Windstream 2012 Annual Report Download

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Table of contents

  • Page 1
    WindstReAm 2012 AnnuAL RePoRt PRoxy stAtement And FoRm 10-k

  • Page 2
    ...our footprint, expanding our data centers and enhancing our We plan to continue to improve the balance sheet by broadband infrastructure. In addition, we made opportunistic directing our excess free cash flow - after our dividend - capital investments to deploy fiber to wireless towers and extend to...

  • 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
    ... Order of the Board of Directors, John P. Fletcher Secretary Little Rock, Arkansas March 26, 2013 WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL 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. Important...

  • Page 6

  • Page 7
    ... Executive Officers ...Information on Plan-Based Awards ...Pension Benefits ...Non-Qualified Deferred Compensation ...Potential Payments Upon Termination or Change-in-Control ...Clawback Policy ...Risks Presented by Windstream's Compensation Programs ...Compensation Committee Interlocks and Insider...

  • Page 8
    ... on how 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. However, if you would prefer to receive printed proxy materials, please follow the...

  • Page 9
    ... LLP as Windstream's independent registered public accountant for 2013 (Proposal No. 3) is considered routine under applicable rules. A broker or other nominee may generally vote on routine matters, and therefore no broker non-votes are expected to exist in connection with Proposal...

  • Page 10
    ...Her service on the boards of other companies has given her additional experience in strategic planning, financial reporting, and mergers and acquisitions. Samuel E. Beall, III, age 62, has served as a director of Windstream since November 2006 and serves as Chairman of the Compensation Committee. Mr...

  • Page 11
    ... 2012. From July 2006 to February 2010, he served as Chairman of the Windstream Board. Beginning in May 2013, Mr. Frantz will serve as the Audit Committee Chairman. Mr. Frantz has served as Chairman of Central Bank (a community bank in Little Rock, Arkansas) since February 2007, as non-executive...

  • Page 12
    ... for election to the Board include his wide range of financial and business experience. In his role as a member of Compensation Committee of Windstream and through his professional career including his prior role as a chief executive officer of a private company, Mr. Montgomery has experience...

  • Page 13
    ... of Windstream since 2010 and is a founding partner of Financial Advisory Partners, LLC, which makes private equity investments and provides financial advisory services to mid-sized companies in the Midwest. He served as Chief Executive Officer of Iowa Telecommunication Services, Inc. ("Iowa Telecom...

  • Page 14
    ... $100,000 for the year in question; (4) The director or a member of the director's immediate family was a partner, controlling shareholder, executive officer or employee of an entity that made payments to, or received payments from, Windstream in any year in question that account for less than $200...

  • Page 15
    ...Compensation Committee. The Compensation Committee held four meetings during 2012. The Compensation Committee assists the Windstream Board of Directors in fulfilling its oversight responsibility related to the compensation programs, plans, and awards for Windstream's directors and principal officers...

  • Page 16
    .... 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 17
    ... to own by the Annual Meeting, which amounts were determined based on each person's position with Windstream, the person's base salary and the closing price of Windstream common stock, in each case as of the date of Windstream's 2012 Annual Meeting of Stockholders, and the number of shares deemed...

  • Page 18
    ... right to acquire beneficial ownership of Common Stock. (3) Windstream grants performance-based restricted stock units (PBRSUs) to its executive officers. Because unvested PBRSUs do not provide the recipients the right to vote or other elements of beneficial ownership as defined under SEC rules and...

  • Page 19
    ...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: Title of Class Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership Percent of Class Blackrock...

  • Page 20
    ... in Windstream Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and Windstream Corporation's Proxy Statement on Schedule 14A for the 2013 Annual Meeting of Stockholders for filing with the Securities and Exchange Commission. The Compensation Committee Samuel...

  • Page 21
    ... Committee recommended to Windstream Corporation's Board of Directors that the audited consolidated financial statements for the year ended December 31, 2012 be included in Windstream Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for filing with the Securities...

  • Page 22
    ..., our CEO own Windstream stock valued at 10 times his base salary. Independent Compensation Consulting Firm - The Compensation Committee benefits from its utilization of an independent compensation consulting firm which provides no other services to the Company. Regular Review of Share Utilization...

  • Page 23
    ...amount of company stock, the value of our executive's total stock holdings declined during the year. The Compensation Committee's 2013 compensation decisions for NEOs included (a) no increases to base salaries, (b) no increases to short-term incentive opportunities, (c) no increases in the long-term...

  • Page 24
    ...to the Compensation Committee. During 2012, the Compensation Committee engaged Pearl Meyer & Partners, LLC ("PM&P") to assist the Committee in the review and design of Windstream's executive compensation program. PM&P reports directly to the Compensation Committee and was originally selected in 2010...

  • Page 25
    ... year and is used as part of the decision-making process for the following year. During 2011, PM&P provided, and the Compensation Committee reviewed, competitive market data as part of its process for approving 2012 executive compensation levels and plan designs. Given the limited number of direct...

  • Page 26
    ... the Windstream Pension Plan and the related Windstream Benefit Restoration Plan. 2012 Total Compensation. Base salaries and long-term incentives increased year-over-year for all named executive officers. These changes were made as a result of the 50% increase in company revenue following the Paetec...

  • Page 27
    ... direct compensation at risk. Each year NEOs receive a portion of his or her total direct annual compensation in the form of long-term equitybased incentive compensation. All Windstream equity compensation awards are issued as either time-based restricted stock or performance-based restricted stock...

  • Page 28
    ... to executive officers other than benefits that are generally available to all employees under Windstream's severance plan and benefits available under the change-in-control agreements discussed below. The employment agreement with Mr. Gardner includes a severance benefit of three times base salary...

  • Page 29
    ... upon which approach would provide the executive with the greater net after-tax benefit. Upon a qualifying separation from service, the executive officers are eligible to receive a cash, lump sum payment based upon a multiple of base salary and target bonus of three times for Messrs. Gardner, Thomas...

  • Page 30
    ... Committee did, however, change the grant mix for all other executive officers from 70%/30% to 50% PBRSUs and 50% time-based awards. The Committee also raised the target level for awards to be paid out from 95.7% of plan to 97% of plan in 2013. x Compensation of Directors During 2012, Windstream...

  • Page 31
    ... fair value on the grant date based on the closing price per share of Windstream Common Stock on the date of grant of the restricted stock, computed in accordance with FASB ASC topic 718. (2) Amount is for travel insurance available for all directors. (3) Mr. Beall elected to receive $75,000 of the...

  • Page 32
    ...our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. As discussed in further detail in footnotes 1-3 and 8 to the Grants of Plan-Based Awards table below, the information provided in the Stock Awards column does not reflect the manner in which the Compensation Committee viewed...

  • Page 33
    ... executive officer in 2012 that vest ratably over a three-year period with each year set as a separate performance period. The Compensation Committee sets the threshold and target Adjusted OIBDA amount each year during the three-year vesting period. Pursuant to SEC rules and applicable accounting...

  • Page 34
    ... Stock on the date of grant. The grant date fair values of the performance-based equity awards and the Overachievement Amount are based on the stock price of Windstream Common Stock on the date of the grant, which is considered the date the performance targets were set. Shares related to the 2012...

  • Page 35
    ... 15, 2015, if Windstream achieves the performance objectives set for fiscal 2014, which have not yet been established by the Compensation Committee. Also includes overachievement shares related to the 2012 grant of PBRSUs as noted in footnote 4 of the "Grants of Plan-Based Awards" table. (6) Shares...

  • Page 36
    ...-bargaining employees. No named executive officers are eligible for continuing accruals under the Pension Plan as of the end of 2012. The Pension Plan's accrued benefit is payable in the form of a monthly life annuity following normal retirement at age 65 (or, if later, at five years of service or...

  • Page 37
    ... 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 38
    ... in prior years. 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 39
    ... her 2012 annual bonus under the Performance Incentive Compensation Plan would have been pro-rated on the basis of the ratio of the number of days of participation during the plan year to the number of days during the plan year and paid by Windstream in a lump sum following the end of the year. For...

  • Page 40
    ... officers would be entitled to receive, in a lump sum paid by Windstream or its successor, the following amounts pursuant to the change-in-control agreements: • Three times for Messrs. Gardner, Thomas, Whittington and Fletcher and two times for Ms. Nash the sum of the executive's base salary...

  • Page 41
    ... December 31, 2012. A new change-in-control agreement was put in place for Mr. Thomas as of January 1, 2013. Mr. Thomas is now eligible for a sum of three times his base salary and target annual incentive compensation and $50,000 for outplacement services. Clawback Policy. Windstream has a clawback...

  • Page 42
    ... 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 43
    ... base salary, annual cash incentives and long-term equity incentives. The following is a summary of key considerations that stockholders should take into account when assessing our executive compensation program: • Windstream's vision is to become the premier enterprise communications and services...

  • Page 44
    ... Windstream's independent registered public accountant, the Board will reconsider the appointment. However, even if the selection is ratified, the Audit Committee, in its sole discretion, may change the appointment at any time during the year if it determines that such a change would be in the best...

  • Page 45
    ... rights in existence on the date this proposal is adopted. SUPPORTING STATEMENT Windstream Corporation (the "Company") allows senior executives to receive an accelerated award of unearned equity under certain conditions after a change of control of the Company. We do not question that some form of...

  • Page 46
    ...the pendency of a change-in-control, as a target company needs a motivated executive team to continue to operate the business during the period between signing and closing. The need for this retention incentive is especially great in Windstream's industry due to the significant time periods that can...

  • Page 47
    ... report shall be presented to the board of directors or relevant board 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 include any activities...

  • Page 48
    ... on Windstream's Investor Relations website, thus offering shareholders and the public a comprehensive view of Windstream's political activity. Windstream has not funded independent expenditures and does not plan to fund independent expenditures as part of its political program. Consistent...

  • Page 49
    ...will of our 66%-shareholder majority. Supermajority requirements are arguably most often used to block initiatives supported by most shareowners but opposed by management. This proposal should also be evaluated in the context of our Company's overall corporate governance as reported in 2012: GMI/The...

  • Page 50
    ...management with those of our stockholders, and promote high ethical conduct among our directors and employees. The independence of the Board is a key safeguard, and we believe our independent Board is in the best position to, among other things, evaluate and approve changes to Windstream's corporate...

  • Page 51
    ... Corporate Secretary at 4001 Rodney Parham Road, Little Rock, Arkansas 72212, no later than November 26, 2013. 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 2014 Annual Meeting...

  • Page 52
    ... an address and receiving by mail multiple copies of Windstream's proxy statement and Annual Report who wish to share a single copy of those documents in the future should also notify Windstream at: Investor Relations, Windstream Corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212...

  • Page 53
    ... Pension Plan. (c) Tax fees are principally comprised of fees for tax consulting services provided by PwC. The increase in 2012 tax fees is primarily due to work performed in connection with a study of acquisition costs and net operating losses related to the PAETEC acquisition. (d) All other fees...

  • Page 54
    ...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 55
    IT IS IMPORTANT THAT ALL SHARES BE VOTED PROMPTLY. THEREFORE, STOCKHOLDERS ARE URGED TO VOTE AS SOON AS POSSIBLE ON THE INTERNET, BY TELEPHONE, OR BY MAIL. Dated: March 26, 2013 By Order of the Board of Directors, John P. Fletcher, Secretary 49

  • Page 56

  • Page 57
    ... 90% of Windstream's total revenue during 2012 and due to the uncertainty surrounding the FCC's inter-carrier compensation reform adopted in December 2011, it was very difficult to accurately estimate target amounts for wholesale, switched access and USF revenue for the 2012 fiscal year. Management...

  • Page 58

  • Page 59
    WINDSTREAM CORPORATION ANNUAL REPORT ON FORM 10-K

  • Page 60

  • Page 61
    ...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 62

  • Page 63
    ... 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 Item...

  • Page 64
    ... and managed services. We opened two new data centers during 2012, and we operated 23 data centers as of the end of the year, December 31, 2012. On the consumer front, we continue to make investments to increase broadband speeds and capacity throughout our territories. Although new customer growth...

  • Page 65
    ...We also actively promote value-added Internet services, such as security and online back-up, to take advantage of the broadband speeds we offer. We are also expanding broadband services to unserved and underserved areas through a combination of our own investment and grant funds received as a result...

  • Page 66
    ...June 1, 2010, we completed the acquisition of Iowa Telecommunications Services, Inc. ("Iowa Telecom"), a regional communications services provider. This acquisition added 247,000 voice lines, 96,000 high-speed Internet customers and 25,000 video customers in Iowa and Minnesota. Iowa Telecom expanded...

  • Page 67
    ...designed to help our customers reduce costs and boost productivity. We also offer low cost, high-speed broadband Internet access with reliable connections at speeds up to 24 Mbps. Voice: Voice services consist of basic telephone services, including voice, long-distance and related features delivered...

  • Page 68
    ... access services to long-distance companies and other local exchange carriers for access to our network in connection with the completion of long-distance calls. We also receive compensation from wireless and other local exchange carriers for the use of our facilities. Certain Universal Service Fund...

  • Page 69
    ...facilities in our local markets. Our fiber transport network is fully integrated and allows us to offer a full suite of voice and advanced data services, including, but not limited to, multi-site networking, dedicated Internet and Ethernet solutions, high-speed Internet and VoIP services. In certain...

  • Page 70
    ...not limited to, the following: • Cable television companies: Cable television providers are aggressively offering high-speed Internet, voice and video services in our service areas. These services are typically bundled and offered to our customers at competitive prices. Wireless carriers: Wireless...

  • Page 71
    ... Annual Report on Form 10-K. MANAGEMENT Staff at our headquarters and regional offices supervise, coordinate and assist subsidiaries in management activities including investor relations, acquisitions and dispositions, corporate planning, tax planning, cash and debt management, accounting, insurance...

  • Page 72
    ... synergies and other benefits from completed acquisitions, expected effective federal income tax rates, expected annualized savings from the management restructuring, the amounts expected to be received from the Rural Utilities Service to fund a portion of our broadband stimulus projects and the...

  • Page 73
    ... effects of work stoppages by our employees or employees of other communications companies on whom we rely for service; and those additional factors under the caption "Risk Factors" in Item 1A of this annual report and in subsequent filings with the Securities and Exchange Commission at www.sec.gov...

  • Page 74
    ... condition could be adversely affected. During 2012, our consumer voice lines declined 4.5 percent. Sources of competition include, but are not limited to, wireless companies, cable television companies and other communications carriers. Many of our competitors, especially wireless and cable...

  • Page 75
    ... continue to expand in availability and reliability, they could become an effective alternative to our high-speed Internet services. In addition, cable operators may be able to take advantage of certain technology to deploy faster broadband speeds more rapidly than Windstream. In addition to...

  • Page 76
    ... for customers. Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as web browsing and email. As utilization rates and availability of these services continue to grow, our high-speed Internet customers may use...

  • Page 77
    ... receive state and federal USF revenues to support the high cost of providing affordable telecommunications services in rural markets. Such support payments constituted approximately 4 percent of our revenues for the year ended December 31, 2012. A portion of such fees are based on relative cost and...

  • Page 78
    ... increases were partially offset by routine benefit payments of $60.1 million and lump sum payments and administrative expenses of $19.8 million. Returns generated on plan assets have historically funded a large portion of the benefits paid under our pension plan. We estimate that the long term rate...

  • Page 79
    ... conditions may limit, our ability to do some of these things on favorable terms or at all. As of February 11, 2013, Moody's Investors Service ("Moody's"), S&P and Fitch Ratings ("Fitch") had granted Windstream the following senior secured, senior unsecured and corporate credit ratings: Description...

  • Page 80
    ... calls for long distance and other voice carriers over our network in exchange for access charges. These access charges represent a significant portion of our revenues. Additionally, we are making significant capital investments to deploy fiber-to-the-tower and other network services for wireless...

  • Page 81
    ... in our facilities through our colocation, managed services and cloud computing services. In addition, we maintain certain sensitive customer information in our financial and operating systems. While we have implemented data security polices and other internal controls to safeguard and protect...

  • Page 82
    ... consists primarily of land and buildings, office and warehouse facilities, central office equipment, software, outside plant and related equipment. Outside communications plant includes aerial and underground cable, conduit, poles and wires. Central office equipment includes digital switches and...

  • Page 83
    ...Issuer Purchases of Equity Securities Market Information, Holders and Dividends (a) Our common stock is traded on the NASDAQ Global Select Market under the symbol "WIN". The following table reflects the range of high, low and closing prices of our common stock as reported by Dow Jones & Company, Inc...

  • Page 84
    ... 500 Stock Index and the S&P Telecom Index. The S&P Telecom Index consists of the following companies: AT&T Inc., CenturyLink, Inc., Crown Castle International Corp., Frontier Communications Corp., MetroPCS Communications Inc., Sprint Nextel Corp., Verizon Communications Inc., Windstream Corporation...

  • Page 85
    ... Equity Compensation Plans Under the our share-based compensation plans, we 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 Amended and Restated Equity Incentive Plan...

  • Page 86
    ... by Windstream in the reports that it files or submits under the Exchange Act is accumulated and communicated to Windstream's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding...

  • Page 87
    ... 41 We have a code of ethics that applies to all employees and members of the Board of Directors. Our code of ethics, referred to as the "Working with Integrity" guidelines, is posted on the Investor Relations page of the our web site (www.windstream.com) under "Corporate Governance". We will...

  • Page 88
    ... and Management and Related Stockholder Matters For information pertaining to beneficial ownership of our securities and director independence, refer to "Security Ownership of Directors and Executive Officers", "Security Ownership of Certain Beneficial Owners" and "Board and Board Committee Matters...

  • Page 89
    ... of Shareholders' Equity for the years ended December 31, 2012, 2011 and 2010 Notes to Consolidated Financial Statements F-34 F-35 F-36 F-37 F-38 F-39 F-40 - F-94 Form 10-K Page Number 28 29 2. Financial Statement Schedules: Report of Independent Registered Public Accounting Firm Schedule II...

  • Page 90
    ...duly authorized. Windstream Corporation Registrant By /s/ Jeffery R. Gardner Jeffery R. Gardner, President and Chief Executive Officer Date: February 19, 2013 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 91
    ... Schedule 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 19, 2013 appearing in this 2012 Annual Report on Form...

  • Page 92
    ... of NuVox and lowa Telecom. Costs primarily include charges for accounting, legal, broker fees and other miscellaneous costs associated with the acquisitions of NuVox, Iowa Telecom, Hosted Solutions, Q-Comm and PAETEC. In addition, we incurred employee transition costs, primarily severance related...

  • Page 93
    EXHIBIT INDEX Number and Name 2.1 Agreement and Plan of Merger, dated July 31, 2011, by and among Windstream Corporation, Peach Merger Sub, Inc. and PAETEC Holding Corp. (incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K of PAETEC dated July 31, 2011). Amended and ...

  • Page 94
    ... and Joint Arrangers (incorporated by reference to Exhibit A to Exhibit 10.1 to the Corporation's Form 8-K dated January 23, 2013). Director Compensation Program dated February 6, 2013. Form of Restricted Shares Agreement (Non-Employee Directors) entered into between Windstream Corporation and non...

  • Page 95
    ...Shares Agreement (Officers: Performance-Based Restricted Stock-Clawback Policy/ Accrued Dividends) entered into between Windstream Corporation and its executive officers (incorporated herein by reference to Exhibit 10.2 to the Corporation's Current Report dated February 19, 2010). Form of Restricted...

  • Page 96
    ...to PAETEC Holding Corp.'s Registration Statement on Form S-3 (SEC File Number 333-159344) and incorporated herein by reference). Registration Rights Agreement dated as of January 23, 2013 among Windstream Corporation, certain subsidiaries of Windstream, as guarantors, and Wells Fargo Securities, LLC...

  • Page 97
    WINDSTREAM CORPORATION FINANCIAL SUPPLEMENT TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012

  • Page 98

  • Page 99
    ... 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, 2012, 2011 and 2010...

  • Page 100
    ... in our business service areas; significant success-based capital investments in our fiber network, designed to accommodate network capacity requirements for wireless carriers as a result of growing wireless data usage; the review of our management structure to increase the efficiency of...

  • Page 101
    ...speed Internet customer growth to continue to slow as the number of households without high-speed Internet service shrinks and our penetration continues to increase. However, we believe growing customer demand for faster speeds and value-added services, such as online security and backup, will drive...

  • Page 102
    ... data centers and approximately 600 business customers. Iowa Telecom - On June 1, 2010, we completed the acquisition of Iowa Telecommunications Services, Inc. ("Iowa Telecom"), a regional communications services provider. This acquisition added 247,000 voice lines, 96,000 high-speed Internet...

  • Page 103
    ... of tax Net income Operating Metrics: (Thousands) Business Operating Metrics: Customers Enterprise Small business Total customers (c) Carrier special access circuits Consumer Operating Metrics: Voice lines High-speed Internet Digital television customers Total consumer connections (a) 2012 2011 2010...

  • Page 104
    ... Due to acquired companies Due to changes in data and integrated services revenues (a) Due to increases in carrier revenues (b) Due to increases in data center and managed service revenues (c) Due to increases in high-speed Internet revenues Due to decreases in voice, long distance and miscellaneous...

  • Page 105
    ... from wireless carriers, cable television companies and other providers using emerging technologies. For the twelve months ended December 31, 2012, consumer voice lines decreased by approximately 86,000, or 4.5 percent. Increasing revenues from high-speed Internet and related services helped offset...

  • Page 106
    ...those areas. As a result, we expect other service revenues to decline as existing customers disconnect. The following table reflects the primary drivers of year-over-year changes in other service revenues: Twelve Months Ended December 31, 2012 (Millions) Due to acquired companies Due to increases in...

  • Page 107
    ... the growth in data customers, as well as higher capacity circuits to service existing customers and increase the transport capacity of our network, partially offset by the favorable impact of network efficiency projects and rate reductions. Increases in federal USF contributions in 2012 and 2011...

  • Page 108
    ... professional fees. These expenses include associated salaries, wages and employee benefits not directly associated with the provision of services. The following table reflects the primary drivers of year-over-year changes in SG&A expenses: Twelve Months Ended December 31, 2012 Increase % (Decrease...

  • Page 109
    ... and related costs; IT and network conversion; rebranding; and consulting fees. Our recent acquisitions of PAETEC, NuVox, Iowa Telecom, Q-Comm, and Hosted Solutions described in the section "Strategic Transactions" drive merger and integration costs for the years presented. Restructuring charges are...

  • Page 110
    ... the years ended December 31: (Millions) Merger and integration costs Transaction costs associated with acquisitions (a) Employee related transition costs (b) Information technology conversion costs Rebranding, consulting and other costs (c) Total merger and integration costs Restructuring charges...

  • Page 111
    ... $ 2010 1.2 0.5 (0.3) - (4.5) (0.4) (3.5) $ The increase for 2012 was primarily due to the sale of wireless assets associated with Iowa Telecom and D&E Communications, Inc ("D&E"). See Note 2 to the consolidated financial statements. This increase in expense was due to a charge to earnings related...

  • Page 112
    ... the years ended December 31, 2012 and 2011, respectively. The increase in 2012 was primarily due to interest incurred on notes issued by subsidiaries, specifically PAETEC. The increase in 2011 was primarily due to interest incurred on additional debt issued during 2011. We enter into interest rate...

  • Page 113
    ... 2013 and add all remaining funds from CAF Phase 1 to the budget for CAF Phase 2. The FCC is working to establish rules for CAF Phase 2 funding based on a forward-looking cost model to further extend broadband to high-cost areas. The development of this model was not completed by the end of 2012 as...

  • Page 114
    ... information related to the broadband stimulus expenditures and receipts for the years ended December 31 is as follows: (Millions) Stimulus capital expenditures funded by RUS Stimulus capital expenditures funded by Windstream (a) Total stimulus capital expenditures Funds received from RUS (a) 2012...

  • Page 115
    ... 2012, we received $77.7 million from the large company program and $10.6 million from the small company program. The purpose of the Texas USF is to assist telecommunications carriers with providing basic local telecommunications services at reasonable rates to customers in high cost rural areas and...

  • Page 116
    ... USF recipient companies and demonstration of the continuing need for support in high-cost areas. We cannot estimate at this time the financial impact that would result from changes, if any, to these other state funds. Intercarrier Compensation There is an ongoing intercarrier compensation reform...

  • Page 117
    ... fund the expected benefit payments related to the unfunded supplemental executive retirement pension plans. The amount and timing of future contributions to the pension plan are dependent upon a myriad of factors including future investment performance, changes in future discount rates and changes...

  • Page 118
    ...of broadband stimulus spend, expansion of our data center presence and enhancements to our network and the acquisition of PAETEC. Given the growing bandwidth needs fueled by wireless data growth, wireless carriers have aggressively accelerated their fiber deployment plans and increased the number of...

  • Page 119
    ... necessary to fund the expected benefit payments related to the unfunded supplemental executive retirement pension plans and approximately $20.0 million in contributions to avoid certain benefit restrictions, which we intend to make in Windstream stock. The amount and timing of future contributions...

  • Page 120
    ... to grant security on accounts relating to escrow notes and the proceeds of notes held in such accounts. On September 17, 2010, we amended our credit facility to permit the signing of rural broadband stimulus grant agreements with the Rural Utilities Service. On March 18, 2011, we increased the...

  • Page 121
    ...and our access to the public capital markets could be adversely affected. Our exposure to interest risk is further discussed in the Market Risk section below. A downgrade in our current short or long-term credit ratings would not accelerate scheduled principal payments of our existing long-term debt...

  • Page 122
    ... $30.7 million of unamortized premiums (net of discounts) and capital lease obligations, respectively included in long-term debt at December 31, 2012. Variable rates on the senior secured credit facility are calculated in relation to one-month and three-month LIBOR rates, which were 0.21 percent and...

  • Page 123
    ... increases were partially offset by routine benefit payments of $60.1 million and lump sum payments and administrative expenses of $19.8 million. Returns generated on plan assets have historically funded a large portion of the benefits paid under our pension plan. See "Critical Accounting Policies...

  • Page 124
    ...recoverable costs, or decreases in the availability of funds in the programs due to increased participation by other carriers. Allowance for Doubtful Accounts In evaluating the collectability of our trade receivables, we assess a number of factors, including a specific customer's ability to meet its...

  • Page 125
    ... signed into law on August 17, 2006. In general, PPA 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, PPA changed the assumptions used to calculate the minimum lump...

  • Page 126
    ... we entered into four pay fixed, receive variable interest rate swap agreements to serve as cash flow hedges of the interest rate risk inherent in our senior secured credit facilities. We renegotiated the four interest rate swap agreements on December 3, 2010, and again on August 21, 2012, each time...

  • Page 127
    ... synergies and other benefits from completed acquisitions, expected effective federal income tax rates, expected annualized savings from the management restructuring, the amounts expected to be received from the Rural Utilities Service to fund a portion of our broadband stimulus projects and the...

  • Page 128
    ... effects of work stoppages by our employees or employees of other communications companies on whom we rely for service; and those additional factors under the caption "Risk Factors" in Item 1A of this annual report and in subsequent filings with the Securities and Exchange Commission at www.sec.gov...

  • Page 129
    ... the years ended December 31, 2012, 2011, 2010, 2009 and 2008. Acquisitions were also considered significant events affecting our historical operating trends during the periods 2009 through 2011. On November 30, 2011, we acquired PAETEC. During 2010, Q-Comm, Hosted Solutions, Iowa Telecom and Nuvox...

  • Page 130
    ... the internal auditors to review matters relating to our financial statements and financial reporting process, annual financial statement audit, engagement of independent registered public accounting firm, internal audit function, system of internal controls, and legal compliance and ethics programs...

  • Page 131
    ...of our internal control over financial reporting as of December 31, 2012, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Dated February 19, 2013 Jeffery R. Gardner President and Chief Executive Officer...

  • Page 132
    Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Windstream Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows ...

  • Page 133
    ...: Cost of services (exclusive of depreciation and amortization included below) Cost of products sold Selling, general, and administrative Depreciation and amortization Merger and integration costs Restructuring charges Total costs and expenses Operating income Other income (expense), net Gain...

  • Page 134
    ... for employee benefit plans Plan curtailment Amounts included in net periodic benefit cost: Amortization of net actuarial loss Amortization of prior service credits Income tax benefit (expense) Change in postretirement and pension plans Other comprehensive income (loss) Comprehensive income 2012 168...

  • Page 135
    ... Total Assets Liabilities and Shareholders' Equity Current Liabilities: Current maturities of long-term debt and capital lease obligations Current portion of interest rate swaps Accounts payable Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current...

  • Page 136
    ... and equipment Broadband network expansion funded by stimulus grants 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 Cash acquired from PAETEC Changes in...

  • Page 137
    ..., net of tax: Change in postretirement and pension plans Amortization of unrealized losses on de-designated interest rate swaps Changes in designated interest rate swaps Comprehensive (loss) income Share-based compensation expense Stock issued to NuVox shareholders (See Note 3) Stock issued to Iowa...

  • Page 138
    ... base. Due to varying customer billing cycle cut-off, we must estimate service revenues earned but not yet billed at the end of each reporting period. Included in accounts receivable are unbilled receivables related to communications services of $49.2 million and $48.7 million at December 31, 2012...

  • Page 139
    .... On February 22, 2012 and March 30, 2012, we completed the sales of wireless assets acquired from D&E Communications, Inc. ("D&E") and Iowa Telecommunications Services, Inc. ("Iowa Telecom"), respectively. During 2010, $16.6 million of wireless assets acquired from D&E Communications, Inc. and $34...

  • Page 140
    ...plant is retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the plant accounts, with the corresponding gain or loss reflected in operating results. The RUS will have a retained security interest in the assets funded by the broadband stimulus grants over...

  • Page 141
    ... we entered into four pay fixed, receive variable interest rate swap agreements to serve as cash flow hedges of the interest rate risk inherent in our senior secured credit facilities. We renegotiated the four interest rate swap agreements on December 3, 2010, and again on August 21, 2012, each time...

  • Page 142
    ... to customers. Revenues derived from other telecommunications services, including interconnection, long distance and enhanced service revenues are recognized monthly as services are provided. Revenue from sales of indefeasible rights to use fiber optic network facilities ("IRUs") and the related...

  • Page 143
    ... the acquisition of PAETEC, we granted restricted stock units to former PAETEC employees to replace outstanding, unvested PAETEC restricted stock units held by these same employees as of the acquisition date. Since these restricted stock units contain a non-forfeitable right to receive dividends on...

  • Page 144
    ... In connection with the preparation of our consolidated financial statements for the year ended December 31, 2012, we became aware of and corrected an error in the accounting for certain promotional credits for new consumer customers. Previously, promotional credits issued on a customer's first...

  • Page 145
    .... With the assistance of outside expertise, we completed analyses of the depreciable lives of assets held for certain subsidiaries during the year 2012. Based on those results, we implemented new depreciation rates resulting in a net increase to depreciation of $59.1 million and a net decrease in...

  • Page 146
    ... and fiber transport services. The following table summarizes the final fair values of the assets acquired and liabilities assumed for PAETEC. (Millions) Fair value of assets acquired: Cash and other current assets Accounts receivable Property, plant and equipment Goodwill Customer lists (a) Trade...

  • Page 147
    ... in the future. Acquisition of Q-Comm - On December 2, 2010, we completed the acquisition of Q-Comm Corporation ("Q-Comm"), a privately held regional fiber transport and business communications provider. This acquisition significantly enhanced our fiber network with increased scale and business...

  • Page 148
    ... 1, 2010, Iowa Telecom provided service to approximately 247,000 voice lines, 96,000 high-speed Internet customers and 25,000 digital television customers in Iowa and Minnesota. Pursuant to the merger agreement, each share of Iowa Telecom common stock was converted into the right to receive 0.804...

  • Page 149
    ...for NuVox, Iowa Telecom, Hosted Solutions, Q-Comm and PAETEC (collectively known as the "Acquired Companies"). The accompanying consolidated financial statements reflect our combined operations with the Acquired Companies for the periods following the respective acquisition dates. Employee severance...

  • Page 150
    ... based on the fair value of such awards at the acquisition date and will be recognized as compensation cost over the remaining future service period. The purchase price allocations for the Acquired Companies have been completed. Pro forma financial results related to the acquisitions of the Acquired...

  • Page 151
    ... as of December 31, 2012: Intangible Assets 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 - 15 years 15 years 1 - 3 years Amortization expense for intangible assets...

  • Page 152
    ... 15, 2015 PAETEC 2018 Notes - 9.875%, due December 1, 2018 Capital lease obligations Premium on long-term debt, net Less current maturities Total long-term debt and capital leases Weighted average interest rate Weighted maturity Senior Secured Credit Facilities Effective August 8, 2012, we incurred...

  • Page 153
    ....248 percent to yield 8.25 percent. Proceeds from the issuance were used 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. 2019 Notes...

  • Page 154
    ...we may call debt held by Windstream Holdings of the Midwest, Inc. at various premiums on early redemption. Premium on long-term debt, net of discounts The premium on long-term debt, net of discounts is primarily due to the debt issuance premium recorded on the debt acquired in the PAETEC acquisition...

  • Page 155
    ... Extinguishment of Debt During the twelve months ended December 31, 2012, we retired all $300.0 million of the outstanding PAETEC 2015 Notes. The PAETEC 2015 Notes were purchased using borrowings on our revolving line of credit. The retirements were accounted for under the extinguishment method, and...

  • Page 156
    ... as of December 31, 2012 and 2011. (b) (c) Our cash equivalents are primarily highly liquid, actively traded money market funds with next day access. The fair values of our interest rate swaps were determined based on the present value of expected future cash flows using observable, quoted LIBOR...

  • Page 157
    ... based on the closing price of our stock on November 30, 2011, and the fair value of the equity awards assumed, as part of the consideration paid to acquire PAETEC (see Note 3). Also as part of this transaction, we assumed $1,591.3 million in long-term debt net of cash acquired, which includes a net...

  • Page 158
    ... ended December 31: Pension Benefits (Millions) Benefits earned during the year Interest cost on benefit obligation Net actuarial loss Amortization of net actuarial loss Amortization of prior service credit Plan curtailment Expected return on plan assets Net periodic benefit expense (income) $ 2012...

  • Page 159
    ... and funded status of the plans (including executive retirement agreements) were as follows at December 31: Pension Benefits (Millions) Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Participant contributions Benefits paid (a) Medicare Part...

  • Page 160
    ... (income) were as follows for the years ended December 31: (Millions) Discount rate Expected return on plan assets Rate of compensation increase Pension Benefits 2012 2011 4.64% 5.31% 8.00% 8.00% 4.17% 3.44% 2010 5.89% 8.00% 3.44% Postretirement Benefits 2012 2011 2010 4.58% 5.11% 5.79% 8.00% 8.00...

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

  • Page 162
    ... to make in Windstream stock. The fair values of our pension plan assets were determined using the following inputs as of December 31, 2012: Quoted Price in Active Markets for Identical Assets (Millions) Domestic equities (b) International equities (b) Agency backed bonds (b) Asset backed securities...

  • Page 163
    ... equity is initially valued by the investment managers based upon cost, then adjusted for available market data based upon observations of the trading multiples of public companies considered comparable to the private companies being valued. Such market data used to determine adjustments to accounts...

  • Page 164
    ... to fund the expected benefit payments related to the unfunded supplemental executive retirement pension plans and approximately $20.0 million in contributions to avoid certain benefit restrictions. During 2011, we contributed 10.8 million shares of our common stock to our pension plan to meet our...

  • Page 165
    ... is funded annually. We expect to make the 2012 contribution in Windstream stock, whereas the contribution was made in cash prior to 2012. We recorded $17.8 million, $13.7 million and $10.9 million in 2012, 2011 and 2010, respectively, related to the employee savings plan, which was included in cost...

  • Page 166
    ...Share-Based Compensation Plans, Continued: (b) In conjunction with the acquisition of Iowa Telecom, we granted 222,400 shares of restricted stock to former Iowa Telecom employees to replace outstanding, unvested Iowa Telecom restricted stock shares held by these same employees as of acquisition date...

  • Page 167
    ... holders had exercised their options on December 31, 2012. This amount changes based on the fair market value of Windstream's common stock. The aggregate intrinsic value of options exercised during the year ended December 31, 2012 was approximately $2.8 million. Total compensation expense related...

  • Page 168
    ... and broker fees; severance and related costs; IT and network conversion; rebranding; and consulting fees. Our recent acquisitions of PAETEC, NuVox, Iowa Telecom, Q-Comm, and Hosted Solutions described in Note 3 drive merger and integration costs for the years presented. Restructuring charges are...

  • Page 169
    ..., were as follows for the years ended December 31: Statutory federal income tax rate Increase (decrease) State income taxes, net of federal benefit Adjust deferred taxes for state net operating loss carryforward Acquisition costs Tax refund interest Other items, net Effective income tax rate 2012 35...

  • Page 170
    ... Lexcom, NuVox, Iowa Telecom, Q-Comm and PAETEC. The 2012 decrease is primarily associated with final adjustments to the state loss carryover from PAETEC and were recorded with an offset through goodwill. Federal and state tax rules limit the deductibility of loss carryforwards in years following an...

  • Page 171
    ... to acquired net operating losses, tax authorities have the ability to adjust those net operating losses related to closed years. We have identified Arkansas, California, Florida, Georgia, Illinois, Iowa, Kentucky, Nebraska, New York, North Carolina, Pennsylvania, Texas and Virginia as "major" state...

  • Page 172
    ...the GRS as a rate. Additionally, on July 22, 2012, the federal court formally certified a class of all retail and wholesale Windstream customers assessed the GRS on services subject to our federal tariff. We filed an interlocutory appeal of the class certification with the Sixth Circuit. On November...

  • Page 173
    ... the years ended December 31, 2012, 2011 and 2010 of the parent company, the Guarantors and the Non-Guarantors. Investments consist of investments in net assets of subsidiaries held by the parent company and other subsidiaries, and have been presented using the equity method of accounting. Condensed...

  • Page 174
    ... and expenses: Cost of services Cost of products sold Selling, general and administrative Depreciation and amortization Merger and integration costs Restructuring charges Total costs and expenses Operating income Earnings (losses) from consolidated subsidiaries Other (expense) income, net Loss on...

  • Page 175
    ... Costs and expenses: Cost of services Cost of products sold Selling, general and administrative Depreciation and amortization Merger and integration costs Restructuring charges Total costs and expenses Operating income Earnings from consolidated subsidiaries Other (expense) income, net Intercompany...

  • Page 176
    ... capital lease obligations Current portion of interest rate swaps Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt and capital lease obligations Deferred...

  • Page 177
    ... capital lease obligations Current portion of interest rate swaps Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt and capital lease obligations Deferred...

  • Page 178
    ... Provision for doubtful accounts Equity in earnings from subsidiaries Share-based compensation expense Pension expense Deferred income taxes Unamortized net premium on retired debt Amortization of unrealized losses on dedesignated interest rate swaps Plan curtailment Other, net Changes in operating...

  • Page 179
    ... accounts Equity in (earnings) losses from subsidiaries Share-based compensation expense Pension expense Deferred income taxes Unamortized net discount on retired debt Amortization of unrealized losses on dedesignated interest rate swaps Plan curtailment Other, net Pension contribution Changes...

  • Page 180
    ... equipment 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 used in investing activities Cash Flows from Financing Activities: Dividends...

  • Page 181
    ... flows for the years ended December 31, 2012, 2011 and 2010 of the Parent, the Guarantors and the Non-Guarantors. Investments consist of investments in net assets of subsidiaries held by the Parent and other subsidiaries, and have been presented using the equity method of accounting. We have made...

  • Page 182
    ... Statement of Income For the Year Ended December 31, 2012 (Millions) Parent PAETEC Issuer Guarantors NonGuarantors 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 and...

  • Page 183
    ... and expenses: Cost of services Cost of products sold Selling, general and administrative Depreciation and amortization Merger and integration costs Restructuring charges Total costs and expenses Operating income Earnings (losses) from consolidated subsidiaries Other (expense) income, net Loss on...

  • Page 184
    ... Statement of Income For the Year Ended December 31, 2010 (Millions) Parent PAETEC Issuer Guarantors NonGuarantors 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 and...

  • Page 185
    ... capital lease obligations Current portion of interest rate swaps Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt and capital lease obligations Deferred...

  • Page 186
    ... capital lease obligations Current portion of interest rate swaps Accounts payable Affiliates payable, net Advance payments and customer deposits Accrued dividends Accrued taxes Accrued interest Other current liabilities Total current liabilities Long-term debt and capital lease obligations Deferred...

  • Page 187
    ... for doubtful accounts Equity in (earnings) losses from subsidiaries Share-based compensation expense Pension expense Deferred income taxes Unamortized net premium on retired debt Amortization of unrealized losses on dedesignated interest rate swaps Plan curtailment Other, net Changes in operating...

  • Page 188
    ...rate swaps Plan curtailment Other, net Changes in operating assets and liabilities, net Net cash (used in) provided from operations Cash Flows from Investing Activities: Additions to property, plant and equipment Broadband network expansion funded by stimulus grants Cash acquired from PAETEC Changes...

  • Page 189
    ... equipment 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 used in investing activities Cash Flows from Financing Activities: Dividends...

  • Page 190
    ... PAETEC 2017 Notes, together with related fees and expenses. The remaining net proceeds of the notes offering, together with available cash, will be used to redeem all of the remaining outstanding PAETEC Notes. On January 23, 2013, we announced that we had amended our existing senior secured credit...

  • Page 191
    ... amounts) For the quarter ended September 30, 2012 Consumer service revenues Total service revenues Product sales Total revenues and sales Selling, general, and administrative Income taxes Income from continuing operations Net income (loss) Basic and diluted earnings per share: Net income (loss) As...

  • Page 192
    ... Reported $ 338.0 1,488.4 56.8 1,545.2 40.0 64.7 64.6 $.11 (Millions, except per share amounts) For the quarter ended March 31, 2012 Consumer service revenues Total service revenues Product sales Total revenues and sales Income taxes Income from continuing operations Net income (loss) Basic...

  • Page 193
    ... M&I costs Pro forma operating income Depreciation and amortization expense PAETEC pre-acquisition depreciation and amortization expense Pro forma OIBDA (B) Other adjustments: Pension expense Restructuring charges Share-based compensation PAETEC share-based compensation prior to acquisition Pro...

  • Page 194
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  • Page 195
    ...800-697-8153 http://www.computershare.com/us/investor Individual Shareholder Contact: Genesis white Staff Manager of Investor Relations and Capital Markets Windstream Corporation 4001 Rodney Parham Road Little Rock, AR 72212-2442 Phone: 501-748-7216 E-mail: [email protected] Windstream...

  • Page 196
    Windstream Corporation 4001 Rodney Parham Road | Little Rock, AR 72212 windstream.com