non-votes, Windstream encourages you to provide voting instructions to the organization that holds your shares by carefully following the instructions provided in the notice of internet availability of proxy materials. 3

  • Page 10
    ... various management and engineering positions during sixteen years of service with Bell Laboratories and Network Systems (which later became Lucent). Since March 2010, Ms. Armitage has served as Chairman of the Board of SCALA, Inc., a provider of digital signage and advertising management solutions...

  • Page 11
    ... Board of Alltel Holding Corp. from December 2005 to July 2006 and of Windstream from July 2006 until February 2010 when, to enhance Windstream's corporate governance profile, Mr. Frantz and the Board determined to select a Chairman who is "independent", as defined by applicable stock exchange rules...

  • Page 12
    ... a telecom trade association. He is a director and a member of the Audit Committee of RF Micro Devices, based in Greensboro, North Carolina. The Board believes it is important that Windstream's Chief Executive Officer serve on the Board, as the position of Chief Executive Officer puts Mr. Gardner in...

  • Page 13
    ...also provides him with a broad perspective on the challenges and opportunities facing Windstream and the communities it serves. Alan L. Wells, age 51, has served as a director of Windstream since June 2010, and served as Chief Executive Officer of Iowa Telecommunication Services, Inc. ("Iowa Telecom...

  • Page 14
    ... 2006 to 2010. In 2010, in order to enhance Windstream's corporate governance profile, Mr. Frantz and the Board of Directors chose to select a Chairman who is "independent", as defined by applicable stock exchange rules. Although Mr. Frantz has not been an officer or employee of Windstream for more...

  • Page 15
    ... related to the compensation programs, plans, and awards for Windstream's directors and principal officers. For more information regarding the Compensation Committee, see "Management Compensation - Compensation Discussion and Analysis". The Governance Committee held two meetings during 2010...

  • Page 16
    ... available to stockholders who submit a request to Windstream Corporation, ATTN: Investor Relations, 4001 Rodney Parham Road, Little Rock, AR 72212. Stockholders and other interested parties may contact the Chairman of the Board or the non-management directors of the Windstream Board of Directors...

  • Page 17
    ...at the time of the 2011 Annual Meeting of Stockholders. Following the 2011 Annual Meeting of Stockholders, the executive officers will have until 2012 Annual Meeting of Stockholders to meet increased share guidelines resulting from changes in stock price, annual base salary or ownership levels since...

  • Page 18
    ... equity compensation plans hold the sole right to vote such shares. To date, Windstream has not granted stock options or other similar instruments that would provide the right to acquire beneficial ownership of Common Stock. (3) In February 2011, Windstream granted performance-based restricted stock...

  • Page 19
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Set forth below is information, as of March 1, 2011, with respect to any person known to Windstream to be the beneficial owner of more than 5% of any class of Windstream's voting securities, all of which are shares of Common Stock: Name and Address of ...

  • Page 20
    ... in Windstream Corporation's Proxy Statement on Schedule 14A for the 2011 Annual Meeting of Stockholders and has discussed such disclosures with the management of Windstream Corporation. Based on such review and discussion, the Compensation Committee recommended to the Windstream Board of Directors...

  • Page 21
    ... reporting process, the Audit Committee has reviewed and discussed with Windstream Corporation's management the audited consolidated financial statements for the year ended December 31, 2010; discussed with PricewaterhouseCoopers LLP, Windstream Corporation's independent registered public accountant...

  • Page 22
    ... in 2011, the performance-based restricted stock units were modified to raise the performance bar five hundred basis points over 2010 goals, and a three-year revenue goal has been added to the program. These changes, along with our robust stock ownership guidelines, including ten times base salary...

  • Page 23
    ...PM&P). PM&P reports directly to the Compensation Committee and provides no other services to the Company. During 2010 and into 2011, PM&P conducted a competitive review of the Company's executive pay levels and executive pay program designs, with such data and information being used by the Committee...

  • Page 24
    ... 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 25
    ... time other key executives, including the other NEOs, received grants of time-based restricted stock. Base Salary. Base salary is designed primarily to provide competitive compensation that reflects the contributions and skill levels of each executive. Short-Term Cash Incentive Payments. Windstream...

  • Page 26
    ... providing long-term compensation incentives. Each officer receives a portion of his or her total direct annual compensation for a given year in the form of long-term equity-based incentive compensation. All Windstream equity compensation awards have been issued as either time-based restricted stock...

  • Page 27
    ... equity compensation granted in 2010, the dividends on performance-based restricted stock are accrued and paid out only when and if the performance conditions are satisfied. Windstream places performance targets on 100% of the grants of restricted stock to Mr. Gardner and 50% for all other executive...

  • Page 28
    ... all employees under Windstream's severance plan and benefits available under the change-in-control agreements discussed below. During 2009, the Compensation Committee approved an extension of the employment agreement with Mr. Gardner that includes a severance benefit of three times base salary (at...

  • Page 29
    ... of Windstream's employee pilots, and other general charges related to ownership of the aircraft. Other executive officers are allowed to have family members accompany them on a business trip on the aircraft, subject to seat availability and prior approval of Mr. Gardner. Any other personal use of...

  • Page 30
    ...and that were assumed by Windstream as part of the spin-off in exchange for cash payments from Alltel totaling the amount of the benefit obligation at the time of the spin-off. On February 1, 2010, Windstream distributed the total balance, net of applicable withholding taxes, to Mr. Frantz as a lump...

  • Page 31
    ... to the Company's Corporate Governance Board Guidelines. (5) Mr. Wells joined the Windstream Board in June 2010 and received an initial grant in the amount of $80,000 in restricted stock, and a prorated amount of the 2010 annual cash and stock retainers. Compensation of Named Executive Officers The...

  • Page 32
    ..., compensation of Windstream's employee pilots and other general charges related to ownership of the aircraft, and (iv) imputed income for value over $50,000 of life insurance coverage provided by the Company. For 2008, "All Other Compensation" included payment of initial or annual country...

  • Page 33
    ... in accordance with applicable standards for financial statement reporting purposes in accordance with FASB ASC topic 718. For 2011, the Compensation Committee granted one-hundred percent (100%) performance-based restricted stock units for Mr. Gardner with a grant date value of $3.6 million...

  • Page 34
    ...,643 Name Jeffery R. Gardner (1) Windstream named executive officers have no outstanding awards of stock options. (2) Market value calculated using the closing price of Windstream Common Stock on December 31, 2010, which was $13.94. (3) Performance-based shares vested ratably in annual one-third...

  • Page 35
    ... officers in 2010. Shares vested on February 15, 2010 with a closing price of $10.18. Shares vested on November 15, 2010 with a closing price of $13.05. Pension Benefits The following is a brief summary of the material terms of the retirement plans maintained by Windstream. Windstream Pension Plan...

  • Page 36
    ... career average annual base salary (three highest years) exceeds his or her Social Security covered compensation, multiplied by his years of pre-1988 credited service. Windstream Benefit Restoration Plan. The Windstream Benefit Restoration Plan ("BRP") contains an unfunded, unsecured pension benefit...

  • Page 37
    ... 2007, accounts are credited with earnings based on the prime rate, plus 200 basis points. The prime rate for 2010 was set at 5.25%, which was determined using the prime rate published in the Wall Street Journal on the first business day of 2011. Of our named executive officers, only Mr. Gardner was...

  • Page 38
    ... Mr. Gardner's 1998 Fund balance. 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 39
    ... $2,973,000. This severance benefit under the Employment Agreement equals three times his annual base salary. The Employment Agreement provides that upon termination of employment, Mr. Gardner is prohibited from soliciting employees or customers or competing against Windstream for a one-year period...

  • Page 40
    ... by (ii) the closing price of Windstream's Common Stock on December 31, 2010 of $13.94 per share. Change-in-Control Agreements. Windstream has a Change-in-Control Agreement with certain of its executive officers, including its executive officers listed in the above table. The agreements provide that...

  • Page 41
    ... against Windstream 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...

  • Page 42
    ... the conditions set forth in the policy. The compensation covered by the policy is annual or short-term incentive compensation, performance-based restricted stock, other performance-based compensation, time-based restricted stock, severance benefits awarded under a change-in-control agreement, and...

  • Page 43
    ... include strong internal controls over financial reporting, robust stock ownership guidelines, a clawback policy for senior executives, and a three year vesting cycle for equity-based compensation. The result is a strong alignment between the interests of management and shareholders. Windstream also...

  • Page 44
    ... NO. 2 ADVISORY VOTE ON EXECUTIVE COMPENSATION At the Annual Meeting and pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and Section 14A of the Securities Exchange Act of 1934, the Board of Directors is providing stockholders of Windstream the opportunity to vote on the...

  • Page 45
    ... at the 2011 Annual Meeting and will have an opportunity to make a statement, if they desire to do so, and to respond to appropriate questions. If the stockholders fail to ratify the appointment of PricewaterhouseCoopers LLP as Windstream's independent registered public accountant, the Board will...

  • Page 46
    ... are the sole responsibility of the Fund. RESOLVED: That the stockholders of Windstream Corporation ("the Company"), assembled in Annual Meeting in person or by proxy, hereby request the Board of Directors to take the necessary steps to provide for cumulative voting in the contested election of...

  • Page 47
    ... shall be presented to the board of directors' audit committee or other relevant oversight committee and posted on the Company's website. Supporting Statement As long-term shareholders of Windstream, we support transparency and accountability in corporate spending on political activities. These...

  • Page 48
    ... long-term shareholder value. Windstream contributed at least $161,000 in corporate funds since the 2006 election cycle, according to the Center for Political Accountability. During the same time frame, the Company spent at least $123,000 on state politics. Publicly available data does not provide...

  • Page 49
    ... 2012 Annual Meeting, and who wish to have those proposals included in Windstream's proxy statement for the 2012 Annual Meeting, must be certain that those proposals are received by the Corporate Secretary at 4001 Rodney Parham Road, Little Rock, Arkansas 72212, no later than November 25, 2011. Such...

  • Page 50
    ... officer of Windstream. Mr. Martin served as a Director of Business Solutions during 2010. For 2010, Windstream paid Mr. Martin total compensation of $148,576 comprised of salary, commissions, the value of restricted stock granted during 2010, Company contribution to the Windstream 401K plan...

  • Page 51
    ... of the Windstream Pension Plan. (c) Tax fees are principally comprised of fees for tax consulting services provided by PwC. The increase in 2010 tax fees is primarily due to work performed in connection with the acquisitions NuVox, Inc.; Iowa Telecom; Q-Comm Corporation; and Hosted Solutions, LLC...

  • Page 52
    ... The Bylaws also provide that no other business may be brought before an annual meeting except as specified in the notice of the meeting or as otherwise brought before the meeting by or at the direction of the Board or by a Windstream stockholder entitled to vote who has delivered timely notice to...

  • Page 53
    ..., 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 electronic means. In the event the management of Windstream deems...

  • Page 54

  • Page 55
    ... Rural Telecommunications Cooperative Qwest Communications International, Inc. SBA Network Services, Inc. Securus Technologies Southern Company-SouthernLINC SureWest Communications Syniverse Technologies TDS Telecom Tellabs Time Warner Cable T-Mobile USA United States Cellular Corporation University...

  • Page 56

  • Page 57
    WINDSTREAM CORPORATION ANNUAL REPORT ON FORM 10-K

  • Page 58

  • Page 59
    ... 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 60

  • Page 61
    ... 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 Item 15. Exhibits, Financial Statement...

  • Page 62
    ... access lines and 1.3 million high-speed Internet customers. During 2010, we further transformed our strategy towards a focus on data and business-solutions through several key acquisitions, including NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions...

  • Page 63
    ...of high-speed Internet to business customers. Integrated solutions consist of multiple voice and data services delivered over an IP connection. Voice services include basic services, such as local, and various enhanced features as well as long-distance. Special access services include point-to-point...

  • Page 64
    ... states and provides opportunities for significant operating efficiencies with contiguous Windstream markets. NuVox's services include voice over internet protocol, local and long-distance voice, high-speed Internet access, email, voicemail, web hosting, secure electronic data storage and backup...

  • Page 65
    ... access lines, 45,000 high-speed Internet customers and 9,000 cable television customers. This acquisition increased Windstream's presence in Pennsylvania and provides the opportunity for operating synergies with contiguous Windstream markets. Pursuant to the merger agreement, Windstream acquired...

  • Page 66
    ... existing competitors receiving financial incentives through the federal broadband stimulus program (See "Federal Regulation"). During 2010, this competition adversely affected Windstream's access line losses and revenue growth rates. Excluding the lines acquired from NuVox, Iowa Telecom and Q-Comm...

  • Page 67
    ...MPLS and ethernet internet access services, allowing the Company to provide higher data speeds and more advanced data products to its business customers. During 2010, excluding acquisitions of NuVox, Iowa Telecom and Q-Comm, the Company added approximately 79,000 high-speed Internet customers. As of...

  • Page 68
    ...businesses in its service area. In 2010, the RUS approved eighteen applications with a total estimated cost of $241.7 million, including $181.3 million in grants and a $60.4 million matching share to be provided by the Company. The grant agreements were executed in December 2010. The RUS grant funds...

  • Page 69
    Windstream Corporation Form 10-K, Part I Item 1. Business Inter-carrier Compensation and Universal Service The Company's local exchange subsidiaries currently receive compensation from other telecommunications providers, including long distance companies, for origination and termination of ...

  • Page 70
    ...reasonable rates to customers 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...

  • Page 71
    ... include, but are not limited to, statements about expected levels of support from universal service funds or other government programs, expected rates of loss of access lines or intercarrier compensation, expected increases in high-speed Internet and business data connections, our expected ability...

  • Page 72
    ... risks and uncertainties that may affect Windstream's future results included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this annual report and in other filings by Windstream with the Securities and Exchange Commission at www.sec.gov...

  • Page 73
    ... to enter markets where Windstream is already providing broadband service. This could result in increased competition and the loss of customers, negatively impacting our operating results and financial performance. Competition from wireless carriers is likely to continue to cause access line losses...

  • Page 74
    ... affected. Our business generates revenue by delivering voice and data services over access lines. We have experienced net access line loss over the past few years. During 2010, excluding the impact of the NuVox, Iowa Telecom and Q-Comm acquisitions, the number of access lines we served declined...

  • Page 75
    ..., NuVox, Iowa Telecom, Hosted Solutions and Q-Comm, and was partially offset by decreases in minutes of use associated with access line losses resulting from wireless and cable voice competition, efforts by carriers to mask traffic to avail their traffic of lower inter-carrier compensation rates and...

  • Page 76
    ... Company has acquired NuVox, Iowa Telecom, Q-Comm and Hosted Solutions during the year ended December 31, 2010. For more information on these transactions, see "Item 1 - Material Acquisitions Completed During The Last Five Years". Windstream expects to achieve substantial synergies, cost savings and...

  • Page 77
    Windstream Corporation Form 10-K, Part I Item 1A. Risk Factors Windstream is dependent upon other ILECs for facilities and service in operating territories in which it is not the incumbent. Since the acquisitions of NuVox and the CLEC operations of Q-Comm, Windstream has acquired significant ...

  • Page 78
    ... future work stoppages could have a material adverse effect on our business, financial condition or results of operations. Windstream cannot assure you that it will continue paying dividends at the current rate. Windstream's board of directors has adopted a current dividend practice for the payment...

  • Page 79
    ..., outside plant and related equipment. Outside communications plant includes aerial and underground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheral equipment. The Company's gross investment in property, by category, as of December 31, 2010, was as...

  • Page 80
    ... the ability of Windstream to pay dividends under its debt instruments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition, Liquidity and Capital Resources" in the Financial Supplement to this annual report on Form 10-K. (b) Not applicable...

  • Page 81
    Windstream Corporation Form 10-K, Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities Set forth below is a line graph showing a quarterly comparison since February 9, 2005, the initial day of public trading of Valor ...

  • Page 82
    Windstream Corporation Form 10-K, Part II Item 5. Market for the Registrant's Common 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 ...

  • Page 83
    ...'s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities Under the Company's stock-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...

  • Page 84
    ... Corporation Form 10-K, Part II Item 6. Selected Financial Data For information pertaining to Selected Financial Data of Windstream, refer to page F-29 of the Financial Supplement, which is incorporated by reference herein. Item 7. Management's Discussion and Analysis of Financial Condition...

  • Page 85
    ... of internal control over financial reporting as of December 31, 2010, because they were acquired by the Company in recently completed 2010 purchase business combinations. The operations of NuVox, Inc., Iowa Telecommunications Services, Inc., Hosted Solutions Acquisition, LLC and Q-Comm Corporation...

  • Page 86
    Windstream Corporation Form 10-K, Part III Item 10. Directors, Executive Officers, and Corporate Governance For information pertaining to Directors of Windstream Corporation refer to "Proposal No. 1 - Election of Directors" in Windstream's Proxy Statement for its 2011 Annual Meeting of Stockholders,...

  • Page 87
    ... to Investor Relations, Windstream Corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212. For information regarding compliance with Section 16(a) of the Exchange Act, refer to "Section 16 (a) Beneficial Ownership Reporting Compliance" in Windstream's Proxy Statement for its 2011 Annual...

  • Page 88
    ... Statements of Windstream Corporation are included in the Financial Supplement, which is incorporated by reference herein: Financial Supplement Page Number Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008...

  • Page 89
    ... duly authorized. Windstream Corporation Registrant By /s/ Jeffery R. Gardner Jeffery R. Gardner, President and Chief Executive Officer Date: February 22, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 90
    ... To the 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 22, 2011 appearing in this 2010 Annual Report on Form 10-K of...

  • Page 91
    ... with the federal net operating loss carry forward acquired from the merger with Valor. (F) Costs primarily include charges for accounting, legal, broker fees and other miscellaneous costs associated with the acquisitions of D&E, Lexcom, NuVox, Iowa Telecom, Hosted Solutions and Q-Comm. In addition...

  • Page 92
    ... Restructuring Charges", to the consolidated financial statements on pages F-65 to F-66 in the Financial Supplement, which is incorporated herein by reference, for additional information regarding the merger, integration and restructuring charges recorded by the Company in 2010, 2009 and 2008. 32

  • Page 93
    ... herein by reference to Exhibit 3.1 to the Corporation's Current Report on Form 8-K dated February 19, 2010). Indenture dated July 17, 2006 among Windstream Corporation (as successor to Alltel Holding Corp.), certain subsidiaries of Windstream as guarantors thereto and SunTrust Bank, as trustee...

  • Page 94
    ... Corp., as Issuers, certain subsidiaries of Windstream, as guarantors, and The Bank of New York Mellon, as trustee (incorporated herein by reference to Exhibit 4.18 to the Corporation's Current Report on Form 10-K dated February 24, 2010). Fifth Supplemental Indenture dated as of November 20, 2009...

  • Page 95
    ... 2010). Form of 8 1⁄ 8% Senior Note due 2013 of Windstream Corporation (as successor to Alltel Holding Corp.) (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated July 17, 2006). Form of 8 5⁄ 8% Senior Note due 2016 of Windstream...

  • Page 96
    ... 10.2 to the Corporation's Current Report on Form 8-K dated February 6, 2009). Form of Restricted Shares Agreement (Officers: Performance-Based Restricted StockClawback Policy/Accrued Dividends) entered into between Windstream Corporation and its executive officers (incorporated herein by reference...

  • Page 97
    ...Current Report on Form 8-K dated November 13, 2006). Windstream 2006 Equity Incentive Plan (as amended and restated effective February 17, 2010 (incorporated by reference to Appendix A to the Corporation's Proxy Statement dated March 26, 2010. 1999 Long-Term Incentive Plan of D&E Communications, Inc...

  • Page 98
    EXHIBIT INDEX, Continued Number and Name 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy ...

  • Page 99
    WINDSTREAM CORPORATION FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010

  • Page 100

  • Page 101
    ... 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, 2010, 2009 and 2008...

  • Page 102
    ... carriers on a wholesale basis. We also provide high-speed Internet, voice, and digital television services to residential customers primarily located in rural areas. As of December 31, 2010, the Company provided service to approximately 3.3 million access lines and 1.3 million high-speed Internet...

  • Page 103
    ... and post acquisition D&E and Lexcom revenues of $447.0 million, revenues increased $7.1 million, or 5.1 percent for the year ended December 31, 2010. High-speed Internet: Growth in high-speed Internet sales, including other value added Internet services such as Security Suite and Online Data Backup...

  • Page 104
    ...can bundle local phone, high-speed Internet, long distance and video services. These bundles provide customers with one convenient location to obtain all their communications and entertainment needs, a convenient billing solution and bundle discounts. Operating trends for access lines and high-speed...

  • Page 105
    ...Midwest states and provides opportunities for approximately $30.0 million in operating synergies with contiguous Windstream markets. NuVox's services include voice over internet protocol, local and long-distance voice, high-speed Internet access, email, voicemail, web hosting, secure electronic data...

  • Page 106
    ... its IP-based voice and data services, MPLS networking, data center and managed hosting services and communications systems. The Company also delivers high-speed Internet, digital phone, long distance and high-definition television services to consumers primarily located in rural areas and operates...

  • Page 107
    ... lines in service: Consumer Business Wholesale (c) Total voice lines in service Data and integrated solutions: High-speed Internet Advanced data and integrated solutions (d) Total data and integrated solutions Special access circuits Access lines (e) Digital television customers $ 2010 2009 2008...

  • Page 108
    ...Due to increases in high-speed Internet revenues (b) Due to increases in data revenues (c) Due to decreases in voice and long distance revenues (d) Total changes in business revenues (a) Increases in special access revenues, which primarily represent monthly flat-rate charges for dedicated circuits...

  • Page 109
    ... for high-speed Internet services and the decrease in USF support revenues effective with the conversion to price-cap on July 1, 2008. (b) Increases in state USF revenues in 2010 are primarily due to an increase in costs recoverable under the program. Decreases in state USF revenues in 2009 were...

  • Page 110
    ... for high-speed Internet services effective with the conversion to price-cap regulation on July 1, 2008, as previously discussed. (b) Decreases in network operations and other expenses in 2010 are primarily attributable to cost saving measures, partially offset by increases in network support costs...

  • Page 111
    ... to changes in pension expense (b) Total changes in SG&A and other expenses (a) Increases in advertising expense during 2010 are primarily due to increased spending to support sales of our price-for-life bundles and to focus on business customers. Decreases in advertising expense and other in 2009...

  • Page 112
    ... million in severance and employee benefit costs primarily related to the workforce reduction initiated during the third quarter of 2009 to better align the Company's focus on high-speed Internet and enterprise opportunities. The Company expected to realize annual pretax savings of approximately $20...

  • Page 113
    ... with acquisitions (a) Employee related transition costs (b) Computer system and conversion costs (c) Signage and other rebranding costs (d) Total merger and integration costs Restructuring charges Total merger, integration and restructuring charges $ 2010 $ 41.2 26.7 4.2 5.2 77.3 7.7 85.0 $ $ 2009...

  • Page 114
    ..., but not limited to, interstate switched and special access rates, as well as high-speed Internet service offerings. It also regulates the rates that ILECs may charge for the use of their local networks in originating or terminating interstate and international transmissions. The state PSCs have...

  • Page 115
    ...reasonable rates to customers 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...

  • Page 116
    ... an inter-carrier compensation reform plan by January 2011. The proposed plan recommends reducing intrastate switched access rates to interstate levels over a three-year period coupled with modest local rate increased and the establishment of a state universal service fund. The proposed plan, if...

  • Page 117
    ... net assets sold to the transaction price less costs to sell. Wireless business income before taxes was $9.7 million in 2008. Additionally, the Company made tax payments of $14.8 million related to the excess of consideration received over tax basis in the assets sold. FINANCIAL CONDITION, LIQUIDITY...

  • Page 118
    ...," extended the maturity of, and re-priced these four interest rate swaps to October 17, 2015 with a weighted-average fixed rate paid by Windstream of 4.553 percent, resulting in an estimated 2011 cash interest expense savings of $11.2 million. As part of these modifications, the accumulated losses...

  • Page 119
    ... voting stock, or breach of certain other conditions set forth in the borrowing agreements. At December 31, 2010, the Company was in compliance with all such covenants and restrictions. As of February 16, 2011, Moody's Investors Service, Standard & Poor's Corporation and Fitch Ratings had granted...

  • Page 120
    ...enacted funding regulations. In 2009, 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. The Company plans to make a pension contribution...

  • Page 121
    ... and $266.2 million in debt and related swap agreements assumed from NuVox, Iowa Telecom and Q-Comm, respectively, in addition to regularly scheduled payments of $23.9 million. Dividends paid to shareholders totaled $464.6 million in 2010, which was an increase of $27.2 million, due to additional...

  • Page 122
    ...5 years. Under our long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, a change in control including a person or group obtaining 50 percent or more of Windstream's outstanding voting stock, or breach of...

  • Page 123
    ...Company does not operate in foreign countries, the Windstream pension plan invests in international securities. As of December 31, 2010 approximately $91.0 million or 10.5 percent of total pension assets are invested in debt or equity securities denominated in foreign currencies. The investments are...

  • Page 124
    ... financial statements. Pension and Other Postretirement Benefits - The annual costs of providing pension and other postretirement benefits are based on certain key actuarial assumptions, including the expected return on plan assets, discount rate and healthcare cost trend rate. Windstream's pension...

  • Page 125
    ... 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 126
    ... equal to the excess. Windstream determines the 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. During 2010, 2009 and 2008, no writedowns in the carrying...

  • Page 127
    ... include, but are not limited to, statements about expected levels of support from universal service funds or other government programs, expected rates of loss of access lines or inter-carrier compensation, expected increases in high-speed Internet and business data connections, our expected ability...

  • Page 128
    with information regarding risks and uncertainties that may affect Windstream's future results included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and in other filings by Windstream with the Securities and Exchange Commission at www.sec.gov. F-28

  • Page 129
    ...2008 through 2010 are provided in Management's Discussion and Analysis of Results of Operations and Financial Condition. During 2007, the Company incurred $4.6 million in restructuring costs from a workforce reduction plan and the announced realignment of its business operations and customer service...

  • Page 130
    ... subsidiaries in Texas. The depreciable lives were lengthened to reflect the estimated remaining useful lives of the wireline plant based on Windstream's expected future network utilization and capital expenditure levels required to provide service to its customers. The effects of this change during...

  • Page 131
    ... 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 22, 2011 Jeffery R. Gardner President...

  • Page 132
    ... of internal control over financial reporting as of December 31, 2010, because they were acquired by the Company in recently completed 2010 purchase business combinations. The operations of NuVox, Inc., Iowa Telecommunications Services, Inc., Hosted Solutions Acquisition, LLC and Q-Comm Corporation...

  • Page 133
    ... Reporting, management has excluded NuVox, Inc., Iowa Telecommunications Services, Inc., Hosted Solutions Acquisition, LLC and Q-Comm Corporation from its assessment of internal control over financial reporting as of December 31, 2010, because they were acquired by the Company in purchase business...

  • Page 134
    ... Cost of products sold Selling, general, administrative and other Depreciation and amortization Restructuring charges Merger and integration costs Total costs and expenses Operating income Other income (expense), net Interest expense Income from continuing operations before income taxes Income taxes...

  • Page 135
    ...Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities Commitments and Contingencies (See Note 13) Shareholders' Equity: Common stock, $0.0001...

  • Page 136
    ... Acquisition of NuVox, net of cash acquired Acquisition of Iowa Telecom, net of cash acquired Acquisition of Hosted Solutions, net of cash acquired Acquisition of Q-Comm, net of cash acquired Disposition of wireless business Disposition of acquired assets held for sale Other, net Net cash used...

  • Page 137
    ..., net of tax: (See Note 11) Change in employee benefit plans Amortization and reclassification of losses included in earnings on dedesignated swap instruments Unrealized holding gains on designated interest rate swaps Comprehensive income (loss) Stock-based compensation expense Stock issued to NuVox...

  • Page 138
    ..., and digital television services to residential customers. As of December 31, 2010, the Company provided service to approximately 3.3 million access lines and 1.3 million high-speed Internet customers. Basis of Presentation - The preparation of financial statements, in accordance with accounting...

  • Page 139
    ... of Significant Accounting Policies and Changes, Continued: During 2008, Windstream received net proceeds of $17.3 million for assets acquired from CT Communications ("CTC"), which approximated the fair value at the date of acquisition, on the sale of the corporate headquarters building, a license...

  • Page 140
    ... asset retirement obligations, totaled $41.7 million and $34.8 million as of December 31, 2010 and 2009, respectively, and are included in other long term liabilities in the accompanying consolidated balance sheets. Derivative Instruments - Windstream accounts for its derivative instruments using...

  • Page 141
    ...CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies and Changes, Continued: weighted average fixed rate paid by Windstream will lower to 4.553 percent effective January 17, 2011. The variable rate received resets on the seventeenth day of each quarter to the three-month...

  • Page 142
    ... - Advertising costs are expensed as incurred. Advertising expense totaled $70.9 million in 2010, $46.6 million in 2009 and $50.0 million in 2008. Share-Based Compensation - In accordance with authoritative guidance on share-based compensation, the Company values all share-based awards to employees...

  • Page 143
    ... Arkansas, Florida, Georgia, Iowa, Kentucky, Nebraska, North Carolina, Pennsylvania and Texas as "major" state taxing jurisdictions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. During the years ended December 31, 2010 and 2009...

  • Page 144
    ... and simplified user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. As a result, Windstream has removed all references to superseded accounting standards in its consolidated financial statements and accompanying...

  • Page 145
    ...Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions"), Q-Comm Corporation ("Q-Comm"), D&E Communications, Inc. ("D&E") and Lexcom, Inc. ("Lexcom"). Noncontrolling Interests in Consolidated Financial Statements - On January 1, 2009, Windstream...

  • Page 146
    ... payment transactions are participating securities. Under this guidance, Windstream's non-vested share-based payment awards that contain a nonforfeitable right to receive dividends, whether paid or unpaid, are considered participating securities and have been included in the computation of basic...

  • Page 147
    ...-class Infrastructure as a Service (IaaS) solutions (managed hosting, managed services, colocation, cloud computing and bandwidth) for small and medium-sized business customers as well as large enterprises. This acquisition provided Windstream with five state-of-the-art data centers in Raleigh, NC...

  • Page 148
    ... states and provides opportunities in operating synergies with contiguous Windstream markets. NuVox's services include voice over internet protocol, local and long-distance voice, highspeed Internet access, email, voicemail, web hosting, secure electronic data storage and backup, internet security...

  • Page 149
    ...as of the date of acquisition served approximately 22,000 access lines, 9,000 high-speed Internet customers and 12,000 cable television customers in North Carolina. This acquisition increased Windstream's presence in North Carolina and provides the opportunity for operating synergies with contiguous...

  • Page 150
    ... lists will be amortized using the sum-of-years digit methodology over an estimated useful life of nine years. (c) Trade names will be amortized on a straight-line basis over an estimated useful life of one year. These transactions have been accounted for as business acquisitions with Windstream...

  • Page 151
    ... financial statements reflect the combined operations of Windstream with NuVox, Iowa Telecom, Hosted Solutions and Q-Comm (collectively known as the "Acquired Companies") and D&E and Lexcom for the periods following the respective acquisition dates. Employee severance and transaction costs...

  • Page 152
    ... Note 3) Balance at December 31, 2009 Adjustment of D&E (a) Adjustment of Lexcom (a) Acquisition of NuVox (see Note 3) Acquisition of Iowa Telecom (see Note 3) Acquisition of Hosted Solutions (see Note 3) Acquisition of Q-Comm (see Note 3) Balance at December 31, 2010 $ $ 2,198.2 88.1 58.1 2,344...

  • Page 153
    ... amortization methodology and useful lives were as follows as of December 31, 2010: Intangible Assets Wireline franchise rights Customer lists Cable franchise rights Other Amortization Methodology straight-line sum of years digits straight-line straight-line Estimated Useful Life 30 years 9 - 12...

  • Page 154
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Debt: Long-term debt was as follows at December 31: (Millions) Issued by Windstream Corporation: Senior secured credit facility, Tranche A - variable rates, due July 17, 2011 (a) Senior secured credit facility, Tranche A2 - variable rates, due July 17,...

  • Page 155
    ...to repay borrowings against our line of credit, which together with cash on hand, was used to pay the cash portion of the Iowa Telecom and NuVox purchase prices and to repay the outstanding debt of these businesses. (e) On October 6, 2010, Windstream completed the private placement of $500.0 million...

  • Page 156
    ... 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 observable at commonly quoted intervals for the full term of the...

  • Page 157
    ... $185.0 million as part of the consideration paid to acquire NuVox (see Note 3). Also as part of this transaction, Windstream assumed $281.0 million in long-term debt and related liabilities on existing swap agreements of NuVox, which was subsequently repaid. On November 10, 2009, the Company issued...

  • Page 158
    ... service (credit) cost Expected return on plan assets Net periodic benefit expense (income) As a component of determining its annual pension cost, Windstream amortizes unrecognized gains or losses that exceed 17.5 percent of the greater of the projected benefit obligation or market-related value...

  • Page 159
    .... The Iowa Telecom plans were merged into the Windstream pension and postretirement employee benefit plans effective December 31, 2010. In conjunction with the acquisition of D&E on November 10, 2009, the Company assumed certain obligations related to a non-contributory qualified pension plan and...

  • Page 160
    ... years ended December 31: Pension Benefits 2010 2009 5.31% 5.89% 8.00% 8.00% 3.44% 3.44% Postretirement Benefits 2010 2009 5.25% 5.79% - Discount rate Expected return on plan assets Rate of compensation increase In developing the expected long-term rate of return assumption, the Company considered...

  • Page 161
    ... out benefits, and the strong financial condition of the Company, the pension plan can accept an average level of risk relative to other similar plans. The liquidity needs of the plan are manageable given that lump sum payments are not available to most participants. Equity securities include stocks...

  • Page 162
    ... reported by the fund manager on the last business day of the year. The underlying assets are mostly comprised of publicly traded equity securities and fixed income securities. These securities are valued at the official closing price of, or the last reported sale prices as of the close of business...

  • Page 163
    ... recorded $10.9 million, $8.9 million and $13.2 million in 2010, 2009 and 2008, respectively, related to the employee savings plan, which was included in cost of services and selling, general, administrative and other expenses in the consolidated statements of income. 9. Share-Based Compensation...

  • Page 164
    ... to this employee and director group as a key component of their annual incentive compensation plan and a one-time grant to executive officers, other than the CEO, and select members of executive management. The one-time grant was approved to provide a retention incentive and increase the long-term...

  • Page 165
    ...with acquisitions (a) Employee related transition costs (b) Computer system and conversion costs (c) Signage and other rebranding costs (d) Total merger and integration costs Restructuring charges (e) Total merger, integration and restructuring charges 2010 $41.2 26.7 4.2 5.2 77.3 7.7 $85.0 2009 $11...

  • Page 166
    ... accrued merger, integration and restructuring charges. This included $8.8 million of accrued severance costs primarily associated with the integration of the Acquired Companies. The severance and related employee costs will be paid as positions are eliminated. Each of these payments will be funded...

  • Page 167
    ... period Amounts included in net periodic benefit cost: Amortization of transition obligation Amortization of net actuarial loss Amortization of prior service cost Income tax expense Change in postretirement plan Change in employee benefit plans Interest rate swaps: Unrealized holding gain (loss) on...

  • Page 168
    ... federal income tax rates Increase (decrease) State income taxes, net of federal benefit Adjustment of deferred taxes for legal entity restructuring Adjust deferred taxes for state net operating loss carryforward Nondeductible transaction costs Other items, net Effective income tax rates 38.5% 38...

  • Page 169
    ... not be utilized. The 2010 increase in the valuation allowance is primarily associated with the acquisition of certain state net operating losses from NuVox and Q-Comm and was recorded with an offset through goodwill. At December 31, 2010 and 2009, the Company had state tax credit carryforwards of...

  • Page 170
    ... been presented using the equity method of accounting. Condensed Consolidated Statement of Income For the Year Ended December 31, 2010 (Millions) Parent Guarantors NonGuarantors Eliminations Consolidated Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses...

  • Page 171
    ...Condensed Consolidated Statement of Income For the Year Ended December 31, 2008 NonGuarantors Guarantors Eliminations Consolidated Revenues and sales: Service revenues Product sales Total revenues and sales Costs and expenses: Cost of services Cost of products sold Selling, general, administrative...

  • Page 172
    ..., net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities Commitments and Contingencies (See Note 13) Shareholders' Equity: Common stock...

  • Page 173
    ..., net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities Commitments and Contingencies (See Note 13) Shareholders' Equity: Common stock...

  • Page 174
    ... Acquisition of NuVox, net of cash acquired Acquisition of Iowa Telecom, net of cash acquired Acquisition of Hosted Solutions, net of cash acquired Acquisition of Q-Comm, net of cash acquired Other, net Net cash from (used in) investing activities Cash Flows from Financing Activities: Dividends...

  • Page 175
    ... and amortization Provision for doubtful accounts Equity in (earnings) losses from subsidiaries Stock-based compensation expense Pension expense Deferred taxes Other, net Pension contribution Changes in operating assets and liabilities, net Net cash provided from operations Cash Flows from...

  • Page 176
    ... on sale of wireless business Depreciation and amortization Provision for doubtful accounts Equity in (earnings) losses from subsidiaries Stock-based compensation expense Pension expense Deferred taxes Other, net Pension contribution Changes in operating assets and liabilities, net Net cash provided...

  • Page 177
    ... share: Net income Notes to Quarterly Financial Information: Significant events affecting Windstream's historical operating trends in the quarterly periods were as follows: • Windstream completed the acquisitions of NuVox, Iowa Telecom, Hosted Solutions and Q-Comm on February 8, 2010, June 1, 2010...

  • Page 178

  • Page 179
    ... the combined operations of Windstream with D&E Communications, Inc. ("D&E"), Lexcom Inc. ("Lexcom"), NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions") and Q-Comm Corporation ("Q-Comm") for the periods following...

  • Page 180
    .... ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions") and Q-Comm Corporation ("Q-Comm"), and to exclude the results of the disposed out-of-territory product distribution operations and all merger and integration costs related to...

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  • Page 183
    ...premier providers of enterprise-class managed hosting solutions, was one of four acquisitions that Windstream completed in 2010. Corporate Headquarters Windstream 4001 Rodney Parham Road Little Rock, AR 72212 501-748-7000 www.windstream.com Annual Meeting The Annual Meeting of Windstream Corporation...

  • Page 184
    4001 Rodney Parham Road | Little Rock, AR 72212 windstream.com