**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

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**(MarkOne)**

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|-------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2002**

 

**or**

 

| **o** |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from                 to                 .**

 

**Commission File Number 1-15307**

 

**BROADWING COMMUNICATIONS INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                             |   | **74-2644120**                        |
|--------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)          |   | (I.R.S. Employer  Identification No.) |
|                                                                     |   |                                  |
| **1122  Capital of Texas Highway South, Austin, Texas  78746-6426** |

 

(Registrant’s telephonenumber, including area code):  **(512) 328-1112**

 

**Securitiesregistered pursuant to Section 12(b) of the Act:**

 
| **Title of each class**                                                                    |   | **Name of  each exchange  on which registered** |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------------------|
| 12 1/2% Series B Junior  Exchangeable Preferred Stock Due 2009 (par value $0.01 per share) |   | New York Stock Exchange                         |

 

Securitiesregistered pursuant to Section 12(g) of the Act**: None**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ýNo o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes  ý  No o

 

All outstanding shares of the Registrant’s commonstock are owned by Broadwing Inc.

 

The aggregate market value of the Preferred Stock ofthe Registrant held by non-affiliates of the Registrant on February 28, 2003based on the closing price of the Preferred Stock on the New York StockExchange on such date, was $23,712,600.

 

The number of shares of Preferred Stock outstandingwas 395,210 on February 28, 2003.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Registrant’s Information Statement to be filed with theSecurities and Exchange Commission within 120 days of December 31, 2002.

 

 

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**BROADWING COMMUNICATIONS INC.**

 

**FORM10-K**

 

**For theFiscal Year Ended December 31, 2002**

 

**TABLE OF CONTENTS**

 
| **PART I**     |
|----------------|
|           |   |
| Item 1.        | Business |
| Item 2.        | Properties |
| Item 3.        | Legal Proceedings |
| Item  4.       | Submission  of Matters to a Vote of Security Holders |
|           |   |
| **PART II**    |
|           |   |
| Item  5.       | Market  for Registrant’s Common Equity and Related Stockholder Matters |
| Item 6.        | Selected Financial  Data |
| Item  7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  7A.      | Quantitative  and Qualitative Disclosures About Market Risk |
| Item  8.       | Financial  Statements and Supplementary Schedules |
| Item  9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |
|           |   |
| **PART III**   |
|           |   |
| Item  10.      | Directors  and Executive Officers of the Registrant |
| Item 11.       | Executive Compensation |
| Item  12.      | Security  Ownership of Certain Beneficial Owners and Management |
| Item  13.      | Certain  Relationships and Related Transactions |
| Item 14.       | Internal  Controls and Procedures |
|           |   |
| **PART IV**    |
|           |   |
| Item  15.      | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |
|           |   |
| Signatures     |
| Certifications |

 

 

This report contains trademarks, service marks and registeredtrademarks and registered marks of the Company and its subsidiaries, asindicated.

 

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**Private Securities Litigation ReformAct of 1995 Safe Harbor Cautionary Statement**

 

This Form 10-K contains “forward-looking” statements, as defined infederal securities laws including the Private Securities Litigation Reform Actof 1995, which are based on Broadwing Communications Inc (“the Company”)current expectations, estimates and projections.  Statements that are not historical facts, including statementsabout the beliefs, expectations and future plans and strategies of the Company,are forward-looking statements.  Theseinclude any statements regarding:

 

•         futurerevenue, profit percentages, income tax refunds, realization of deferred taxassets, earnings per share or other results of operations;

•         thecontinuation of historical trends;

•         thesufficiency of cash balances and cash generated from operating and financingactivities for future liquidity and capital resource needs;

•         the effectof legal and regulatory developments; and

•         the economyin general or the future of the communications services industries.

 

Actual results may differ materially from those expressed or implied inforward-looking statements.  Thesestatements involve potential risks and uncertainties, which include, but arenot limited to:

 

•         changingmarket conditions and growth rates within the telecommunications industry orgenerally within the overall economy;

•         world andnational events that may affect the Company’s ability to provide services orthe market for telecommunication services;

•         changes incompetition in markets in which the Company operates;

•         pressureson the pricing of the Company’s products and services;

•         advances intelecommunications technology;

•         the abilityto generate sufficient cash flow to fund the Company’s business plan andmaintain its networks;

•         the abilityto refinance the Company’s indebtedness when required on commercially reasonableterms;

•         changes inthe demand for the services and products of the Company;

•         the demandfor particular products and services within the overall mix of products sold,as the Company’s products and services have varying profit margins;

•         theCompany’s ability to procure key network components from key vendors;

•         theCompany’s ability to rely on portions of other company’s networks underoperating leases and indefeasible- right-of-use (“IRU”) agreements;

•         theCompany’s ability to introduce new service and product offerings in a timelyand cost effective basis;

•         theCompany’s ability to attract and retain highly qualified employees; and

•         theCompany’s ability to access capital markets and the successful execution ofrestructuring initiatives.

 

You are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date on which they weremade. The Company does not undertake any obligation to update anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

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**ITEM 1.  BUSINESS**

 

**Overviewand Recent Events**

 

Broadwing Communications Inc. (“BCI” or “theCompany”) is an Austin, Texas based provider of data and voice communications services.  These services are provided overapproximately 18,700 route miles of fiber-optic transmission facilities.  The Company’s revenue is generated bybroadband transport through private line and IRU agreements, Internet servicesutilizing technology based on Internet protocol (“IP”), and switched voiceservices provided to both wholesale and retail customers.  The Company also offers data collocation,information technology consulting, network construction and other services.

 

The Company is a wholly owned subsidiary of Broadwing Inc. (“Broadwing”or “the Parent Company”).  On November9, 1999 the Company was merged with a wholly owned subsidiary of Broadwing(“the Merger”).  The Merger wasaccounted for as a purchase business combination and, accordingly, the purchaseaccounting adjustments, including goodwill, have been pushed down and arereflected in these financial statements in all periods subsequent to November9, 1999.

 

As of January 1, 2002, the web hosting operations of the ParentCompany’s ZoomTown subsidiary were merged with the operations of BCI and arereflected in the data and Internet product line.

 

On February 22, 2003, certain subsidiaries of the Parent Companyentered into a definitive agreement to sell substantially all of the assets ofthe Company, excluding the information technology consulting assets, to C IIICommunications (“C III”), for up to $129 million in cash and the assumption ofcertain long-term operating contractual commitments.  The sale is subject to certain closing conditions, includingapproval by the Federal Communications Commission (“FCC”) and relevant statepublic utility commissions.  The ParentCompany expects to close the sale in 2003. The Company will retain a 3% minority interest in the new company.  The carrying value of the current andlong-lived assets to be sold totaled $103 million and $41 million,respectively, as of December 31, 2002. The carrying value of the current and long-term liabilities to beassumed totaled $180 million and $293 million, respectively, as of December 31,2002.

 

In addition, the Parent Company’s local communications subsidiary,Cincinnati Bell Telephone (“CBT”), entered into agreements with C III wherebyCBT will continue to market BCI’s broadband products to business customers andpurchase capacity on its network in order to sell long distance services, underthe Cincinnati Bell Any Distance (“CBAD”) brand, to residential and businesscustomers in the Greater Cincinnati area market after the closing of the sale.

 

On March 26, 2003, the Parent Company issued $350 million of mezzaninefinancing through Senior Subordinated Discount Notes Due 2009 (the “MezzanineFinancing”). The Mezzanine Financing was provided by Goldman Sachs, togetherwith certain other institutions and contains financial and non-financialcovenants including restrictions on the Parent Company’s ability to fund theoperations of the Company.  Proceedsfrom the Mezzanine Financing, net of fees, were used to pay down borrowingsunder the Parent Company’s credit facility.

 

In conjunction with the Mezzanine Financing, the Parent Company’scredit facility was also amended and restated ("Amended and RestatedCredit Agreement") to, among other things, extend the revolvingcommitment, revise the financial covenants and allow for the sale ofsubstantially all of the assets of the broadband business. As a result ofthe  terms of the amendment the totalborrowing capacity will decrease from $1.825 billion to approximately $1.343billion through 2003 and the maturities of the revolving portion of the credit

 

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facility were extended to 2005 and 2006. The amendment was required bythe term of the Mezzanine Financing and was necessary to meet the ParentCompany’s 2003 liquidity requirements.

 

The terms of the Mezzanine Financing and Amended and Restated CreditAgreement limit the Parent Company’s ability to make investments in or fund theoperations of the Company. Specifically, the Parent Company and its othersubsidiaries may not make investments in or fund the operations of the Companybeyond an aggregate amount of $118 million after October 1, 2002.  This restriction does not apply toguarantees by Broadwing of the Company’s borrowings under the creditfacilities, liens on assets of Broadwing securing Company borrowings under thecredit facilities, scheduled interest payments made or guaranteed by Broadwingin respect to Company borrowings under the credit facilities, and certain otheritems.  As of February 28, 2003, theParent Company had the ability to invest an additional $58 million in theCompany based on these provisions. The uncertainty of the Company's availableliquidity resulting from these funding constraints, has prompted the Company’sindependent accountants to include a going concern explanatory paragraph intheir audit report.  The going concernexplanatory paragraph means that, in the opinion of the Company’s independentaccountants, there is substantial doubt about the Company’s ability to continueto operate as going concern.  If theCompany is unable to finance its operations through the closing of the assetsale and meet its remaining obligations, or if a sale is not consummated, itmay be forced to seek protection from its creditors through bankruptcyproceedings.

 

In addition, in March 2003, the Parent Company reached an agreementwith holders of more than two-thirds of the Company’s 121⁄2 percent preferredstock and 9 percent senior subordinated notes to exchange these instruments forcommon stock of the Parent Company.

 

The Parent Company was initially incorporated under the laws of Ohio in1873 and remains incorporated under the laws of Ohio.  It has its principal executive offices at 201 East Fourth Street,Cincinnati, Ohio 45202 (telephone number (513) 397-9900 and website addresshttp://www.broadwing.com).  The ParentCompany makes available on its website its and the Company’s reports on form10-K, 10-Q, and 8-K (as well as all amendments to these reports) as soon as practicableafter they have been filed.

 

The Company files annual, quarterly and special reports, proxystatements and other information with the Securities Exchange Commission (“theSEC”) under the Exchange Act.  Thesereports and other information filed by the Company may be read and copied atthe Public Reference Room of the SEC, 450 Fifth Street, N.W., Room 1024,Washington, D.C. 20549.  Thisinformation may be obtained on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.  TheSEC also maintains an Internet site that contains reports, proxy statements andother information about issuers, like the Company, which file electronicallywith the SEC.  The address of this siteis http://www.sec.gov.

 

**Business**

 

Broadband transport services consist of long-haul transmission of data,voice and Internet traffic over dedicated circuits.  Revenue from the broadband transport category is mainly generatedby private line monthly recurring revenue. However, approximately 44%, 29% and 14% of the broadband transportrevenue in 2002, 2001 and 2000, respectively, was provided by IRU agreements,which cover a fixed period of time and represent the lease of capacity ornetwork fibers.  The buyer of IRUservices typically pays cash upon execution of the contract.  The Company’s policy and practice is toamortize these payments into revenue over the life of the contract.  In the event the buyer of an IRU terminatesa contract prior to the contract expiration and releases the Company from theobligation to provide

 

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future services, the remaining unamortized unearned revenue isrecognized in the period in which the contract is terminated.  In 2002, the Company recognized non-cash,non-recurring revenue and operating income related to IRU terminations withbankrupt customers to whom the Company was no longer obligated to provideservices, totaling $59 million. Broadband transport services produced 43% of the Company’s total revenuein 2002 and 39% of the Company’s total revenue in 2001 and 2000.

 

Switched voice services consist of billed minutes of use, primarily forthe transmission of voice long distance services on behalf of both wholesaleand retail customers.  Switched voiceservice revenue has been decreasing as a percentage of total revenue due todeclining rates as a result of intense competition.  As the Company focused its efforts on retaining higher marginrevenue, the Company minimized sales to less creditworthy customers, tightenedcredit to wholesale customers in the wake of increasing bankruptcies in thetelecommunications industry and exited its telemarketing operations to itslow-end customer base.  Additionally, inthe fourth quarter of 2002, the Company announced its plan to exit the low margininternational wholesale voice business. As a result, the Company expects switched voice service revenue tocontinue to decline going-forward. Switched voice services provided 31%, 32% and 41% of total revenue in2002, 2001 and 2000, respectively.  Theinternational wholesale voice business provided 7%, 8% and 5% of total revenuein 2002, 2001 and 2000, respectively.

 

Data and Internet services consist of the sale of high-speed datatransport services utilizing technology based on Internet protocol (“IP”),ATM/frame relay, data collocation and web hosting.  These services continued to grow as a percentage of totalrevenue, increasing from 7% in 2000 to 10% in 2001 to 12% in 2002.  Data collocation services generated revenueof $8 million, $15 million, and $6 million in 2002, 2001 and 2000, respectively.  The decrease in data collocation revenue in2002 was primarily due to the Company closing eight of its eleven data centersas part of its November 2001 restructuring plan discussed in Note 3 of the ConsolidatedFinancial Statements.

 

IT consulting consists of information technology consulting servicesand related hardware sales.  Theseservices are provided by Broadwing Technology Solutions (“BTS”), a wholly ownedsubsidiary of BCI.  Informationtechnology consulting revenue was $144 million in 2002, or $3 million higherthan in 2001 and $78 million higher than in 2000.

 

Network construction and other services consist of large, joint-usenetwork construction projects and the receipt of warrants in 2000 related to afield trial of optical equipment.  TheCompany typically gains access to rights-of-way or additional fiber routesthrough its network construction activities. In November 2001, the Company announced its intention to exit thenetwork construction business upon completion of one remaining contract asdiscussed in Note 3 of the Notes to Consolidated Financial Statements.  That contract to build a 1,550 mile fiberroute system is in dispute as discussed in Note 14 of the Notes to ConsolidatedFinancial Statements.  In 2002, networkconstruction projects provided no revenue, compared to $87 million and $68million in 2001 and 2000, respectively.

 

The Company’s network includes an Internet backbone and incorporatesoptical switching technology.  In orderto maintain its network, the Company relies on supplies from certain keyexternal vendors and a variety of other sources.

 

As revenue from the Company is primarily generated by usage-based andmonthly service fees, the operations follow no particular seasonalpattern.  However, the Company receivedapproximately 57%, 64% and 67% of its revenue in 2002, 2001 and 2000,respectively, from interexchange carriers that have or are capable ofconstructing their own network facilities but utilize the Company’s broadbandtransport, switched voice and network construction services to augment theirown networks.  Cincinnati Bell AnyDistance (“CBAD”), a subsidiary of the Parent Company, contributed

 

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interexchange carrier revenue, included in the amounts above, of 4% tototal Company revenue in 2002 and 3% in 2001 and 2000.  Remaining revenue is generated by businessenterprise customers through the purchase of broadband transport, data andInternet, switched voice and IT consulting services.

 

Prices and rates for the Company’s service offerings are primarilyestablished through contractual agreements. Accordingly, the Company is influenced by competitive conditions such asthe number of competitors, availability of comparable service offerings and theamount of fiber network capacity available from these competitors.

 

The Company faces significant competition from other fiber-basedtelecommunications companies such as AT&T Corp., WorldCom, Inc., SprintCorporation, Level 3 Communications, Inc., Qwest Communications InternationalInc., and several emerging and recapitalized competitors.  These competitors attempt to compete on thebasis of price, quality, service and product breadth.  BTS, a business unit of BCI, competes with Intranet hardwarevendors, wiring vendors, and other information technology consultingbusinesses.  The web hosting operationsof BTS face competition from nationally known web hosting providers.

 

**Employees**

 

At December 31, 2002, the Company employed 1,500 people, of whom 400provided operational and technical services, 500 engaged in sales services, 400provided information technology consulting services at BTS and the balanceengaged in administration and marketing. These employees are not represented by labor unions, and the Company considersemployee relations to be good.

 

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**RiskFactors**

 

***The Parent Companyis highly leveraged***

 

The Parent Company is highly leveraged and has significant debt serviceobligations.  As of December 31, 2002,the Parent Company had outstanding indebtedness of $2,558 million, minorityinterest of $444 million (which represents the Company’s 12.5% preferred stocksecurity) and total shareowners’ deficit of $2,548 million.  As of December 31, 2002 the Parent Companyhad the ability to borrow an additional $164 million under its revolving creditfacility, subject to compliance with certain conditions.  In March 2003, the Parent Company completedan amendment to its credit facility, which included the extension of revolvingcredit maturity to 2005 and 2006, and the acceleration of a portion of thematurities of term loans from banking institutions from 2004 into 2003.

 

The Parent Company’s substantial debt could have important consequencesto the shareowners, including the following:

 

•                  theParent Company will be required to use a substantial portion of its cash flowfrom operations to pay principal and interest on its debt, thereby reducing theavailability of cash flow to fund working capital, capital expenditures,strategic acquisitions, investments and alliances and other general corporaterequirements;

•                  theParent Company’s interest expense could increase if interest rates in generalincrease because a substantial portion of its debt bears interest at floating rates;

•                  theParent Company’s substantial leverage could increase its vulnerability togeneral economic downturns and adverse competitive and industry conditions andcould place the Company at a competitive disadvantage compared to those of itscompetitors that are less leveraged;

•                  theParent Company’s debt service obligations could limit its flexibility to planfor, or react to, changes in its business and the industries in which itoperates;

•                  theParent Company’s level of debt may restrict it from raising additionalfinancing on satisfactory terms to fund working capital, capital expenditures,strategic acquisitions, investments and joint ventures and other general corporaterequirements; and

•                  a potential failure to comply with thefinancial and other restrictive covenants in the Parent Company’s debtinstruments, which, among other things, require it to maintain specifiedfinancial ratios could, if not cured or waived, have a material adverse effecton the Parent Company’s ability to fulfill its obligations and on its businessor prospects generally.

 

***The Company is highly leveraged***

 

The Company is highly leveraged and has significant debt serviceobligations.  As of December 31, 2002,the Company had aggregate outstanding indebtedness of $1,738 million and atotal shareowner’s deficit of $2,562 million. Of the Company’s total debt outstanding, $1,498 million is debt owed tothe Parent Company.

 

The Company’s substantial debt could have important consequences,including the following:

 

•                  itwill be required to use a substantial portion of its cash flow from operationsto pay principal and interest on its debt, thereby reducing the availability ofits cash flow to pay dividends on the Company’s preferred stock, fund workingcapital, capital expenditures, strategic acquisitions, investments andalliances and other general corporate requirements;

•                  itssubstantial leverage could increase its vulnerability to general economicdownturns and adverse competitive and industry conditions and could place it ata competitive

 

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disadvantagecompared to those of its competitors that are less leveraged;

•                  itsdebt service obligations could limit its flexibility to plan for, or react to,changes in its business and the industry in which it operates; and

•                  itslevel of debt may restrict it from raising additional financing on satisfactoryterms to fund working capital, capital expenditures, strategic acquisitions,investments and joint ventures and other general corporate requirements.

 

***The Company depends on the receipt ofdividends or other intercompany transfers from its subsidiaries***

 

The Company conducts substantially all of its operations through itssubsidiaries and substantially all of its operating assets are held directly byits subsidiaries.  The Company willtherefore be dependent upon dividends or other intercompany transfers of fundsfrom these subsidiaries in order to pay any dividends on or redeem theCompany’s preferred stock, and to meet its other obligations.

 

Accordingly, in the event of the dissolution, bankruptcy, liquidationor reorganization of the Company, amounts may not be available for payments onthe Company’s preferred stock until after the payment in full of the claims ofits creditors.

 

***Servicingindebtedness requires a significant amount of cash, and the Parent Company’sability to generate cash depends on many factors beyond its control***

 

The Parent Company expects to obtain the cash to make payments on itscredit facility and other indebtedness and to fund working capital, capitalexpenditures and other general corporate requirements from operations,additional sources of debt financing and borrowings under its creditfacility.  The Parent Company’s abilityto generate cash is subject to general economic, financial, competitive,legislative, regulatory and other factors that are beyond the Parent Company’scontrol.  The Company cannot be assuredthat its business will generate sufficient cash flow from operations,additional sources of debt financing will be available to it or that futureborrowings will be available to it under the credit facilities, in each case,in amounts sufficient to enable it to service its indebtedness or to fund itsother liquidity needs.  If the ParentCompany cannot service its indebtedness, it will have to take actions such asreducing or delaying capital expenditures, strategic acquisitions, investmentsand joint ventures, selling assets, restructuring or refinancing indebtednessor seeking additional equity capital, which may adversely affect its customersand affect their willingness to remain customers.  There can be no assurances that any of these remedies could, ifnecessary, be effected on commercially reasonable terms, or at all.  In addition, the terms of existing or futuredebt instruments may restrict the Parent Company from adopting any of thesealternatives.

 

***There can be noassurances that the  Company’ssubsidiaries will be successful in their efforts to complete the sale of thebroadband business***

 

On February 22, 2003, certain subsidiaries of the Parent Companyentered into a definitive agreement to sell substantially all of the Company'sassets, excluding the information technology consulting assets, to C III for upto $129 million in cash and the assumption of certain long-term operating andcontractual commitments.  The sale issubject to certain closing conditions, including approval by the FCC andrelevant state public utility commissions. Broadwing expects that the sale will close in 2003, however, there canbe no assurances that the sale will be completed.  If the Company’s subsidiaries are unable to complete this sale,the Company could face material adverse impacts, including bankruptcy.

 

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***If the sale to CIIIis completed, substantially all of the operating assets of certain of theCompany’s subsidiaries will have been sold and the Company will have retainedconsiderable long-term operating contractual commitments***

 

BCI conducts substantially all of its operations through itssubsidiaries and is dependent upon dividends or other intercompany transfers offunds from its subsidiaries in order to meet its obligations.  After the completion of the sale of thebroadband business, the only remaining BCI subsidiary with operating assetswill be Broadwing Technology Solutions, an information technology consultingsubsidiary.  In 2002, BroadwingTechnology Solutions generated $164 million in revenue, or 15% of BCI’s total revenue.  Furthermore, upon the completion of the saleof the broadband business, BCI will retain certain long-term operatingcontractual commitments.

 

There can be no assurances that BCI will be able to generate sufficientcash from its remaining operations or that additional sources of financing willbe available to it to enable it to service the long-term operating contractualcommitments remaining after the sale of the broadband business or to fund itsother liquidity needs.

 

***Servicingindebtedness requires a significant amount of cash, and the Company’s abilityto generate cash depends on many factors beyond its control;******if theCompany is unable to finance its operations, the Company may be forced to seekprotection from its creditors by filing for bankruptcy***

 

The Company expects to obtain needed cash from operations and, to thelimited extent still allowed under various credit documents, from third partyborrowings and intercompany loans from the Parent Company.  The Company’s ability to generate cash issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond its control. The Company cannot be assured that its business will generate sufficientcash flow from operations, additional sources of funding will be available toit or that future borrowings will be available to it in amounts sufficient toenable it to service its indebtedness or to fund its other liquidity needs.

 

The terms of the Mezzanine Financing andAmended and Restated Credit Agreement contain certain financial and non-financialcovenants including restrictions on the Company’s ability to make investmentsin the Company.  Specifically, Broadwingand its other subsidiaries may not make investments in or fund the operationsof the Company beyond an aggregate amount of $118 million after October 1,2002.  As of February 28, 2003, theremaining available investment was $58 million.  If the Company requires funds in excess of the amounts describedabove in order to finance its operations, there can be no assurances that therequired lenders will consent to Broadwing investing additional funds to allowthe Company to meet its obligations.

 

If the Parent Company is unable to fundthe Company through closing of the sale to C III and meet its remainingobligations going forward after the sale or is unable to close the sale, theCompany may explore alternative transactions or sources of financing, includingborrowing money or raising equity. There can be no assurances that any such transactions could beconsummated on acceptable terms, or at all. The uncertainty of the Company's available liquidity combined with thefunding constraints discussed above, has prompted the Company’s independentaccountants to issue a going concern explanatory paragraph in their audit report.  The going concern explanatoryparagraph means that, in theopinion of the Company’s independent accountants, there is substantial doubtabout the Company’s ability to continue to operate as a going concern.  If the Company is unable to finance itsoperations through the closing of the sale and meet its remaining obligations,or if a sale is not consummated, it may be forced to seek protection from itscreditors under the United States Bankruptcy Code.

 

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In addition, the Company’s subsidiary, Broadwing CommunicationsServices Inc., has directly borrowed $193 million under the Parent Company’scredit facilities.  However, the amendedterms of the Parent Company’s credit facilities prohibit any additionalborrowings by the Company or its subsidiaries. Because the Company has relied on the Parent Company’s credit facilitiesin the past to fund its operations, the restrictions on future borrowings mightadversely affect its ability to access sufficient cash to meet its obligations.

 

***The Parent Companydepends on its bank credit facility to provide liquidity***

 

The Parent Company depends on its bank credit facility to provide forfinancing requirements in excess of amounts generated by operations.

 

In November 1999, the Parent Company obtained a credit facility of $1.8billion from a group of lending institutions. The credit facility was increased to $2.1 billion in January 2000 andagain to $2.3 billion in June 2001. Total availability under the credit facility decreased to $1.825 billionas of December 31, 2002 following a $335 million prepayment of the outstandingterm debt facilities in the first quarter of 2002 (with proceeds from the saleof substantially all of the assets of CBD), $5 million in scheduled repaymentsof the term debt facilities and $135 million in scheduled amortization of therevolving credit facility.

 

In March 2003, the Parent Company completed an amendment to the creditfacility, which included the extension of revolving credit maturity to 2005 and2006, and the acceleration of a portion of the maturities of term loans frombanking institutions from 2004 into 2003. As of March 26, 2003, the creditfacilities consisted of $644 million in revolving credit maturing on March 1,2006, $516 million in term loans from banking institutions, maturing in variousamounts during 2003 and 2004, and $444 million in term loans from non-bankinginstitutions, maturing in various amounts between 2003 and 2007.

 

However, the ability to borrow from the credit facility is predicatedon the Parent Company’s and its subsidiaries’ compliance with covenants thathave been negotiated with the lenders. As a result of the significant capital the Parent Company has investedin the Company as well as the effect the weak U.S. economy and telecommunicationsindustry has had on the Parent Company's and its subsidiaries’ businesses, theParent Company is highly leveraged and it is uncertain whether the ParentCompany will be able to remain in compliance with these covenants.  Failure to satisfy these covenants couldseverely constrain the Parent Company’s ability to borrow under the creditfacility.  As of December 31, 2003,Broadwing was in compliance with all of the covenants of the credit facility.

 

***The ParentCompany’s credit facility and other indebtedness impose significantrestrictions on the Parent Company***

 

The Parent Company’s debt instruments impose, and the terms of anyfuture debt may impose, operating and other restrictions on the ParentCompany.  These restrictions willaffect, and in many respects will limit or prohibit, among other things, theParent Company's and its subsidiaries’ ability to:

 

•                  incuradditional indebtedness;

•                  createliens;

•                  makeinvestments;

•                  enterinto transactions with affiliates;

•                  sellassets;

•                  guaranteeindebtedness;

•                  declareor pay dividends or other distributions to shareholders;

•                  repurchaseequity interests;

 

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•                  redeemdebt that is junior in right of payment to such indebtedness;

•                  enterinto agreements that restrict dividends or other payments from subsidiaries;

•                  issueor sell capital stock of certain of its subsidiaries; and

•                  consolidate,merge or transfer all or substantially all of its assets and the assets of itssubsidiaries on a consolidated basis.

 

In addition, the Parent Company’s credit facility includes other andmore restrictive covenants and prohibit the Parent Company from prepaying otherdebt and preferred stock while debt under the credit facility is outstanding.  The agreements governing the credit facilityalso require the Parent Company to achieve specified financial and operatingresults and maintain compliance with specified financial ratios.  The Parent Company is highly leveraged andit is uncertain whether it will continue to remain in compliance with theseagreements.

 

The restrictions contained in the terms of the credit facility and itsother debt instruments could:

 

•                  limitthe Parent Company’s ability to plan for or react to market conditions or meetcapital needs or otherwise restrict the Company’s activities or business plans;and

•                  adverselyaffect the Parent Company’s ability to finance BCI’s operations, strategicacquisitions, investments or alliances or other capital needs or to engage inother business activities that would be in BCI’s interest.

 

A breach of any of these restrictive covenants or the inability tocomply with the required financial ratios could result in a default under thecredit facility.

 

***Increased Competition Could AffectProfitability and Cash Flow***

 

There is substantial competition in the telecommunicationsindustry.  Competition may intensify dueto the efforts of existing competitors to address difficult market conditionsthrough reduced pricing, bundled offerings or otherwise, as well as a result ofthe entrance of new competitors and the development of new technologies,products and services.  Pricecompetition has been intense and may further intensify.  If the Company cannot offer reliable,value-added services on a price competitive basis in any of its markets, itcould be adversely impacted by competitive forces.  In addition, if the Company does not keep pace with technologicaladvances or fails to respond timely to changes in competitive factors in the industry,it could lose market share or experience a decline in its revenue and profitmargins.

 

The Company faces significant competition from companies such asAT&T Corp., WorldCom, Inc., Sprint Corporation, Level 3 Communications,Inc., Qwest Communications International Inc., and several emerging andrecapitalized competitors.  Thesignificant capacity of these competitors could result in decreasing priceseven if the demand for higher-bandwidth services increases.  In addition, some competitors areexperiencing financial difficulties or are in bankruptcy reorganization.  Competitors in financial distress orcompetitors emerging from bankruptcy with lower cost capital structures andsubstantial excess fiber capacity in most markets, and forecasted demand forbroadband services not being realized as a result of the state of the economicand financial difficulties experienced by many telecommunications carriers’could exacerbate downward pricing pressure in the telecommunications industry.

 

The effect of the foregoing competition could have a material adverseimpact on the Company’s businesses, financial condition and results ofoperations.  This could result inincreased reliance on borrowed funds and could adversely impact the Company’sability to maintain its optical network.

 

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***Network Utilization is Dependent onMaintaining Rights-of-Way and Permits***

 

The utilization of the Company’s network depends on maintainingrights-of-way and required permits from railroads, utilities, governmentalauthorities and third-party landlords on satisfactory terms and conditions. TheCompany cannot guarantee that it will be able to maintain all of the existingrights and permits. Although the Company expects to maintain and renew itsexisting agreements, the loss of a substantial number of existing rights andpermits could have a material adverse impact on the Company’s business,financial condition and results of operations.****** Forportions of the Company’s network that it leases or purchases use rights fromthird parties, the Company must rely on such third parties’ maintenance of allnecessary rights-of-way and permits. Some agreements that the Company may rely on to use portions of othercompanies’ networks could be terminated if associated rights-of-way were terminated.

 

***Significant Capital Expenditures Will beRequired to Maintain the Network***

 

Capital expenditures of $600 million in 2000 decreased to $472 millionin 2001 and decreased again in 2002 to $65 million.  The Company could incur significant additional capitalexpenditures as a result of unanticipated expenses, regulatory changes andother events that impact the business. If the Company fails to adequately maintain its networks to meetcustomer needs there could be a material adverse impact on the Company’sbusiness, financial condition and results of operations.

 

***RegulatoryInitiatives May Impact the Company’s Profitability***

 

The Company is subject to regulatory oversight of varying degrees atthe state and federal levels. Regulatory initiatives that would put the Company at a competitivedisadvantage or mandate lower rates for its services could result in lowerprofitability and cash flow.  This couldcompromise the Company’s ability to maintain its national optical network,which could have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

# ***The Company’s RestructuringInitiative is Critical to Its Success***

 

In October 2002, the Company initiated a restructuring that is intendedto reduce annual expenses by approximately $200 million compared to 2002 andenable the Company to become cash flow positive.  The plan includes initiatives to reduce the workforce byapproximately 500 positions; reduce line costs by approximately 25% throughnetwork grooming, optimization, and rate negotiations; and exit theinternational wholesale voice business. The Company recorded a cash restructuring charge of approximately $13million during the fourth quarter of 2002 related to employee severancebenefits and contract terminations. There can be no assurances that any of the actions under therestructuring plans will be successful. If the Company fails to successfully implement these restructuringinitiatives, the Company’s business, financial condition and results of operationscould be adversely affected.

 

***The Company Relies, in part, on Portions ofCompetitors’ Networks***

 

The Company uses network resources ownedby other companies for portions of its network.  The Company obtains the right to use such network portions throughoperating leases and IRU agreements in which the Company pays for the right touse such other companies’ fiber assets and through agreements in which theCompany exchanges the use of portions of its network for the use of portions ofsuch other companies’ networks.  Inseveral of those agreements, the counter party is responsible for networkmaintenance and repair.  In the event acounter party to a lease, IRU or an exchange suffers financial distress orbankruptcy, the Company may not be able to enforce its rights to use such

 

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network assets or, even if the Companycould continue to use such network assets, the Company could incur materialexpenses related to their maintenance and repair.  The Company also could incur material expenses if it wererequired to locate alternative network assets. The Company cannot give assurance that it would be successful inobtaining reasonable alternative network assets if needed.  Failure to obtain usage of alternativenetwork assets, if necessary, could have a material adverse impact on theCompany’s business, financial condition and results of operations.

 

***Attracting and Retaining Highly QualifiedEmployees is Necessary for Competitive Advantage***

 

The Company seeks to achieve competitive advantage by hiring andretaining highly skilled personnel.  TheCompany believes this is of particular importance in an industry that dependson innovation and execution in order to attract and retain customers.  If the Company fails to attract or retainthese skilled personnel, the Company’s financial condition and results ofoperations could be materially impacted.

 

***The Company’s Success Depends on theIntroduction of New Products and Services***

 

The Company’s success depends on being able to anticipate the needs ofcurrent and future enterprise and carrier customers.  The Company seeks to meet these needs through new productintroductions, service quality and technological superiority.  Failure of the Company to anticipate theneeds of these customers and to introduce the new products and servicesnecessary to attract or retain these customers could have a material adverseimpact on the Company’s business, financial condition and results ofoperations.

 

***Continuing Softness in the Economy isHaving a Disproportionate Effect in the Telecommunications Industry***

 

Beginning in 2001, the business environment for the telecommunicationsindustry deteriorated significantly and rapidly and remains weak.  This was primarily due to: the general weaknessin the U.S. economy, which was exacerbated by the events of September 11, 2001,and concerns regarding terrorism; pressure on prices for broadband services dueto substantial excess fiber capacity in most markets; and forecasted demand forbroadband services not being realized as a result of the state of the economy,the bankruptcy or liquidation of a substantial number of Internet companies andfinancial difficulties experienced by many telecommunications customers.  The Company expects these trends tocontinue, including reduced business from financially troubled customers anddownward pressure on prices due to reduced demand and overcapacity.  If these trends  continue, there could be a material adverse impact on theCompany’s business, financial condition and results of operations.

 

***A Significant Portion of the Company’sRevenue Is Derived From Telecommunications Carriers***

 

Eight of the Company’s top ten customers, which as a group, accountedfor approximately 38% of total revenue, are large telecommunicationscarriers.  Several customers have beenimpacted by negative industry trends. Four of the Company’s largest customers, who accounted for approximately14% of revenue in 2002, were in Chapter 11 bankruptcy proceedings.  Non-IRU revenue from these customersapproximated 7% of total revenue in 2002. The remaining revenue from these customers, approximating 7% of totalrevenue, was generated by the amortization of IRU agreements and the earlytermination of two IRUs, for which consideration had been previouslyreceived.  In addition, interexchangecarriers generated approximately 57% of total revenue in 2002.  Most of the Company’s arrangements withlarge customers do not provide the Company with guarantees that customer usagewill be maintained at current levels. Industry pressures have caused telecommunications carriers to lookaggressively for ways to cut costs which has resulted in reduced demand andreduced prices.  In addition,construction of their own facilities by certain of the Company’s customers,construction of additional facilities by competitors or further consolidationin the telecommunications industry

 

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involving the Company’s customers could lead such customers to reduceor cease their use of the Company’s network. To the extent these largecustomers cease to employ the Company’s network to deliver their services, orcannot pay outstanding accounts receivable balances, the Company couldexperience a material adverse impact on its business, financial condition andresults of operations.

 

***Terrorist Attacks and Other Acts ofViolence or War May Affect the Financial Markets and the Company’s Business,Financial Condition and Results of Operations***

 

As a result of the September 11, 2001 terroristattacks and subsequent events, there has been considerable uncertainty in worldfinancial markets.  The full effect ofthese events, as well as concerns about future terrorist attacks, couldadversely affect the Company’s ability to obtain financing on terms acceptableto it, or at all, to finance the Company’s operations and capital expenditures.

 

Terrorist attacks or war may negativelyaffect the Company’s operations and financial condition.  There can be no assurance that there willnot be further terrorist attacks against the United States of America or U.S.businesses or armed conflict involving the United States of America.  These attacks or armed conflicts maydirectly impact the Company’s physical facilities or those of its customers andvendors.  These events could causeconsumer confidence and spending to decrease or result in increased volatilityin the United States and world financial markets and economy.  Any of these occurrences could have amaterial adverse impact on the Company’s business, financial condition andresults of operations.

 

***The Company is Dependent on Limited Sourcesof Supply for Certain Key Network Components***

 

Where possible and practical, the Company utilizes commerciallyavailable technologies and products from a variety of vendors.  However, the Company relies on one supplier,Corvis, for its advanced optical switching and transport equipment on the coreof its long-haul network.  There can beno assurance that the Company will be able to obtain such equipment from Corvisin the future.  If the Company cannotobtain adequate replacement equipment or service from Corvis, or an acceptablealternate vendor, the Company could experience a material adverse impact on itsbusiness, financial condition and results of operations.  Corvis is also the majority owner of C III,the entity that has entered into a agreement to purchase substantially all ofthe assets Company’s Broadband segment.

 

***Network Failure and Transmission Delays andErrors Could Expose the Company to Potential Liability***

 

The Company’s network utilizes a variety of communication equipment,software, operating protocols and components of others’ networks for thehigh-speed transmission of data and voice traffic among various locations.  Such equipment, software and physicallocations could malfunction, suffer physical damage or otherwise becomeimpaired.  The Company is held to highquality and delivery standards in its customer contracts.  Network failures or delays in data deliverycould cause service interruptions resulting in losses to the Company’scustomers.  Failures or delays couldexpose the Company to claims by its customers that could have a material impacton the financial condition and operating results of the Company’s business.

 

# **Capital Additions**

 

The Company’s capital additions have historically been for its nationaloptical network and have totaled $65 million, $472 million and $600 million in2002, 2001 and 2000, respectively.

 

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###### **ITEM 2.  PROPERTIES**

 

The Company owns or maintains communications facilities in 39states.  Principal office locations arein Austin, TX; Cincinnati, OH, Reston, VA; and Indianapolis, IN.

 

The gross investment in property, plant and equipment,  at December 31, 2002 and 2001 is comprisedof the following ($in millions):

 
|                                     |   | **2002** |   | **2001** |   |
|------------------------------------------|--------|----------|--------|----------|--------|
|                                     |   |     |   |     |   |
| Land and rights  of way                  |   | $        | 0.6    |     | $      | 153.7 |   |
| Buildings and  leasehold improvements    |   | 7.2      |   | 209.1    |   |
| Transmission  facilities                 |   | 30.8     |   | 2,057.7  |   |
| Furniture,  fixtures, vehicles and other |   | 0.6      |   | 49.6     |   |
| Fiber usage  rights                      |   | 8.2      |   | 51.4     |   |
| Construction in  process                 |   | 7.3      |   | 214.1    |   |
| Total                                    |   | $        | 54.7   |     | $      | 2,735.6 |   |

 

The gross investment in property, plant, and equipment includes $18.7million and $19.1 million of assets accounted for as capital leases in 2002 and2001, respectively.  These assets areincluded in ‘Transmission facilities.’

 

The Company recorded a non-cash asset impairment charge of $2.2 billionto state both tangible and intangible assets at estimated fair value as ofDecember 31, 2002.  The impairmentcharge related to tangible property, plant and equipment totaled $1,902million.

 

###### **ITEM 3. LEGALPROCEEDINGS**

 

The information required by this item is included in Note 14 of theNotes to Consolidated Financial Statements that are contained in Item 8 of thisReport on Form 10-K, “Financial Statements and Supplementary Data.”

 

###### **ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of the Company’s security holdersduring the quarter ended December 31, 2002.

 

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**PART II**

 

**ITEM 5.****                 MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

###### **Market Information**

 

At December 31, 2002, all of the Company’s common stock was held byBroadwing Inc.  As such, there is noestablished public trading market for this common stock.

 

**DividendPolicy**

 

The Company does not pay dividends on its common stock.  Dividends on the Company’s 121⁄2% JuniorExchangeable Preferred Stock (the “Preferred Stock”) are payable quarterly atthe annual rate of 121⁄2% of the aggregate liquidation preference (which amountedto $426.1 million at December 31, 2002 including accrued dividends of $30.9million).  Historically, the Companypaid dividends in additional shares of the Preferred Stock.  Effective November 16, 1999, the Companyelected to switch to a cash payment option for the Preferred Stock rather thanissue additional shares of the Preferred Stock, and made its first cash paymenton February 15, 2000.  In 2002, theCompany’s board of directors voted to defer the third and fourth quarter 2002cash payment of the quarterly dividend on the Preferred Stock , in accordancewith the terms of the security.  TheCompany continued to accrue the dividend in accordance with the terms of thesecurity.  The status of futurequarterly dividend payments on the Preferred Stock security will be determinedquarterly by the board of directors, but the Company does not expect to paydividends in the foreseeable future.

 

**Equity Compensation Plans**

 

The Company’s employees are eligible to participate in the ParentCompany’s stock-based compensation plans. Detailed disclosures regarding the stock-based compensation plans can befound in the Parent Company’s annual report.

 

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**ITEM6.  SELECTED FINANCIAL DATA**

 

The Selected Financial Data should be read in conjunction with, Item 1,“Business;” Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations;” and the Company’s Consolidated FinancialStatements, related notes thereto and other financial information included inthis document.

 
|                                                             |   | **Company**                  |       | **Predeccessor**             |       |
|------------------------------------------------------------------|--------|------------------------------|------------|------------------------------|------------|
|                                                             |   | **Year Ended December  31,** |       | **Year Ended December  31,** |       |
| **($ in millions)**                                              |   | **2002**                     |       | **2001**                     |       | **2000** |   | **Period from  Nov 10 to  Dec 31  1999** |   | **Period from  Jan 1 to  Nov 9  1999** |   | **1998** |   |
|                                                             |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Operating Data (1):                                              |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Revenue                                                          |   | $                            | 1,068.1    |                         | $          | 1,197.6 |   | $ | 1,004.6 |   | $ | 99.0 |   | $ | 568.2 |   | $ | 668.6 |   |
| Operating loss                                                   |   | (2,437.6                     | )          | (502.1                       | )          | (225.7 | ) | (46.5 | ) | (214.1 | ) | (30.8 | ) |
| Loss (gain) on investments                                       |   | (0.2                         | )          | (11.6                        | )          | 394.5 |   | — |   | 23.8 |   | — |   |
| Loss before cumulative effect of change  in accounting principle |   | (2,533.7                     | )          | (382.2                       | )          | (463.3 | ) | (38.9 | ) | (281.0 | ) | (95.5 | ) |
| Cumulative effect of change in  accounting principle (2)         |   | 2,008.7                      |       | —                       |       | — |   | — |   | — |   | — |   |
| Extraodinary loss                                                |   | —                       |       | —                       |       | — |   | 6.6 |   |   |   | (67.0 | ) |
| Net loss                                                         |   | (4,542.4                     | )          | (388.4                       | )          | (464.6 | ) | (45.5 | ) | (281.0 | ) | (162.5 | ) |
|                                                             |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
|                                                             |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
|                                                             |   | **Company**                  | ** ** | **Predeccessor**             | ** ** |
|                                                             |   | **December 31,**             | ** ** |                         | ** ** | **December 31,** | ** ** |
|                                                             |   | **2002**                     | ** ** | **2001**                     | ** ** | **2000** | ** ** | **1999** | ** ** |   | ** ** | **1998** | ** ** |
| Financial Position (1):                                          |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment, net (3)                           |   | $                            | 54.7       |                         | $          | 2,182.0 |   | $ | 2,103.9 |   | $ | 1,726.4 |   |   |   | $ | 983.7 |   |
| Total assets                                                     |   | 239.1                        |       | 4,977.8                      |       | 4,994.2 |   | 5,147.2 |   |   |   | 1,748.2 |   |
| Total debt and capital lease obligations  (4)                    |   | 1,737.9                      |       | 1,563.5                      |       | 1,057.1 |   | 1,046.2 |   |   |   | 693.0 |   |
| Redeemable preferred stock (5)                                   |   | 414.4                        |       | 417.8                        |       | 421.0 |   | 418.2 |   |   |   | 447.9 |   |
| Shareowner’s equity (deficit) (6)                           |   | (2,561.8                     | )          | 2,024.6                      |       | 2,394.0 |   | 2,463.6 |   |   |   | (72.5 | ) |
|                                                             |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Other Financial Data (1):                                        |   |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Cash flow from continuing operatons                              |   | (94.9                        | )          | (111.4                       | )          | (32.7 | ) | 87.8 |   | 71.5 |   | 202.3 |   |
| Capital Expenditures                                             |   | 64.9                         |       | 472.0                        |       | 599.9 |   | 165.0 |   | 479.1 |   | 476.4 |   |
|                                                                  |        |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                        OnNovember 9, 1999 (the “Merger Date”), the Company completed a merger with awholly owned subsidiary of Broadwing. This Merger was accounted for as a purchase business combination and,accordingly, purchase accounting adjustments, including goodwill, have beenpushed down and are reflected in the Company’s financial statements subsequentto the Merger Date.  The financialstatements for periods before the Merger Date were prepared using the Company’shistorical basis of accounting and are designated as “Predecessor.”  The financial statements for periods after theMerger are designated as “Company.”  Thecomparability of operating results for the Predecessor and Company periods areaffected by the purchase accounting adjustments.  The 2001 and 2000 results presented include the results of BTS asthe Parent Company contributed the capital stock of the information technologyconsulting business to the Company during 2000.  The 2001 and 2000 results also reflect an agreement with theformer CBLD to service its customers outside of the Cincinnati, Ohio area.  All revenue and expenses associated with theformer CBLD’s customers outside the Cincinnati area were assigned to BroadwingCommunications.

(2)                        See Note 1and Note 2 of the Notes to Consolidated Financial Statements.

(3)                        See Note 1of the Notes to Consolidated Financial Statements.

(4)                        See Note 5of the Notes to Consolidated Financial Statements.

(5)                        See Note 7of the Notes to Consolidated Financial Statements.

(6)                        See Note 9of the Notes to Consolidated Financial Statements.

 

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###### **ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*“Management’s Discussion andAnalysis of Financial Condition and Results of Operations” which follows shouldbe read in conjunction with the “Private Securities Litigation Reform Act of1995 Safe Harbor Cautionary Statement”, “Risk Factors,” Consolidated FinancialStatements and accompanying Notes to Consolidated Financial Statements.*

 

Broadwing Communications (“BCI”) provides data and voice communicationsservices nationwide.  These services aregenerally provided over the Company’s national optical network, which comprisedapproximately 18,700 route miles of fiber-optic transmission facilities.  The Company’s revenue is generated bybroadband transport (which includes revenue from indefeasible- right-of-use(“IRU”) agreements), switched voice services, data and Internet services(including web hosting), information technology consulting and networkconstruction and other services.  As ofJanuary 1, 2002, as part of the Company’s November 2001 restructuring plan(refer to Note 3 of the Notes to Consolidated Financial Statements), the webhosting operations of the Parent Company’s ZoomTown subsidiary were merged withthe operations of BCI and are reflected in the data and Internet product linein all periods presented.  The Companyrecorded a non-cash impairment charge of approximately $2.2 billion in thefourth quarter of 2002 to write down its tangible and intangible assets toestimated fair market value.  InFebruary 2003, the Parent Company announced certain of its subsidiaries hadentered into a definitive agreement to sell substantially all of the assets ofthe Company, excluding the information technology consulting assets (refer toNote 18 of the Notes to Consolidated Financial Statements).

 

**Critical Accounting Policies andEstimates**

 

The preparation of consolidated financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses. The Company continually evaluates its estimates, including but notlimited to those related to revenue recognition, bad debts, investments,intangible assets, income taxes, fixed assets, access line costs,restructuring,  pensions, otherpostretirement benefits, contingencies and litigation.  The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the facts and circumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

The Company believes the following critical accounting policies impactits more significant judgments and estimates used in the preparation of itsconsolidated financial statements.  Fora more detailed discussion of the application of these and other accountingpolicies, refer to Note 1 of the Notes to Consolidated Financial Statements.

 

**RevenueRecognition****-**The Company  recognizes revenue as services are provided.  Both switched voice and data and Internetproduct revenue are billed monthly in arrears, while the revenue is recognizedas the services are provided.  Whilecustomers are billed in advance for month-to-month broadband transportservices, revenue is recognized as the services are provided.  Revenue from product sales is generallyrecognized upon performance of contractual obligations, such as shipment,delivery, installation or customer acceptance. Indefeasible right-of-use agreements, or IRUs, represent the lease ofnetwork capacity or dark fiber and are recorded as unearned revenue at theearlier of the acceptance of the applicable portion of the network by thecustomer or the receipt of cash and accounted for approximately 44%, 29% and14% of broadband transport revenue in 2002, 2001 and 2000, respectively.  The buyer of IRU services typically payscash upon execution of the contract, and the associated IRU revenue is thenrecognized over the life of the agreement as services are provided,

 

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beginning on the date of customer acceptance.  In the event the buyer of an IRU terminates a contract prior tothe contract expiration and releases the Company from the obligation to providefuture services, the remaining unamortized unearned revenue is recognized inthe period in which the contract is terminated.

 

For long-term construction contracts, the Company recognizes revenueand the associated cost of that revenue using the percentage of completionmethod of accounting.  This method ofaccounting relies on estimates of total expected contract revenue andcosts.  The method is used as theCompany can make reasonably dependable estimates of revenue and costsapplicable to various stages of a contract. As the financial reporting of these contracts depends on estimates thatare continually assessed throughout the terms of the contracts, revenuerecognized is subject to revision as the contract nears completion.  Revisions in estimates are reflected in theperiod in which the facts that give rise to the revision become known.  Revisions have the potential to impact bothrevenue and cost of services and products. Construction projects are considered substantially complete uponcustomer acceptance.

 

Since its merger with IXC Communications Inc. (“IXC”) in November 1999(“the Merger”), the Company has not entered into any significant revenuegenerating fiber exchange agreements. For certain preacquisition fiber exchange agreements with othercarriers, the Company recognizes the fair value of revenue earned and therelated expense in offsetting amounts over the life of the agreement.  In no instances has the Company recognizedrevenue upon consummation of any such fiber exchange agreements or capitalizedany expenses associated therewith.

 

**Deferred Tax Asset**-The Company’s tax provision is based upon the modified separate return methodunder which an income tax benefit is recorded for losses based upon thepotential to be realized by the Company, as well as any affiliated members ofthe federal income tax consolidated group of the Parent Company.  As of December 31, 2002, the Company hadapproximately $801 million of federal operating loss tax carryforwards with arelated tax benefit of $280 million.  Inaddition, the Company had approximately $125 million in deferred tax assetsrelated to state and local operating loss tax carrryforwards.  The Company evaluates all positive andnegative evidence available in determining whether there is reasonableassurance that its deferred tax assets will be realized.  In performing this evaluation, the Companyconsiders future taxable income projections, expirations of loss carry forwardsand ongoing prudent and feasible tax planning strategies.  Based on this evaluation as of December 31,2002, which included the uncertainty regarding the future operations of theCompany, the Company determined that realization of certain deferred tax assets(including federal and state operating loss carryforwards) was not consideredto be more likely than not, and therefore provided a valuation allowance, whichamounted to $1,170 million as of December 31, 2002.  The valuation allowance was recorded as a component of income taxexpense in the fourth quarter of 2002. The Company is pursuing several alternatives and the resolution of uncertaintiesrelated to the Company that may result in the realization of these reserved taxassets.

 

**Allowances for Doubtful Accounts –**The Company maintains allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments.  The Company determines the estimate of theallowance for doubtful accounts based on a variety of factors including thelength of time receivables are past due, the financial health of customers, andhistorical experience.  If the financialcondition of the Company’s customers were to deteriorate or other circumstancesoccur that result in an impairment of customers’ ability to make payments,additional allowances may be required.

 

**Depreciation –** TheCompany uses the straight line method to depreciate its property, plant, andequipment.  Due to rapid changes intechnology, significant judgment is required in determining the estimateduseful life of telecommunications plant and equipment.

 

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**Goodwilland Indefinite-Lived Intangible Assets –**Goodwill representsthe excess of the purchase price consideration over the fair value of assetsacquired recorded in connection with the merger with IXC in November 1999.  Upon the adoption of Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS142”) on January 1, 2002, the Company recorded a goodwill impairment charge of$2,008.7 million, net of tax, as discussed in Note 2 of the Notes to the ConsolidatedFinancial Statements.

 

Pursuant to SFAS 142, goodwill and intangible assets not subject toamortization are tested for impairment annually, or when events or changes incircumstances indicate that the asset might be impaired.  For goodwill, a two-step impairment test isperformed.  The first step compares thefair value of a reporting unit with its carrying amount, includinggoodwill.  If the carrying value of areporting unit exceeds its fair value, then the second step of the impairmenttest is performed to measure the amount of impairment loss.  The second step compares the implied fairvalue of the reporting unit goodwill with the carrying amount of thatgoodwill.  The implied fair value isdetermined by allocating the fair value of a reporting unit to all of theassets and liabilities of that unit as if the reporting unit had been acquiredin a business combination.  The excessof the fair value of a reporting unit over the amounts assigned to its assetsand liabilities is the implied fair value of goodwill.  If the carrying amount of the reporting unitgoodwill is in excess of the implied fair value of that goodwill, then animpairment loss is recognized equal to that excess.  For indefinite-lived intangible assets, the impairment testconsists of a comparison of the fair value of the intangible asset with itscarry value.  If the carrying value ofan indefinite-lived asset exceeds its fair value, an impairment loss isrecognized in an amount equal to that excess.

 

In 2001 and 2000, goodwill was amortized on a straight-line basis overestimated useful lives of 30 years.

 

**Impairment of Long-lived Assets,Other than Goodwill and Indefinite lived Intangibles****-** As of December 31, 2002, the Company hadfixed assets with a net carrying value of $55 million.  The Company reviews the carrying value oflong-lived assets, other than goodwill and indefinite lived assets discussedabove, when events or changes in circumstances indicate that the carryingamount of the assets may not be recoverable. An impairment loss is recognized when the estimated future undiscountedcash flows expected to result from the use of an asset (or group of assets) andits eventual disposition are less than its carrying amount.  An impairment loss is measured as the amountby which the asset’s carrying value exceeds its estimated fair value.

 

During the fourth quarter of 2002, the Company performed an impairmentassessment of its long-lived assets. This assessment considered all of the contemplated strategicalternatives for the Company, including a potential sale of assets, using aprobability-weighted approach.  Based onthe analysis, it was determined that the Company’s assets were impaired and,accordingly, the Company recorded a $2.2 billion non-cash impairment charge toreduce the carrying value of these assets. Of the total charge, $1,902 million related to tangible fixed assets and$298 million related to finite-lived intangible assets.

 

**Restructuring –**During 2002 and 2001, the Company recorded restructuring charges representingdirect costs of exiting certain product lines, including certain contractuallease commitments, and involuntary employee terminations. These charges wererecorded in accordance with EITF 94-3 “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (IncludingCertain Costs Incurred in a Restructuring)” and represent the Company’s bestestimate of undiscounted liabilities at the date the charges were taken.  Adjustments for changes in assumptions arerecorded in the period such changes become known.  Changes in assumptions, especially as they

 

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relate to contractual lease commitments, could have a material effecton the restructuring liabilities and results of operations.

 

**FiberSales and IRUs**

 

The Company has entered into various agreements to sell fiber andcapacity usage rights, which include the design and maintenance of theserights.  Sales of these rights arerecorded as unearned revenue and are included in other current and othernoncurrent liabilities in the accompanying consolidated balance sheets when thefiber or capacity is accepted by the customer or cash is received.  The buyer of IRU services typically pays cashupon execution of the contract.  The Company’spolicy and practice is to amortize these payments into revenue over the life ofthe contract.  The Company receivedapproximately $10 million, $61 million and $23 million in cash in 2002, 2001and 2000, respectively, from these sales and recognized revenue from theamortization of previously recorded unearned revenue of $205 million, $134million and $53 million, respectively.

 

**Consolidated Overview**

 

In accordance with Statement of Financial Accounting Standard No. 131,“Disclosures About Segments of an Enterprise and Related Information,” theoperations of the Company comprise a single segment and are reported as such tothe Chief Executive Officer of the Parent Company, who functions in the role ofchief operating decision maker for the Company.  A tabular presentation of the Company’s financial results can befound in Item 6, “Selected Financial Data” on page 16 and in the ConsolidatedStatements of Operations and Comprehensive Income (Loss) on page 37 of thisReport on Form 10-K.

 

The table below presents revenue for groups of similar products andservices ($ in millions):

 
|                                     |   | **Year Ended December  31** |    |
|------------------------------------------|--------|-----------------------------|---------|
|                                     |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                     |   |                        |    |   |   |   |   |
| Broadband  transport                     |   | $                           | 461.6   |   | $ | 466.5 |   | $ | 393.2 |   |
| Switched voice  services                 |   | 328.6                       |    | 380.5 |   | 408.6 |   |
| Data and Internet                        |   | 132.9                       |    | 121.9 |   | 69.7 |   |
| IT consulting                            |   | 143.7                       |    | 141.3 |   | 65.8 |   |
| Network  construction and other services |   | 1.3                         |    | 87.4 |   | 67.3 |   |
| Total revenue                            |   | $                           | 1,068.1 |   | $ | 1,197.6 |   | $ | 1,004.6 |   |

 

###### **2002 Compared to 2001**

 

###### **Revenue**

 

Broadband transport revenue decreased $5 million in 2002, or 1%, to$462 million compared to 2001.  Thedecrease was due to lower dedicated optical and digital circuit revenue asdemand from both established and emerging carriers continued to decline.  This decrease was substantially offset by $59million in non-recurring, non-cash revenue from the termination of IRUcontracts with two of the Company’s customers who filed for Chapter 11bankruptcy protection.  The Companyexpects the revenue deterioration to continue as carriers groom their networksin an attempt to synchronize their supply with the demand in themarketplace.  Broadband products sold in the franchise area of Cincinnati BellTelephone (“CBT”), a subsidiary of theParent Company, contributed revenue to the Company of $28 million in 2002 and$12 million in 2001.  TheCompany’s largest IRU contract,

 

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which contributed $104 million to broadband transport revenue andoperating income in 2002, will expire in May 2003 and contribute $43 million inrevenue and operating income in 2003.

 

Switched voice services revenue decreased 14% in 2002 compared to 2001,from $381 million to $329 million.      Thedecrease in revenue was the result of the Company’s continued focus on highermargin business and declining rates and volume due to intense competition,partially offset by a reduction in uncollectible revenue due to tightenedcredit policies.  Cincinnati Bell AnyDistance (“CBAD”), a subsidiary of theParent Company, resells voice long distance in its local franchise area andcontributed switched voice revenue of $44 million in 2002 and $41 million in2001.  The Company initiated arestructuring plan in the fourth quarter of 2002, which included exiting theinternational switched wholesale voice business.  Based on this plan, the Company expects switched voice servicerevenue to decline going-forward.  Theinternational switched wholesale voice business accounted for $75 million and$94 million of revenue during 2002 and 2001, respectively.

 

Data and Internet revenue increased $11 million, or 9%, over 2001 onthe strength of demand for dedicated IP and ATM/frame relay services.  These increases were partially offset inboth periods by a decrease in equipment sales, a decrease in revenue related tothe exit of the bundled Internet access product (refer to Note 14 of the Notesto the Consolidated Financial Statements), and a decrease in data collocationrevenue, as the Company closed eight of its eleven data centers as part of itsNovember 2001 restructuring.

 

IT consulting revenue grew $2 million, or 2%, during 2002 compared to2001.  The growth was attributable toincreased sales of hardware and consulting services.  Revenue from services and hardware sales comprised 21% and 79%,respectively, of total IT consulting revenue during both 2002 and 2001.

 

Network construction and other services revenue decreased $86 million,or 99%, during 2002 compared to 2001. As further discussed in Note 3 of the Notes to Consolidated FinancialStatements, the Company’s November 2001 restructuring plan included plans toexit the network construction business upon completion of a large project.  The contract for that project is in disputeas discussed in Note 14 of the Notes to Consolidated Financial Statements.

 

**Costs and Expenses**

 

Cost of services and products primarily reflects access charges paid tolocal exchange carriers and other providers, transmission lease payments toother carriers, costs incurred for network construction projects and personneland hardware costs for IT consulting. In 2002, cost of services and products amounted to $656 million, a 14%decrease compared to the $760 million incurred during 2001.  The decrease was driven primarily by lowerswitched voice services and network construction activity, and cost reductionsimplemented as part of the November 2001 restructuring plan.  The decreases were partially offset by anincrease in local access charges associated with the Company’s continuedpenetration of enterprise customer accounts and a non-recurring charge of $13million for estimated costs associated with the termination of the Company’suncompleted network construction contract currently under dispute.  Refer to Note 14 of the Notes toConsolidated Financial Statements for a detailed discussion of this contract.

 

SG&A expenses decreased 9% to $301 million in 2002 compared to2001.  The decrease was due primarily toa decrease in employee costs, as headcount was approximately 660 lower atDecember 31, 2002 than at December 31, 2001, and lower marketing expenses.  These decreases were offset by a decrease incapitalized overhead costs associated with the completion of the Company’snational optical network.

 

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Depreciation expense of $291 million increased $18 million, or 6% in2002 compared to 2001 as a result of placing assets related to the opticalnetwork overbuild into service.  TheCompany recorded a non-cash impairment charge of $2.2 billion in the fourthquarter of 2002 related to the Company’s tangible and intangible assets (referto Note 1 of the Notes to Consolidated Financial Statements).  As such, the Company expects depreciationexpense to decrease by approximately $290 million in 2003.

 

Amortization expense, which in 2001 primarily related to theamortization of goodwill as a result of the Merger, decreased 78% to $25million in 2002 from $111 million in 2001. Upon adoption of SFAS 142 as required on January 1, 2002, the Companystopped amortizing goodwill.  Inaddition, the Company recorded an asset impairment charge as described in Note1 of the Notes to Consolidated Financial Statements of approximately $298million related to intangible assets in the fourth quarter of 2002.  Therefore, the Company expects noamortization expense in 2003.

 

During the first quarter of 2002, the Company recorded restructuringcharges of $16 million resulting from employee separation benefits and costs toterminate contractual obligations, which were actions contemplated in theNovember 2001 restructuring plan for which an amount could not be reasonablyestimated at that time.  During thefourth quarter of 2002, a $1 million reversal was made to the restructuringliability due to a change in estimate related to the termination of contractualobligations.  In total, the Companyexpects the November 2001 restructuring plan to result in cash outlays of $88million and non-cash items of $149 million. The Company completed the plan as of December 31, 2002, except for certainlease obligations, which are expected to continue through December 31,2005.  Refer to Note 3 of the Notes toConsolidated Financial Statements.

 

During the third quarter of 2002, the Company recorded restructuringcharges of $5 million.  Therestructuring charges related to contractual terminations associated with theCompany’s exit of a product line. Refer to Note 14 of the Notes to ConsolidatedFinancial Statements.

 

In October 2002, the Company initiated a restructuring that is intendedto reduce annual expenses by approximately $200 million compared to 2002 andenable the Company to become cash flow positive.  The plan includes initiatives to reduce the workforce byapproximately 500 positions; reduce line costs by approximately 25% throughnetwork grooming, optimization, and rate negotiations; and exit theinternational wholesale voice business. The Company recorded a cash restructuring charge of approximately $13million during the fourth quarter of 2002 for employee severance and contracttermination costs.  The Company expectsto complete the plan by June 30, 2003.

 

Based on certain indicators, including a potential asset sale,  the Company performed an impairment analysisof its assets in the fourth quarter of 2002. The impairment analysis indicated that the carrying value of the assetswas not recoverable.  Accordingly, theCompany wrote down the assets to estimated fair market value, resulting in anon-cash impairment charge of $2.2 billion.

 

###### **Theoperating loss of $2,438 million recorded in 2002 represents a $1,936 millionincrease over the $502 million operating loss in 2001.  The increase in the operating loss is due tothe asset impairment charge of approximately $2.2 billion, offset slightly bythe decrease in amortization and restructuring charges noted above.**

 

Interest expense, primarily consisting of interest paid to the ParentCompany, increased approximately 5% in 2002 to $72 million from $68 million in2001.  The increase was the result ofhigher outstanding debt, partially offset by a decrease in interest rates, asthe London Interbank Offering Rate (“LIBOR”) decreased, and a decrease in theamount of interest capitalized due to the completion of the optical network.

 

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The Company recorded less than a $1 million in net gain on investmentscompared to $12 million during 2001. The net gain in 2001 is comprised of a $17 million gain from the sale ofthe Company’s investment in PSINet, partially offset by mark-to-marketadjustments and losses on the sale of the Applied Theory investment.  See Note 4 of the Notes to ConsolidatedFinancial Statements for a detailed discussion of investments.

 

The Company had income tax expense of $26 million in 2002 versus the($174) million benefit recorded in 2001, due substantially to the establishmentof a valuation allowance against certain federal and state deferred tax assets(including net operating loss carryforwards), offset partially by the taxeffect of the $2.2 billion asset impairment.

 

Effective January 1, 2002, the Company recorded a $2,009 millionexpense as a cumulative effect of a change in accounting principle, net oftaxes, related to the adoption of SFAS 142. The write down of goodwill, finalized in the second quarter of 2002, wasrelated to the fair value of goodwill associated with the Merger.  See Note 2 of the Notes to ConsolidatedFinancial Statements for a detailed discussion of the adoption of SFAS 142.

 

As a result of the above, the Company reported a net loss of $4,542million for the year ended December 31, 2002, representing an increase of$4,154 million compared to the loss in 2001 of $388 million.

 

###### **2001 Compared to 2000**

 

###### **Revenue**

 

Broadband transport revenue increased $73 million in 2001, growing 19%to $466 million compared to 2000. Approximately two-thirds of the increase was driven by the renegotiationof IRU contracts with one of the Company’s customers.  In order for these contracts to survive the customer’sbankruptcy, the contracts were adjusted to reduce the services provided, updatethe operations and maintenance fees to a current market rate and shorten thelives of the agreements.  Revenue alsoincreased due to sales to new and existing customers, but the increases werepartially offset by circuit disconnections during the second half of theyear.  CBT resells the broadband products in its local franchise area, whichcontributed revenue of $12 million in 2001 and less than a million in 2000.

 

Switched voice services revenue decreased 7% in 2001 compared to 2000,from $409 million to $381 million. This was the result of a continued focus ondata services and a de-emphasis of sales of voice services to lower margincustomers.  At the same time, theCompany made an effort to minimize sales to less creditworthy customers in thewake of increasing bankruptcies in the wholesale segment of this market.  CBADresells voice long distance in CBT’s local franchise area, which contributedswitched voice revenue of $41 million in 2001 and $33 million in 2000.

 

Data and Internet revenue increased $52 million, or 75%, in 2001compared to 2000 as revenue continued to increase on the strength of demand fordedicated IP and ATM/frame relay services. These increases were further supplemented by additional collocation andweb hosting revenue.  Despite the growthin collocation revenue, the Company’s November 2001 restructuring plan includedthe closure of eight of the Company’s eleven data centers due to actual growthfailing to meet expectations.

 

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IT consulting revenue grew $76 million, or 115%, during 2001 comparedto 2000.  Of this growth, approximately$60 million was attributable to increased sales of hardware, while theremaining growth was the result of increased sales of consulting services.

 

Network construction and other services revenue increased $20 million,or 30%, during 2001 compared to 2000 as a result of a large, joint-useconstruction project.  The increase waspartially offset by the nonrecurring receipt of warrants associated with afield trial of optical equipment in 2000. In November 2001, the Company announced its intention to exit theconstruction business upon completion of one remaining contract as discussed inNote 3 of the Notes to Consolidated Financial Statements.  That contract is in dispute as discussed inNote 14.

 

**Costsand Expenses**

 

Cost of services and products primarily reflects access charges paid tolocal exchange carriers and other providers, transmission lease payments toother carriers, costs incurred for network construction projects and personneland hardware costs for IT consulting. In 2001, cost of services and products amounted to $760 million, a 27%increase over the $600 million incurred during 2000.  These increases were driven primarily by incremental costs neededto support the revenue growth, as described above, in broadband transport, dataand Internet, information technology consulting services and networkconstruction.

 

SG&A expenses increased 2% to $330 million in 2001 compared to2000.  Increased employee expensesattributable to higher headcount during the first half of the year were almostentirely offset by lower advertising expenses and efforts to decreaseconsulting and contracted labor services.

 

Depreciation expense of $273 million increased $76 million, or 39% in2001 compared to 2000 as a result of placing assets related to the opticalnetwork into service.  Amortizationexpense, which primarily related to the amortization of goodwill as a result ofthe Merger, increased 1% to $111 million in 2001 from $110 million in 2000.

 

In November 2001, the Company approved restructuring plans whichincluded initiatives to close eight of the Company’s eleven data centers,reduce the expense structure, exit the network construction business and othernon-strategic operations; and consolidate web hosting operations of the ParentCompany into the Company.  The Companyrecorded restructuring and other costs of $222 million in 2001 related to theseinitiatives.  The $222 million consistedof restructuring liabilities in the amount of $74 million and related non-cashasset impairments in the amount of $148 million.  The restructuring-related liabilities of $74 million werecomprised of $11 million related to involuntary employee separation benefits(including severance, medical insurance and other benefits) for 760 employeesand approximately $63 million related to lease and other contractualterminations.  In total, the Companyexpects this restructuring plan to result in cash outlays of $74 million andnon-cash items of $148 million.  ThroughDecember 31, 2001, the Company had utilized $4 million of the $73 millionreserve, nearly all of which was cash expended.  The Company expects to realize approximately $77 million inannual expense and capital expenditure savings from this restructuring planrelative to expenses incurred in 2001. Refer to Note 3 of the Notes to Consolidated Financial Statements.

 

The operating loss of $502 million recorded in 2001 represents a $276million increase over the $226 million operating loss in 2000.  The higher loss is due to the increase indepreciation associated with the optical network assets placed in service andto the November 2001 restructuring charges, offset slightly by an improvementin gross profit.

 

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The Company recorded a $4 million equity-share loss on its AppliedTheory investment during 2001 versus $16 million in 2000.  The decline in the loss is due to theCompany’s discontinued use of equity method accounting during the secondquarter of 2001 because its ownership percentage in Applied Theory had droppedbelow 20% and it no longer held a seat on Applied Theory’s board ofdirectors.  As a result, the Company nolonger had significant influence over the operations of Applied Theory.

 

Interest expense, primarily consisting of interest paid to the ParentCompany, decreased approximately 3% in 2001 to $68 million from $70 million in2000.  Although total borrowingsincreased during 2001, a decrease of nearly 4% in the average interest ratecharged on the borrowings offset the volume increase.  Interest expense related to $42 million borrowed directly fromthe Parent Company’s credit facility was insignificant as the funds wereborrowed late in the fourth quarter of 2001.

 

The Company realized a $12 million net gain on investments during 2001,reflecting a $407 million improvement from a loss of $395 million in 2000.  The net gain in 2001 is comprised of a $17million gain from the sale of the Company’s investment in PSINet, partiallyoffset by mark-to-market adjustments and losses on the sale of the AppliedTheory investment.  The $395 millionloss in 2000 resulted from recognized losses on the PSINet and Applied Theoryinvestments.  See Note 5 of the Notes toConsolidated Financial Statements for a detailed discussion of investments.

 

The income tax benefit of $174 million decreased $67 million from thebenefit of $241 million in 2000.  Thiswas primarily the result of the $143 million decrease in pretax losses fromcontinuing operations.

 

As a result of the above, the Company reported a net loss of $388million for the year ended December 31, 2001, representing decreased losses of$76 million, or 16%, as compared to the loss in 2000 of $465 million.

 

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**CapitalInvestment, Resources and Liquidity**

 

The Company is dependent on financing from the Parent Company to fundits operations.  The Parent Company'sbank credit facility and senior subordinated discount notes restrict the amountof financing available to the Company form the Parent Company.  The uncertainty of the Company's availableliquidity resulting from these funding constraints has prompted the Company'sindependent accountants to include a going concern explanatory paragraph intheir audit report.  The going concernexplanatory paragraph means that, in the opinion of the Company's independentaccountants, there is substantial doubt about the Company's ability to continueto operate as going concern.

 

On February 22, 2003, certain subsidiaries of the Company entered intoa definitive agreement to sell substantially all of the assets of the Company,excluding the information technology consulting business, for up to $129million in cash and the assumption of certain long term operating contractualcommitments.  The sale is subject tocertain closing conditions, including approval by the Federal CommunicationsCommission ("FCC") and relevant state public utility commissions.  In addition, in March 2003, the ParentCompany reached an agreement with holders of more than two-thirds of theCompany's 121⁄2percent preferred stock security and 9 percent senior subordinated notes toexchange these instruments for common stock of the Parent Company.  If the Company is unable to finance itsoperations through the closing of the asset sale and meet its remainingobligations, or if a sale is not consummated, it may be forced to seekprotection from its creditors through bankruptcy proceedings. 

 

The Company has invested significant capital in order to expand thereach of its national broadband network. Since the Company has completed the optical overbuild of its nationalnetwork, capital spending will be focused on maintenance, andrevenue-generating initiatives, which occur as customers are added to theCompany’s networks.

 

Since the Merger, the Company has relied on a $1.825 billion creditfacility with a group of lending institutions, secured by the Parent Company,in order to support the Company’s operations. The credit facility consists of $765 million in revolving credit,maturing in various amounts during 2003 and 2004, $569 million in term loansfrom banking institutions, maturing in various amounts during 2003 and 2004,and $491 million in term loans from nonbanking institutions, maturing invarious amounts between 2003 and 2007.

 

At December 31, 2002, the Parent Company had drawn approximately $1.648billion from the credit facility, of which, $193 million had been drawndirectly by the Company, and had outstanding letters of credit totaling $13million, leaving $164 million in additional borrowing availability under itsrevolving credit facility.  The creditfacility borrowings have been used by the Parent Company to refinance its debtand debt assumed as part of the Merger, to fund its capital expenditure programand other working capital needs in addition to funding operating losses of theCompany.  The amount refinanced includedapproximately $404 million borrowed in order to redeem the majority of theoutstanding 9% Senior Subordinated Notes of IXC (the “9% Notes”) assumed duringthe Merger as part of a tender offer and $391 million in outstanding bank debtof IXC assumed as part of the Merger. The tender offer for the 9% Notes was required under the terms of thebond indenture by the change in control provision contained in the indenturegoverning the 9% Notes.  As furtherdiscussed below, in March 2003, the Parent Company completed an amendment tothe credit facility, which included the extension of revolving credit maturityto 2005 and 2006, and the acceleration of a portion of the maturities of termloans from banking institutions from 2004 into 2003.

 

In December 2001, the Company began borrowing directly from the ParentCompany’s credit facility.  Of the$1.648 billion which had been borrowed under the credit facility by the ParentCompany as of December 31, 2002, $193 million had been borrowed directly by theCompany.  Prior to obtaining the creditfacility amendment in March 2003, the Parent Company’s credit facility capacitywas scheduled to decrease throughout 2003 from $1.825 billion to approximately$1.476 billion due to $124 million of scheduled amortization of the term debtfacilities and $225 million of scheduled amortization of the revolving creditfacility.  As of December 31, 2002, theParent Company’s debt maturities totaled $195 million in 2003 and $995 millionin 2004.

 

On March 26, 2003, the Parent Company issued $350 million of mezzaninefinancing through Senior Subordinated Discount Notes Due 2009 (the “MezzanineFinancing”).  Proceeds from theMezzanine Financing, net of fees, were used to pay down borrowings under theParent Company’s credit facility. Interest on the Mezzanine Financing will be payable semi-annually onJune 30 and December 31, whereby 12% is paid in cash and 4% is accreted on theaggregate principal amount.  Inaddition, purchasers of the Mezzanine Financing received 17.5 million commonstock warrants, each to purchase one share of Broadwing Common Stock.

 

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In conjunction with the Mezzanine Financing, the Parent Company’scredit facility was also amended and restated ("Amended and RestatedCredit Agreement") to, among other things, extend the revolvingcommitment, revise the financial covenants and allow for the sale ofsubstantially all of the assets of the broadband business. As a result ofthe  terms of the amendment, the totalborrowing capacity will decrease from $1.825 billion as of December 31, 2002.  The borrowing capacity will decrease toapproximately $1.343 billion as of December 31, 2003 due to $262 million ofscheduled repayments of the term debt facilities and a $220 million prepaymentof the outstanding term debt and revolving credit facility from the MezzanineFinancing proceeds. After the credit facility amendment, the Parent Company’sdebt maturities total $285 million in 2003 and $287 million in 2004.

 

The Mezzanine Financing andamended and restated credit agreement contain certain financial and non-financial covenants, includingrestrictions on Broadwing’s ability to make investments in the Company.  Specifically, Broadwing and its othersubsidiaries may not make investments in or fund the operations of the Companybeyond an aggregate amount of $118 million after October 1, 2002.  This restriction does not apply toguarantees by Broadwing of the Company borrowings under the credit facilities,liens on assets of Broadwing securing Company borrowings under the creditfacilities, scheduled interest payments made or guaranteed by Broadwing inrespect of Company borrowings under the credit facilities, and certain otheritems.  As of February 28, 2003, theParent Company had the ability to invest an additional $58 million in theCompany to fund operations and extinguish remaining obligations based on theseprovisions.

 

As of December 31, 2002, the interest rates to be charged on borrowingsfrom the credit facility can range from 150 to 350 basis points above theLIBOR, and as of December 31, 2002 were between 275 and 325 basis points aboveLIBOR, or 4.13% and 4.63%, respectively, as a result of the Parent Company’scredit rating.  The Parent Companyincurs banking fees in association with this credit facility that range from37.5 basis points to 75 basis points, applied to the unused amount ofborrowings under the revolving credit facility.  Upon completion of the credit facility amendment in March 2003,interest rates charged on borrowings from the credit facility increased to 425basis points above LIBOR on revolving credit borrowings and 375 basis points aboveLIBOR for term debt borrowings.  Thebanking fees applied to the unused amount of borrowings increased to 62.5 basispoints.

 

The Parent Company is subject to financial covenants in associationwith the credit facility.  Thesefinancial covenants require that the Parent Company maintain certain debt toEBITDA (as defined in the Amended and Restated Credit Agreement), debt tocapitalization, senior secured debt to EBITDA and interest coverageratios.  This facility also containscertain covenants which, among other things, may restrict the Parent Company’sability to incur additional debt or liens; pay dividends; repurchase Broadwingcommon stock; sell, transfer, lease, or dispose of assets; make investments ormerge with another company.  The ParentCompany was in compliance with all covenants set forth in its credit facilityand the indentures governing its other debt as of December 31, 2002.  The March 2003 Amended and Restated CreditAgreement subjects the Parent Company to an additional covenant related toannual capital expenditures and eliminated the debt to capitalization financialcovenant.  If the Parent Company were toviolate any of its covenants and was unable to obtain a waiver, it would beconsidered a default.  If the ParentCompany were in default on its credit facility, no additional borrowings underthe credit facility would be available until the default was waived or cured.

 

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In December 2001, the Parent Company obtained an amendment to itscredit facility to exclude the charges associated with the November 2001Restructuring Plan from the covenant calculations and to amend certain definedterms.  In March 2002, the ParentCompany obtained an amendment for certain financial calculations and consent toits credit facility to allow for the sale of substantially all of the assets ofCincinnati Bell Directory (a subsidiary of the Parent Company), exclude chargesrelated to SFAS 142 (refer to Notes 1 and 2 of the Notes to Consolidated FinancialStatements), increase its ability to incur additional indebtedness and amendcertain defined terms.  In December2002, the Parent Company obtained a waiver to exclude charges related toStatement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS 144”) from its covenantcalculations through March 30, 2003.  InMarch 2003, as discussed above, the Parent Company amended its credit facilityto, among other things, exclude charges related to SFAS 144 going forward.

 

In February 2002, the Parent Company’s corporate credit rating wasdowngraded by Moody’s Investors Service to Ba3 from its previous level ofBa1.  In March 2002, the ParentCompany’s corporate credit rating was downgraded by Standard and Poor’s andFitch Rating Service to BB from its previous level of BB+.  In December 2002, Standard and Poor’sdowngraded the Parent Company’s corporate credit rating to B- from BB.  In January 2003, Moody’s downgraded theParent Company’s corporate credit rating to B1 from Ba3.  In the past, the credit facility was securedonly by a pledge of the stock certificates of certain subsidiaries of theParent Company.  Upon the initialdowngrades, the Parent Company became obligated to provide certain subsidiaryguarantees and liens on the assets of the Parent Company and certainsubsidiaries in addition to the pledge of the stock certificates of thesubsidiaries.

 

Intercompany advances payable to the Parent Company totaled $1,493million and $1,469 million as of December 31, 2002 and December 31, 2001,respectively. As of December 31, 2002, the intercompany note to the ParentCompany was payable upon demand and was therefore classified as a currentliability.

 

In May 2002, the Parent Company obtained an amendment to its creditfacility to exclude certain subsidiaries from the obligation to secure thecredit facility with subsidiary guarantees and asset liens, extend the time toprovide required collateral and obtain the ability to issue senior unsecuredindebtedness and equity under specified terms and conditions.  The amendment also placed additionalrestrictions on the Parent Company under the covenants related to indebtednessand investments, required the Parent Company to transfer its cash managementsystem to a wholly-owned subsidiary and further increased the interest rates onthe total credit facility by 50 basis points.

 

The Parent Company does not have any downgrade triggers that wouldaccelerate the maturity dates of its debt. However, further downgrades of the Parent Company’s credit rating couldadversely impact the cost of future debt facilities.  Due to the Parent Company’s credit rating, which is below Baa3and  BBB- as rated by Moody’s andStandard & Poor’s, respectively, the Parent Company is obligated by itscredit facility covenants to use 75% of any annual excess cash flows, asdefined in its March 2003 amended and restated credit facility agreement, toreduce its outstanding borrowings.  Ifthe Parent Company is unable to meet the covenants of its various debtagreements, the payment of the underlying debt could be accelerated.  Additionally, the Parent Company iscurrently obligated by its

 

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credit facility to use the net cash proceeds received from certainasset sales or issuances of debt by the Parent Company or any of itssubsidiaries to reduce its outstanding borrowings.

 

The following table summarizes the Company’s contractual obligations asof December 31, 2002:

 
| **Contractual Obligations ($ in millions)**             |   | **Payments Due by Period** |    |
|---------------------------------------------------------|--------|----------------------------|---------|
|                                                    |   | **Total**                  |    | **<1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **Thereafter** |   |
| Debt, including  Intercompany Payable to Parent Company |   | $                          | 1,735.1 |   | $ | 1,495.3 |   | $ | 193.8 |   | $ | — |   | $ | 46.0 |   |
| Capital Leases, excluding  interest                     |   | 2.9                        |    | 2.2 |   | 0.5 |   | 0.2 |   | — |   |
| Non-cancelable Operating  Lease Obligations             |   | 373.2                      |    | 100.9 |   | 150.8 |   | 65.6 |   | 55.9 |   |
| Total                                                   |   | $                          | 2,111.2 |   | $ | 1,598.4 |   | $ | 345.1 |   | $ | 65.8 |   | $ | 101.9 |   |

 

 

As part of the November 2001 RestructuringPlan, the Company announced its intention to exit several data centers, reducenetwork costs and consolidate office space. To the extent the Company can sublease or negotiate lease terminations,contractual obligations could decrease. During 2002, the Company negotiated contract terminations, which reducedfuture commitments by approximately $90 million.  The buyer of substantially all of the assets of the broadbandbusiness has agreed to assume approximately $3 million in capital leasecommitments and approximately $316 million in operating lease obligations.  Refer to Note 18 of the Notes to theConsolidated Financial Statements.

 

In July 2002, the Company announced that it would defer the August 15,2002 cash dividend payment on its 121⁄2% preferred stock, in accordance with theterms of the security, conserving $12 million in cash during the third quarterof 2002.  In October 2002, the Novemberdividend was also deferred, conserving an additional $12 million in cash duringthe fourth quarter of 2002.  The Companycontinued to accrue the dividend.  Thestatus of future quarterly dividend payments on the 121⁄2% preferred stockwill be determined quarterly by the board of directors, but the Company doesexpect to pay dividends in the foreseeable future.

 

In addition, in March 2003, the Parent Company reached an agreementwith holders of more than two-thirds of the Company’s 121⁄2 percent preferredstock security and 9 percent senior subordinated notes to exchange theseinstruments for common stock of the Parent Company.  In order to consummate the exchange offers, the Parent Companyexpects to issue approximately 26 million new shares of Broadwing Inc. commonstock assuming 100% redemption of the outstanding instruments, which representsan increase of 11 percent in the number of shares outstanding.

 

**BalanceSheet**

 

The following comparisons are relative to December 31, 2001.

 

The decrease in accounts receivable was primarily the result of anincrease in allowance for doubtful accounts and a decrease in revenue due tocarrier customer bankruptcies.  Thedecrease of $2,008 million in goodwill was due to the write-down of goodwillassociated with the adoption of SFAS 142 and further described in Note 2 of theNotes to Consolidated Financial Statements. The decrease in net property plant, and equipment and other intangibleswas due to the $2.2 billion asset impairment charge as further discussed inNote 1 of the Notes to the Consolidated Financial Statements.  Additionally, the decrease in net property,plant and equipment was due to the depreciation of assets of $291 million exceedingcapital additions of $65 million.

 

Deferred income tax assets decreased by $233 million due primarily tothe net effect of an increase of approximately $878 million related to the $2.2billion asset impairment, more than offset by the

 

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establishment of a valuation allowance of $1,108 million againstcertain federal and state deferred tax assets, including net operating losscarryforwards.

 

The intercompany note payable increased to $1,498 million, which is dueon demand and is therefore presented as a current liability as of December 31,2002.  Accounts payable decreased $52million, or 45%, primarily due to decreases in capital spending.  The decrease in current unearned revenue isprimarily due to amortization of an IRU contract that will expire in May 2003,which generated revenue of $104 million in 2002.  The decrease in noncurrent unearned revenue of $123 million wasdue to scheduled amortization of outstanding IRU agreements, and $59 million dueto non-recurring decreases related to two IRU contract terminations in 2002 asa result of customers’ bankruptcies, offset partially by consideration receivedfor an additional contract entered into during 2002.  The buyer of IRU services typically pays cash upon execution ofthe contract.  The Company’s policy andpractice is to amortize these amounts into revenue over the life of thecontract.

 

**CashFlow**

 

In 2002, cash used in operating activities totaled $95 million comparedto $111 million in 2001, as the Company focused on reducing its cash burnthrough reducing expenses.

 

The Company’s capital investing activities for 2002 were $65 million,86% lower than the $472 million in 2001. The reduction in capital expenditures is due substantially to the completionof the optical overbuild of the national network.  In 2001, the Company sold its investment in PSINet and portionsof its investment in Applied Theory, generating proceeds of $30 million.  There were no investments sold in 2002.

 

Cash provided by financing activities decreased to $151 million from$534 million, as the Company relied less on the Parent Company and externalfinancing to fund its operations and significantly reduced its capitalprogram.  Additionally, approximately$25 million in cash was conserved in 2002 as the Company deferred two quarterlydividend payments on the 121⁄2% Junior Exchangeable Preferred Stock.

 

As of December 31, 2002, the Company held approximately $3 million incash and cash equivalents.  In additionto cash on hand, the primary sources of cash will be cash generated byoperations, borrowings from the Parent Company and borrowings from the ParentCompany’s credit facility.  The primaryuses of cash will be for funding the maintenance of the network, workingcapital and operating losses.

 

###### **Contingencies**

 

In the normal course of business, the Company is subject to variousregulatory proceedings, lawsuits, claims and other matters.  Such matters are subject to manyuncertainties and outcomes that are not predictable with assurance.

 

In 2002, several purported class action lawsuits were filed in theUnited States District Court for the Southern District of Ohio on behalf ofpurchasers of the securities of the Parent Company between January 17, 2001 andMay 20, 2002, inclusive (the “Class Period”). The complaints alleged that the Parent Company, its former ChiefExecutive Officer  (“CEO”), its currentCEO, and several board

 

30

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members violated federal securities laws arising out of allegedlyissuing material misrepresentations during the Class Period which resulted inartificially inflating the market price of the Parent Company’ssecurities.  The Parent Company intendsto defend these claims vigorously.

 

In June 2000, the Company entered into a long-term constructioncontract to build a 1,550-mile fiber route system for a customer.  During the second quarter of 2002, thecustomer alleged a breach of contract and requested the Company to cease allconstruction activities, requested a refund of $62 million in progress paymentspreviously paid to the Company, and requested conveyance of title to all routesconstructed under the contract. Subsequently, the Company notified the customer that such purportedtermination was improper and constituted a material breach under the terms ofthe contract, causing the Company to terminate the contract.  As a result of the contract terminationduring the second quarter of 2002, the Company expensed $13 million in bothcosts incurred under the contract and estimated shutdown costs, which have beenreflected in cost of services and products in the Consolidated Statements ofOperations and Comprehensive Income (Loss). In addition, the Company’s balance sheet included $51 million inunbilled accounts receivable (including both signed change orders and claims)at December 31, 2002 related to this contract. Based on information available as of December 31, 2002, the Companybelieves it is due significant amounts outstanding under the contract, includingunbilled accounts receivable.  TheCompany expects this matter to be resolved through arbitration during2003.  The timing and outcome of theseissues are not currently predictable. An unfavorable outcome could have a material adverse effect on the financialcondition and results of operations of the Company.

 

**Commitments**

 

The Company leases certain facilities and equipment used in itsoperation.  Total rental expenses(excluding access circuit leases) were approximately $29 million, $28 millionand $24 million in 2002, 2001 and 2000.

 

In 2000, the Company entered into a purchase commitment with CorvisCorporation, a Columbia, Maryland-based manufacturer of optical networkequipment.  The agreement specified thatthe Company would purchase $200 million in optical network equipment fromCorvis Corporation over a two-year period beginning in July 2000.  As of December 31, 2002 and 2001, theCompany’s remaining purchase commitment was zero and $20 million, respectively.  In 2000, the Company also entered into aseparate agreement giving it the right to purchase Series H preferred stock at$80.53 per share, which had a fair value $30 million, and $5 million of thecommon stock of Corvis at the initial public offering price.  The Company subsequently exercised theserights during the second and third quarters of 2000.  The established prices for these Corvis equity purchases reflectthe contemporaneous fair value of the equity, as evidenced by independent thirdparty investor purchases of this equity in the same timeframe.

 

In 2001, the Company entered into an agreement with Teleglobe Inc.(“Teleglobe”), a Reston, Virginia-based telecommunications company which statedthat the Company would purchase $90 million of services and equipment fromTeleglobe over four years.  In September2002, in response to Teleglobe’s bankruptcy filing, the Company terminated theagreement for a payment of $4 million to Teleglobe, which released the Companyfrom $63 million of future commitments (refer to Note 1 of the Notes to the ConsolidatedFinancial Statements).

 

In 2001 and 2000, the Company entered into agreements with two vendorsto provide bundled Internet access to the Company’s customers based on amonthly maintenance fee.  In March 2002,the Company terminated its contract with one of the vendors as part of itsfourth quarter 2001 restructuring (refer to Note 3 to the ConsolidatedFinancial Statements).  This contracttermination

 

31

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reduced the Company’s future commitments by approximately $60million.  In September 2002, the Companyterminated its remaining contract (refer to Note 3 to the ConsolidatedFinancial Statements), which eliminated the remaining $13 million of futurecommitments related to bundled Internet access.

 

The Company has certain contractual obligations to utilize networkfacilities, including access lines, from various interexchange and localexchange carriers.  These contracts arebased on a fixed monthly rate with terms on certain agreements extending through2021.  As of December 31, 2002, theCompany had committed to approximately $230 million in operating leases relatedto network utilization.  In addition the buyer of substantially all ofthe assets has agreed to assume approximately $3 million in capital leasecommitments and approximately $316 million in certain operating leaseobligations including the network related commitments.

 

**RecentlyIssued Accounting Standards**

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS143”).  This statement deals with thecosts of closing facilities and removing assets.  SFAS 143 requires entities to record the fair value of a legalliability for an asset retirement obligation in the period it is incurred.  This cost is initially capitalized andamortized over the remaining life of the underlying asset.  Once the obligation is ultimately settled,any difference between the final cost and the recorded liability is recognizedas a gain or loss on disposition.  SFAS143 is effective for fiscal years beginning after June 15, 2002.  The Company is currently evaluating theimpact, if any, that SFAS 143 will have on its future consolidated financialstatements.

 

In June 2002, the FASB issued Statement of Financial AccountingStandards No. 146, “Accounting for Exit or Disposal Activities” (“SFAS146”).  SFAS 146 addresses therecognition, measurement, and reporting of costs that are associated with exitand disposal activities, including costs related to terminating contracts that are not capital leases andtermination benefits that involuntarily terminated employees receive in certaininstances.  SFAS 146 supersedes EmergingIssues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)” (“EITF94-3”) and requires liabilities associated with exit and disposal activities tobe expensed as incurred.  SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002.

 

In December 2002, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard No. 148 “Accounting forStock-Based Compensation-Transition and Disclosure” (“SFAS 148”).  SFAS 148 amends FASB Statement No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”) to provide foralternative methods of transition for an entity that voluntarily changes to thefair value based method of accounting for stock-based employee compensation andrequires disclosure of the impact in interim financial information.  In addition, it amends the disclosureprovisions of SFAS 123 to require prominent disclosure about the effects onreported net income of an entity’s accounting policy decisions with respect tostock-based employee compensation.  TheCompany adopted the disclosure provisions of SFAS 148 in December 2002, butcurrently does not intend to adopt SFAS 123 and therefore, has not selected atransition approach.

 

In November 2002, the FASB issued Financial Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 elaborates on the disclosures to bemade by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee. FIN 45 doesnot prescribe a specific approach for subsequently measuring the guarantor’srecognized liability over the term of the related guarantee.

 

32

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FIN 45 is effective for all guarantees issued or modified afterDecember 31, 2002, irrespective of the guarantor’s fiscal year.  The Company is currently evaluating theimpact, if any, that FIN 45 will have on its future consolidated financial statements,but could be required to record a liability for indemnifications related to thesale of substantially all of its assets discussed further in Note 18 of theNotes to Consolidated Financial Statements.

 

In December 2002, the Financial Accounting Standards Board (“FASB”)issued Financial Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”).  Thisinterpretation of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements” (“ARB 51”), addresses consolidation by business enterprises ofvariable interest entities.  ARB 51requires that an enterprise’s consolidated financial statements includesubsidiaries in which the enterprise has a controlling financial interest.  This Interpretation requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved.  FIN 46 is effective in thefirst fiscal year or interim period beginning after June 15, 2003, for variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003.  Asthe Company does not have any variable interest entities, FIN 46 is expected tohave no impact on the Company’s consolidated financial statements.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Substantially all of the Company’s revenue isderived from domestic operations, so risk related to foreign currency exchangerates is considered minimal.

 

In December 2001, the Company began borrowing funds directly from theParent Company’s credit facility.  Assuch, the Company is exposed to the impact of interest rate fluctuations.  To manage its exposure to interest ratefluctuations, the Parent Company uses a combination of variable rate short-termand fixed rate long-term financial instruments.  The Parent Company employs derivative financial instruments tomanage the Company’s exposure to fluctuations in interest rates.  The Company and the Parent Company do nothold or issue derivative financial instruments for trading purposes or enterinto interest rate transactions for speculative purposes.  For a more detailed discussion of theCompany’s use of financial instruments, see Note 6 of the Notes to ConsolidatedFinancial Statements.

 

33

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**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

 
| **Index to Consolidated Financial  Statements**                        |
|------------------------------------------------------------------------|
|                                                                   |
| Consolidated Financial Statements:                                     |
|                                                                   |
| Report  of Management                                                  |
|                                                                   |
| Report of Independent  Accountants                                     |
|                                                                   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) |
|                                                                   |
| Consolidated Balance Sheets                                            |
|                                                                   |
| Consolidated  Statements of Shareowner’s Equity (Deficit)         |
|                                                                   |
| Consolidated  Statements of Cash Flows                                 |
|                                                                   |
| Notes to  Consolidated Financial Statements                            |
|                                                                   |
| Financial Statement Schedule:                                          |
|                                                                   |
| For each of the  three years in the period ended December 31, 2002:    |
|                                                                   |
| II  - Valuation and Qualifying Accounts                           |

 

Financial statements and financial statement schedules other than thatlisted above have been omitted because the required information is contained inthe financial statements and notes thereto, or because such schedules are notrequired or applicable.

 

34

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| **Report  of Management** |   | **Broadwing  Communications Inc.** |   |
|---------------------------|--------|------------------------------------|--------|

 

The management of Broadwing Communications Inc. is responsible for theinformation and representations contained in this report. Management believesthat the financial statements have been prepared in accordance with generallyaccepted accounting principles and that the other information in this report isconsistent with those statements. In preparing the financial statements, managementis required to include amounts based on estimates and judgments that itbelieves are reasonable under the circumstances.

 

In meeting its responsibility for the reliability of the financialstatements, management maintains a system of internal accounting controls,which is continually reviewed and evaluated. Our internal auditors monitorcompliance with the system of internal controls in connection with theirprogram of internal audits. However, there are inherent limitations that shouldbe recognized in considering the assurances provided by any system of internalaccounting controls. Management believes that its system provides reasonableassurance that assets are safeguarded and that transactions are properlyrecorded and executed in accordance with management’s authorization, that therecorded accountability for assets is compared with the existing assets atreasonable intervals, and that appropriate action is taken with respect to anydifferences. Management also seeks to assure the objectivity and integrity ofits financial data by the careful selection of its managers, by organizationarrangements that provide an appropriate division of responsibility, and bycommunications programs aimed at assuring that its policies, standards andmanagerial authorities are understood throughout the organization.

 

The financial statements have been audited by PricewaterhouseCoopersLLP, independent accountants. Their audit was conducted in accordance withauditing standards generally accepted in the United States of America. TheAudit and Finance Committee of the Board of Directors of the Parent Company,which is composed of five directors who are not employees, meets periodicallywith management, the internal auditors and PricewaterhouseCoopers LLP to reviewtheir performance and responsibilities and to discuss auditing, internalaccounting controls and financial reporting matters. Both the internal auditorsand the independent accountants periodically meet alone with the Audit andFinance Committee and have access to the Audit and Finance Committee at anytime.

 

 
| */s/  Kevin W. Mooney*     |   |   |
|----------------------------|--------|--------|
| *Kevin  W. Mooney*         |   |
| *Chief  Executive Officer* |   |
|                       |   |
|                       |   |
| */s/  Thomas L. Schilling* |   |   |
| *Thomas  L. Schilling*     |   |
| *Chief Financial Officer*  |   |

 

35

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**Reportof Independent Accountants**

 

*To theBoard of Directors and the*

*Shareownersof Broadwing Communications, Inc.*

 

In our opinion, the consolidated financial statements listed in theaccompanying index present fairly, in all material respects, the financialposition of Broadwing Communications Inc. and its subsidiaries (“the Company”)at December 31, 2002 and 2001, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2002,in conformity with accounting principles generally accepted in the UnitedStates of America.  In addition, in ouropinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financialstatements.  These financial statementsand financial statement schedule are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits. We conductedour audits of these statements in accordance with auditing standards generallyaccepted in the United States of America, which require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidatedfinancial statements, the Company is dependent on financing from its parent tofund its operations.  The parent’sability to continue to fund the Company is restricted by its bank creditfacility and certain other debt instruments, which raises substantial doubtabout the ability of the Company to continue as a going concern.  Management’s plans in regard to thesematters are also described in Note 1. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

As discussed in Note 2 to the consolidated financial statements, onJanuary 1, 2002, the Company changed the manner in which it accounts for goodwilland other intangible assets upon adoption of the accounting guidance ofStatement of Financial Accounting Standards No. 142.

 
| /s/ PricewaterhouseCoopers LLP |   |   |
|--------------------------------|--------|--------|
| Austin, Texas                  |   |
| March 27, 2003                 |   |

 

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**BROADWING COMMUNICATIONS INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME (LOSS)**

**(Dollars in millions)**

 
|                                                                                              |   | **Year Ended December 31,** |     |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------|----------|
|                                                                                              |   | **2002**                    |     | **2001** | ** ** | **2000** | ** ** |
| **Revenue**                                                                                       |   |                        |     |   |   |   |   |
| Service revenue                                                                                   |   | $                           | 950.6    |   | $ | 1,070.7 |   | $ | 939.0 |   |
| Product revenue                                                                                   |   | 117.5                       |     | 126.9 |   | 65.6 |   |
| Total revenue                                                                                     |   | 1,068.1                     |     | 1,197.6 |   | 1,004.6 |   |
|                                                                                              |   |                        |     |   |   |   |   |
| **Costs and expenses**                                                                            |   |                        |     |   |   |   |   |
| Cost of services (excluding depreciation  of $231.2, $200.0, and $128.4 included below)           |   | 552.2                       |     | 659.0 |   | 545.0 |   |
| Cost of products                                                                                  |   | 103.4                       |     | 101.1 |   | 54.8 |   |
| Selling, general and administrative                                                               |   | 301.0                       |     | 329.6 |   | 323.5 |   |
| Depreciation                                                                                      |   | 291.1                       |     | 273.4 |   | 197.1 |   |
| Amortization                                                                                      |   | 24.8                        |     | 110.7 |   | 109.9 |   |
| Restructuring                                                                                     |   | 32.6                        |     | 73.9 |   | — |   |
| Asset impairments and other                                                                       |   | 2,200.6                     |     | 152.0 |   | — |   |
| Total costs and expenses                                                                          |   | 3,505.7                     |     | 1,699.7 |   | 1,230.3 |   |
|                                                                                              |   |                        |     |   |   |   |   |
| **Operating loss**                                                                                |   | (2,437.6                    | )        | (502.1 | ) | (225.7 | ) |
|                                                                                              |   |                        |     |   |   |   |   |
| Equity loss in unconsolidated entities                                                            |   | —                      |     | 4.0 |   | 15.5 |   |
| Interest expense                                                                                  |   | 71.6                        |     | 68.1 |   | 68.3 |   |
| Loss (gain) on investments                                                                        |   | (0.2                        | )        | (11.6 | ) | 394.5 |   |
| Other expense (income), net                                                                       |   | (1.6                        | )        | — |   | 1.9 |   |
| Loss from operations before income taxes  and cumulative effect of change in accounting principle |   | (2,507.4                    | )        | (562.6 | ) | (705.9 | ) |
|                                                                                              |   |                        |     |   |   |   |   |
| Income tax expense (benefit)                                                                      |   | 26.3                        |     | (174.2 | ) | (241.3 | ) |
|                                                                                              |   |                        |     |   |   |   |   |
| Loss from operations before cumulative  effect of change in accounting principle                  |   | (2,533.7                    | )        | (388.4 | ) | (464.6 | ) |
|                                                                                              |   |                        |     |   |   |   |   |
| Cumulative effect of change in  accounting principle, net of taxes of $5.8                        |   | 2,008.7                     |     | — |   | — |   |
|                                                                                              |   |                        |     |   |   |   |   |
| **Net loss**                                                                                      |   | (4,542.4                    | )        | (388.4 | ) | (464.6 | ) |
|                                                                                              |   |                        |     |   |   |   |   |
| **Other comprehensive  loss, net of tax**                                                         |   |                        |     |   |   |   |   |
| Reclassification adjustment -  investments                                                        |   | —                      |     | — |   | (84.5 | ) |
| Total other comprehensive loss                                                                    |   | —                      |     | — |   | (84.5 | ) |
|                                                                                              |   |                        |     |   |   |   |   |
| **Comprehensive loss**                                                                            |   | $                           | (4,542.4 | ) | $ | (388.4 | ) | $ | (549.1 | ) |

 

Theaccompanying notes are an integral part of the financial statements.

 

37

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**BROADWING COMMUNICATIONS INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in millions)**

 
|                                                                                                                                                                                                                                              |   | **December 31,  2002** |       | **December 31,  2001** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
| **Assets**                                                                                                                                                                                                                                        |   |                   | ** ** |                   | ** ** |
| Current Assets                                                                                                                                                                                                                                    |   |                   | ** ** |                   | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                                                        |   | $                      | 2.9        |                   | $          | 11.6 |   |
| Receivables,  less allowances of $32.8 and $22.6, respectively                                                                                                                                                                                    |   | 162.0                  |       | 175.6                  |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                        |   | 12.5                   |       | 18.2                   |       |
| Total current  assets                                                                                                                                                                                                                             |   | 177.4                  |       | 205.4                  |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| Property, plant  and equipment, net of accumulated depreciation of $0.0 and $553.6                                                                                                                                                                |   | 54.7                   |       | 2,182.0                |       |
| Goodwill                                                                                                                                                                                                                                          |   | —                 |       | 2,007.7                |       |
| Other  intangibles, net                                                                                                                                                                                                                           |   | —                 |       | 347.2                  |       |
| Deferred income  tax benefits                                                                                                                                                                                                                     |   | —                 |       | 233.2                  |       |
| Other  noncurrent assets                                                                                                                                                                                                                          |   | 7.0                    |       | 2.3                    |       |
| Total Assets                                                                                                                                                                                                                                      |   | $                      | 239.1      |                   | $          | 4,977.8 |   |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| **Liabilities and  Shareowner’s Equity (Deficit)**                                                                                                                                                                                           |   |                   | ** ** |                   | ** ** |
|                                                                                                                                                                                                                                              |   |                   | ** ** |                   | ** ** |
| Current  Liabilities                                                                                                                                                                                                                              |   |                   | ** ** |                   | ** ** |
| Current portion  of long-term debt                                                                                                                                                                                                                |   | $                      | 4.8        |                   | $          | 3.2 |   |
| Intercompany  payable to Parent Company, net                                                                                                                                                                                                      |   |                   | 1,492.7    |                   |       | — |   |
| Accounts  payable                                                                                                                                                                                                                                 |   | 62.8                   |       | 115.2                  |       |
| Accrued service  cost                                                                                                                                                                                                                             |   | 32.7                   |       | 58.2                   |       |
| Accrued taxes                                                                                                                                                                                                                                     |   | 52.0                   |       | 66.3                   |       |
| Accrued  restructuring                                                                                                                                                                                                                            |   | 39.9                   |       | 70.4                   |       |
| Current portion  of unearned revenue and customer deposits                                                                                                                                                                                        |   | 77.8                   |       | 150.5                  |       |
| Other current  liabilities                                                                                                                                                                                                                        |   | 59.6                   |       | 39.3                   |       |
| Total current  liabilities                                                                                                                                                                                                                        |   | 1,822.3                |       | 503.1                  |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| Long-term debt,  less current portion                                                                                                                                                                                                             |   | 240.5                  |       | 91.5                   |       |
| Intercompany payable to Parent Company,  net                                                                                                                                                                                                      |   |                   | —     |                   |       | 1,468.8 |   |
| Unearned  revenue, less current portion                                                                                                                                                                                                           |   | 290.7                  |       | 414.0                  |       |
| Other  noncurrent liabilities                                                                                                                                                                                                                     |   | 33.0                   |       | 58.0                   |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| Total  liabilities                                                                                                                                                                                                                                |   | 2,386.5                |       | 2,535.4                |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| 121⁄2% Junior  Exchangeable Preferred Stock; $.01 par value; authorized -  3,000,000 shares of all classes of preferred stock; 395,210 shares issued and  outstanding and aggregate liquidation preference of $426.1 and $401.4,  respectivley |   | 414.4                  |       | 417.8                  |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| Commitments and  contingencies                                                                                                                                                                                                                    |   | —                 |       | —                 |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| Shareowner’s  Equity (Deficit)                                                                                                                                                                                                               |   |                   |       |                   |       |
| Common stock,  $0.01 par value; 100,000,000 shares authorized;   500,000 shares issued and outstanding at December 31, 2002 and 2001                                                                                                              |   | —                 |       | —                 |       |
| Additional  paid-in capital                                                                                                                                                                                                                       |   | 2,879.1                |       | 2,923.1                |       |
| Accumulated  deficit                                                                                                                                                                                                                              |   | (5,440.9               | )          | (898.5                 | )          |
| Total  shareowner’s equity (deficit)                                                                                                                                                                                                         |   | (2,561.8               | )          | 2,024.6                |       |
|                                                                                                                                                                                                                                              |   |                   |       |                   |       |
| Total  Liabilities and Shareowner’s Equity (Deficit)                                                                                                                                                                                         |   | $                      | 239.1      |                   | $          | 4,977.8 |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

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 **BROADWING COMMUNICATIONS INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREOWNER’SEQUITY (DEFICIT)**

**(Shares in thousands, dollars in millions)**

 

 
|                                       |   |             |   | **Additional  Paid-in Capital** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive Income** |   | **Total  Shareowner’s  Equity (Deficit)** |     |
|--------------------------------------------|--------|------------------|--------|---------------------------------|--------|--------------------------|--------|----------------------------------------------|--------|------------------------------------------------|----------|
|                                       |   | **Common Stock** |   |                            |   |                     |   |
| **Shares**                                 |   | **Amount**       |
|                                       |   |             |   |                            |   |                     |   |                                         |   |                                           |     |   |   |
| **Balance at  January 1, 2000**            |   | 500              |   | $                               | — |                     | $      | 2,424.6                                      |   | $                                              | (45.5    | ) | $ | 84.5 |   | $ | 2,463.6 |   |
|                                       |   |             |   |                            |   |                     |   |                                         |   |                                           |     |   |   |
| Preferred dividends accrued                |   | —           |   | —                          |   | (41.0                    | )      | —                                       |   | —                                         |     | (41.0 | ) |
| Contributed capital from  Parent Company   |   | —           |   | —                          |   | 520.5                    |   | —                                       |   | —                                         |     | 520.5 |   |
| Reclassification adjustment  - investments |   | —           |   | —                          |   | —                   |   | —                                       |   | (84.5                                          | )        | (84.5 | ) |
| Net loss                                   |   | —           |   | —                          |   | —                   |   | (464.6                                       | )      | —                                         |     | (464.6 | ) |
| **Balance at  December 31, 2000**          |   | 500              |   | —                          |   | 2,904.1                  |   | (510.1                                       | )      | —                                         |     | 2,394.0 |   |
|                                       |   |             |   |                            |   |                     |   |                                         |   |                                           |     |   |   |
| Preferred dividends accrued                |   | —           |   | —                          |   | (46.3                    | )      | —                                       |   | —                                         |     | (46.3 | ) |
| Contributed capital from  Parent Company   |   | —           |   | —                          |   | 65.3                     |   | —                                       |   | —                                         |     | 65.3 |   |
| Net loss                                   |   | —           |   | —                          |   | —                   |   | (388.4                                       | )      | —                                         |     | (388.4 | ) |
| **Balance at  December 31, 2001**          |   | 500              |   | —                          |   | 2,923.1                  |   | (898.5                                       | )      | —                                         |     | 2,024.6 |   |
|                                       |   |             |   |                            |   |                     |   |                                         |   |                                           |     |   |   |
| Preferred dividends accrued                |   | —           |   | —                          |   | (45.9                    | )      | —                                       |   | —                                         |     | (45.9 | ) |
| Contributed capital from  Parent Company   |   | —           |   | —                          |   | 1.9                      |   | —                                       |   | —                                         |     | 1.9 |   |
| Net loss                                   |   | —           |   | —                          |   | —                   |   | (4,542.4                                     | )      | —                                         |     | (4,542.4 | ) |
| **Balance at  December 31, 2002**          |   | 500              |   | $                               | — |                     | $      | 2,879.1                                      |   | $                                              | (5,440.9 | ) | $ | — |   | $ | (2,561.8 | ) |

 

Theaccompanying notes are an integral part of the financial statements.

 

39

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**BROADWING COMMUNICATIONS INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in millions)**

 

 
|                                                                     |   | **Year Ended December 31,** |     |
|--------------------------------------------------------------------------|--------|-----------------------------|----------|
|                                                                     |   | **2002**                    |     | **2001** | ** ** | **2000** | ** ** |
| **Cash Flows from  Operating Activities**                                |   |                        |     |   |   |   |   |
| Net loss                                                                 |   | $                           | (4,542.4 | ) | $ | (388.4 | ) | $ | (464.6 | ) |
| Adjustments to  reconcile net loss to cash used in operating activities: |   |                        |     |   |   |   |   |
| Cumulative  effect of change in accounting principle, net of tax         |   | 2,008.7                     |     | — |   |   |   |
| Depreciation                                                             |   | 291.1                       |     | 273.4 |   | 197.1 |   |
| Amortization                                                             |   | 24.8                        |     | 110.7 |   | 109.9 |   |
| Asset  impairments                                                       |   | 2,200.6                     |     | 152.0 |   | — |   |
| Tax valuation  allowance                                                 |   | 1,108.5                     |     | 13.2 |   | 31.6 |   |
| Deferred income  tax expense (benefit)                                   |   | (877.6                      | )        | (94.3 | ) | (214.2 | ) |
| Intercompany  credit in lieu of taxes                                    |   | (204.6                      | )        | (93.1 | ) | (58.7 | ) |
| Provision for  loss on receivables                                       |   | 33.0                        |     | 77.0 |   | 52.0 |   |
| Equity loss in  unconsolidated entities                                  |   | —                      |     | 4.0 |   | 15.5 |   |
| (Gain) loss on  investments, net                                         |   | (0.2                        | )        | (11.6 | ) | 394.5 |   |
| Other, net                                                               |   | (0.1                        | )        | (3.8 | ) | (6.3 | ) |
|                                                                     |   |                        |     |   |   |   |   |
| Changes in  operating assets and liabilities:                            |   |                        |     |   |   |   |   |
| Increase in  receivables                                                 |   | (19.9                       | )        | (78.3 | ) | (143.4 | ) |
| (Increase)  decrease in other current assets                             |   | 6.0                         |     | (17.8 | ) | (8.6 | ) |
| (Decrease)  increase in accounts payable                                 |   | (52.8                       | )        | (65.0 | ) | 80.1 |   |
| Increase  (decrease) in accrued and other current liabilities            |   | 132.8                       |     | 132.5 |   | (21.5 | ) |
| Decrease in  unearned revenue                                            |   | (202.1                      | )        | (85.8 | ) | (25.1 | ) |
| Increase in  other assets and liabilities, net                           |   | (0.7                        | )        | (36.1 | ) | 29.0 |   |
| Net cash used  in operating activities                                   |   | (94.9                       | )        | (111.4 | ) | (32.7 | ) |
|                                                                     |   |                        |     |   |   |   |   |
| **Cash Flows from Investing  Activities**                                |   |                        |     |   |   |   |   |
| Capital  expenditures                                                    |   | (64.9                       | )        | (472.0 | ) | (599.9 | ) |
| Proceeds from  sale of investments                                       |   | —                      |     | 30.4 |   | — |   |
| Purchases of  investments                                                |   | —                      |     | — |   | (0.5 | ) |
| Other, net                                                               |   | —                      |     | — |   | 10.4 |   |
| Net cash used  in investing activities                                   |   | (64.9                       | )        | (441.6 | ) | (590.0 | ) |
|                                                                     |   |                        |     |   |   |   |   |
| **Cash Flows from  Financing Activities**                                |   |                        |     |   |   |   |   |
| Capital  contribution from Parent Company                                |   | 1.9                         |     | 65.3 |   | 520.5 |   |
| Proceeds from  Parent Company intercompany loan, net                     |   | 23.3                        |     | 479.5 |   | 532.7 |   |
| Issuance of  long-term debt                                              |   | 151.0                       |     | 42.0 |   | — |   |
| Repayment of  long-term debt                                             |   | (0.4                        | )        | (3.2 | ) | (404.0 | ) |
| Preferred stock  dividends paid                                          |   | (24.7                       | )        | (49.4 | ) | (49.4 | ) |
| Other, net                                                               |   | —                      |     | — |   | (2.9 | ) |
| Net cash  provided by financing activities                               |   | 151.1                       |     | 534.2 |   | 596.9 |   |
| Net decrease in  cash and cash equivalents                               |   | (8.7                        | )        | (18.8 | ) | (25.8 | ) |
| Cash and cash  equivalents at beginning of period                        |   | 11.6                        |     | 30.4 |   | 56.2 |   |
| Cash and cash  equivalents at end of period                              |   | $                           | 2.9      |   | $ | 11.6 |   | $ | 30.4 |   |
|                                                                     |   |                        |     |   |   |   |   |
| **Supplemental Disclosure  of Cash Flow Information**                    |   |                        |     |   |   |   |   |
| Cash paid  (received) for:                                               |   |                        |     |   |   |   |   |
| Income taxes,  net of refunds                                            |   | $                           | 1.1      |   | $ | 0.5 |   | $ | 0.2 |   |
| Interest, net  of amount capitalized                                     |   | $                           | 75.5     |   | $ | 60.6 |   | $ | 52.6 |   |
| Non-cash  investing and financing activities:                            |   |                        |     |   |   |   |   |
| Accretion of  preferred stock                                            |   | $                           | 3.5      |   | $ | 3.2 |   | $ | 4.1 |   |
| Capitalized  interest                                                    |   | $                           | 8.1      |   | $ | 22.9 |   | $ | 22.4 |   |

 

 The accompanying notes are an integral partof the financial statements.

 

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**BROADWING COMMUNICATIONS INC.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****              Description of Business, Liquidity, andAccounting Policies**

 

**Description ofBusiness -**BroadwingCommunications Inc. (“the Company”) is an Austin, Texas based provider ofcommunications services. The Company utilizes its advanced opticalnetwork consisting of approximately 18,700 route miles to provide broadbandtransport through private line and indefeasible right of use (“IRU”)agreements, Internet services utilizing ATM and frame relay technology, andlong-distance services to both wholesale and retail markets. The Company alsooffers data collocation, information technology consulting, networkconstruction and other services.  TheCompany is wholly owned subsidiary of Broadwing Inc. ("Broadwing" or"the Parent Company").  OnNovember 9, 1999 the Company was merged with a wholly owned subsidiary ofBroadwing ("the Merger").

 

**Basis ofPresentation*-***On January 1, 2002, the web hosting operationsof a subsidiary of the Parent Company weretransferred to the Company and are reported in all periods presented.  Accordingly, the historical results ofoperations, balance sheets, shareowner’s equity and cash flows have been recastto reflect this transfer of operations. The impact of this transfer was not material to the financial statements.

 

***Basisof Consolidation -***The accompanying consolidated financial statements includeaccounts of the Company and its wholly owned and its majority ownedsubsidiaries over which it exercises control (“the Company”).  Investments in which the Company has theability to exercise significant influence, but which it does not control, areaccounted for using the equity method. For equity method investments, the Company’s share of income iscalculated according to the Company’s equity ownership.  Any differences between the carrying amountof an investment and the amount of the underlying equity in the net assets ofthe equity investee are amortized over the expected life of the asset.

 

**Liquidity and Financial Resources —** TheCompany is dependent on financing from its Parent Company to fund itsoperations.  Under the terms of theParent Company's amended bank credit facility and recently issued discountnotes, the Parent Company's ability to make future investments in or fund theoperations of the Company was limited to $58 million as of February 28,2003.  As discussed in Note 18, onFebruary 22, 2003 certain subsidiaries of the Parent Company entered into adefinitive agreement to sell substantially all of the assets of the broadbandbusiness, excluding the information technology consulting assets, to C IIICommunications ("C III"), for up to $129 million in cash and theassumption of certain long-term operating contractual commitments.  In addition, in March 2003, the ParentCompany reached an agreement with holders of more than two-thirds of theCompany's 121⁄2percent preferred stock and 9 percent senior subordinated notes to exchangethese instruments for common stock of the Parent Company.  If the Company is unable to finance itsoperations through closing of the asset sale and meet its remainingobligations, or if a sale is not consummated, it may be forced to seekprotection from its creditors through bankruptcy proceedings. 

 

41

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**Use of Estimates -**Preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported.  Actual results could differ from thoseestimates.

 

**Cash Equivalents** - Cash equivalents consist of short-term, highlyliquid investments with original maturities of three months or less.

 

***NotesReceivable -***From time to time, the Company accepts interest-bearingnotes from customers and other debtors when payments are expected to bereceived over extended periods.  Amountsdue on notes classified as current are expected to be received within one year.

 

**Unbilled Receivables -**Unbilled receivables arise from networkconstruction revenue that is recognized under the percentage-of-completionmethod and from broadband, switched, data and internet and consulting servicesrendered but not yet billed.  Networkconstruction receivables are billable upon achievement of contractualmilestones or upon completion of contracts. As of December 31, 2002 and 2001, unbilled receivables totaled $71million and $69 million, respectively. Unbilled receivables of $51 million and $45 million at December31, 2002 and 2001, respectively, include both claims and signed change ordersrelated to a construction contract that was terminated during the secondquarter of 2002.  The Company believessuch amounts are valid and collectible receivables.  Refer to Note 14 for a detailed discussion of this constructioncontract.

 

**Allowancefor Uncollectible Accounts Receivable –**The Companyestablishes provisions for uncollectible accounts receivable using bothpercentages of aged accounts receivable balances to reflect the historicalaverage of credit losses and specific provisions for certain large, potentiallyuncollectible balances.  The Company believes that its allowance forpotential losses is adequate based on the methods above.  However, if one or more of the Company’slarger customers were to default on its accounts receivable obligations orgeneral economic conditions in the United States of America deteriorated, theCompany could be exposed to potentially significant losses in excess of theprovisions established.

 

**Materials and Supplies -**The Company’s inventory is carried at the lower of average cost or market.

 

**Property, Plant and Equipment -**Property, plant and equipment is recorded at cost(subject to fair market value adjustments made as part of purchase accountingat the date of the Merger). Depreciation is provided for using the straight-line method over theestimated useful life.  Repairs andmaintenance are charged to expense as incurred.  Property, plant and equipment recorded under capital leases areincluded with the Company’s owned assets. Costs associated with uncompleted portions of the network are classifiedas construction in progress in the accompanying consolidated balance sheets.

 

Interest is capitalized as partof the cost of constructing the Company’s optical network.  Interest capitalized during constructionperiods is computed by determining the average accumulated expenditures foreach interim capitalization period and applying an average interest rate. Totalinterest capitalized during the years ended December 31, 2002, 2001 and 2000,was $8 million, $23 million and $22 million, respectively.

 

**Goodwill and Indefinite-Lived IntangibleAssets -**Goodwill represents the excess of the purchase priceconsideration over the fair value of assets acquired recorded in connectionwith purchase business combinations, primarily the merger with IXC, in November1999.  Upon the adoption of Statement of

 

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Financial Accounting Standards No. 142, “Goodwill andOther Intangible Assets” (“SFAS 142”) on January 1, 2002, the Company recordeda goodwill impairment charge of $2,008.7 million, net of tax, as discussed inNote 2.

 

Pursuant to SFAS 142, goodwill and intangible assetsnot subject to amortization are tested for impairment annually, or when eventsor changes in circumstances indicate that the asset might be impaired.  For goodwill, a two-step impairment test isperformed.  The first step compares thefair value of a reporting unit with its carrying amount, includinggoodwill.  If the carrying value of areporting unit exceeds its fair value, then the second step of the impairmenttest is performed to measure the amount of impairment loss.  The second step compares the implied fairvalue of the reporting unit goodwill with the carrying amount of thatgoodwill.  The implied fair value isdetermined by allocating the fair value of a reporting unit to all of theassets and liabilities of that unit as if the reporting unit had been acquiredin a business combination.  The excessof the fair value of a reporting unit over the amounts assigned to its assetsand liabilities is the implied fair value of goodwill.  If the carrying amount of the reporting unitgoodwill is in excess of the implied fair value of that goodwill, then animpairment loss is recognized equal to that excess.  For indefinite-lived intangible assets, the impairment testconsists of a comparison of the fair value of the intangible asset with itscarrying value.  If the carrying valueof an indefinite-lived asset exceeds its fair value, an impairment loss isrecognized in an amount equal to that excess.

 

In 2001 and 2000, goodwill was amortized on astraight-line basis over estimated useful lives of 30 years.

 

**Other Intangible Assets —** Intangible assetssubject to amortization expense consist primarily of acquired customerrelationships.  These intangible assetsare amortized on a straight-line basis over their estimated useful livesranging from 2 to 20 years.  As ofDecember 31, 2002 the carrying value of other intangible assets was zero due tothe asset impairment discussed below.

 

**Impairmentof Long-lived Assets, Other than Goodwill and Indefinite lived Intangibles**— The Company reviews the carrying value of long-lived assets, other thangoodwill and indefinite lived assets discussed above, when events or changes incircumstances indicate that the carrying amount of the assets may not berecoverable.  An impairment loss isrecognized when the estimated future undiscounted cash flows expected to resultfrom the use of an asset (or group of assets) and its eventual disposition areless than its carrying amount.  Animpairment loss is measured as the amount by which the asset’s carrying valueexceeds its fair value.

 

The Company performed an impairment assessment of itsassets during the fourth quarter of 2002. This assessment considered all of the contemplated strategicalternatives, including a potential sale of assets, using aprobability-weighted approach.  Based onthis assessment, it was determined that the long-lived assets of the Companywere impaired and, accordingly, the Company recorded a $2.2 billion non-cashimpairment charge to reduce the carrying value of these assets.  Of the total charge, $1,901.7 millionrelated to tangible fixed assets and $298.3 million related to finite-livedintangible assets.

 

**Investments –**Investmentsin publicly traded companies over which the Company does not exercisesignificant influence are reported at fair value in accordance with Statementof Financial Accounting Standard No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities” (“SFAS 115”). The Company reviews its investments for impairment whenever the fairvalue of the individual investment is less than its cost basis.  An impairment loss is recognized if thedecline in fair value is

 

43

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deemed to be “other than temporary.”  The Company uses the average cost basis todetermine the gain or loss on an investment transaction.

 

**Revenue Recognition -**Broadbandtransport service revenue is billed monthly, in advance, with revenue beingrecognized when earned.  Both switchedvoice and data and Internet product revenue are billed a monthly in arrears,while the revenue is recognized as the services are provided.  Revenue from product sales and certainservices is generally recognized upon performance of contractual obligations,such as shipment, delivery, installation or customer acceptance.  The Company modified its revenue recognitionpolicies on January 1, 2000, to be in conformity with the Securities andExchange Commission’s (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognitionin Financial Statements” (“SAB 101”). Accordingly, service activation revenue is deferred and recognized overthe appropriate service life for the associated service.

 

Indefeasible right-of-use agreements (“IRU”) representthe lease of network capacity or dark fiber and are recorded as unearnedrevenue at the earlier of the acceptance of the applicable portion of thenetwork by the customer or the receipt of cash.  The buyer of IRU services typically pays cash upon execution ofthe contract, and the associated IRU revenue is then recognized over the lifeof the agreement as services are provided, beginning on the date of customeracceptance. In the event the buyer of an IRU terminates a contract prior to thecontract expiration and releases the Company from the obligation to providefuture services, the remaining unamortized unearned revenue is recognized inthe period in which the contract is terminated.  In 2002, the Company recognized non-cash, non-recurring revenueand operating income related to IRU terminations with bankrupt customers towhom the Company was no longer obligated to provide services, totaling $58.7million (net of a $4.25 million termination payment discussed in Note 14).  IRU and related maintenance revenue areincluded in the broadband transport category.

 

Construction revenue and estimated profits arerecognized according to the percentage of completion method on a cost incurredto total costs estimated at completion basis. The method is used because the Company can make reasonably dependableestimates of revenue and costs applicable to various stages of a contract.  As the financial reporting of thesecontracts depends on estimates that are continually assessed throughout theterms of the contracts, revenue recognized is subject to revision as thecontracts near completion.  Revisions inestimates are reflected in the period in which the facts that give rise to therevision become known and could impact revenue and costs of services andproducts.  Construction projects are consideredsubstantially complete upon customer acceptance.  In November 2001, the Company announced its intention to exit theconstruction business upon completion of one remaining contract as discussed inNote 3.  That contract was terminated in2002 and is currently in dispute as discussed in Note 14.

 

**Advertising -**Costs related to advertising are expensed asincurred and amounted to $2 million, $14 million, and $27 million in 2002, 2001and 2000, respectively.

 

**Fiber Exchange Agreements** - In connection with the development ofits optical network, the Company entered into various agreements to exchangefiber usage rights.  The Companyaccounts for agreements with other carriers to exchange fiber asset servicecontracts either for capacity or services by recognizing the fair value of therevenue earned and expense incurred. Exchange agreements accounted for non-cash revenue and expense, in equalamounts, of $8 million, $12 million and $19 million in 2002, 2001 and 2000,respectively, with no impact on operating or net income (loss).

 

**Income Taxes** - The Company’s tax provision is basedupon the modified separate return method under which an income tax benefit isrecorded for losses based upon the potential to be realized by the Company, aswell as any affiliated members of the federal income tax consolidated group ofthe

 

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Parent Company. The income-producing members of the consolidated group compensate theCompany for losses as they are realized in the consolidated tax return.  Theincome tax provision consists of an amount for taxes currently payable and anexpense (or benefit) for tax consequences deferred to future periods.  In evaluating the carrying value of its deferred tax assets, the Companyconsiders prior operating results, future taxable income projections of theParent Company’s consolidated group, expiration of tax loss carryforwards,ongoing prudent and feasible tax planning strategies, and other factors.

 

**Stock-Based Compensation** - Employees are eligible to participate in thestock-based compensation plans of the Parent Company.  The Company accounts for stock-based compensation plansunder the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”), and relatedinterpretations.  Compensation cost ismeasured under the intrinsic value method (refer to Note 9).  Stock-based employee compensation cost isnot reflected in net loss, as all options granted under these plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net loss if the company had applied the fair valuerecognition provisions of FASB Statement No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”), to stock-based employee compensation in all periodspresented.

 
|                                                 |   | **Year ended December  31** |     |
|------------------------------------------------------|--------|-----------------------------|----------|
| **($ in millions except  per share amounts)**        |   | **2002**                    |     | **2001** |   | **2000** |   |
| Net loss applicable to common  shareowners:          |   |                        |     |   |   |   |   |
| As reported                                          |   | $                           | (4,542.4 | ) | $ | (388.4 | ) | $ | (464.6 | ) |
| Pro forma compensation expense, net of  tax benefits |   | (18.3                       | )        | (19.5 | ) | (22.9 | ) |
| Total pro forma net loss                             |   | $                           | (4,560.7 | ) | $ | (407.9 | ) | $ | (487.5 | ) |

 

 

The weighted average fair values at the date of grantfor the Company options granted to employees were $2.66, $7.66 and $12.75during 2002, 2001 and 2000, respectively. The fair value disclosures assumethat the fair value of option grants was calculated at the date of grant usingthe Black-Scholes option pricing model with the following weighted averageassumptions:

 
|                             |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                             |   |     |   |     |   |     |   |
| Expected  dividend yield         |   | —   |   | —   |   | —   |   |
| Expected  volatility             |   | 120.4    | %      | 67.9     | %      | 48.9     | %      |
| Risk-free  interest rate         |   | 3.1      | %      | 4.1      | %      | 5.1      | %      |
| Expected  holding period - years |   | 3        |   | 3        |   | 4        |   |

 

**Pensionand Postretirement Benefits****–**The Parent Company calculates net periodic pension andpostretirement expenses and liabilities on an actuarial basis under theprovisions of Statement of Financial Accounting Standards No. 87, “Employers’Accounting for Pensions” (“SFAS 87”) and Statement of Financial AccountingStandards No. 106, “Employers’ Accounting for Postretirement Benefits OtherThan Pensions” (“SFAS 106”).  Theactuarial assumptions attempt to anticipate future events and are used incalculating the expense and liability related to these plans.  Key actuarial assumptions are presented inthe Parent Company’s financial statements. The impact on the Company’s financial statements is discussed in Note10.

 

**Reclassifications -**Certain prior years amounts have been reclassifiedto conform to the current year presentation with no effect on financialresults.

 

45

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**Recently Issued Accounting Standards**  In June 2001, the FASB issued Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations” (“SFAS 143”).  Thisstatement deals with the costs of closing facilities and removing assets.  SFAS 143 requires entities to record thefair value of a legal liability for an asset retirement obligation in theperiod it is incurred.  This cost isinitially capitalized and amortized over the remaining life of the underlyingasset.  Once the obligation isultimately settled, any difference between the final cost and the recordedliability is recognized as a gain or loss on disposition.  SFAS 143 is effective for fiscal yearsbeginning after June 15, 2002.  TheCompany is currently evaluating the impact, if any, that SFAS 143 will have onits future consolidated financial statements.

 

In June 2002, the FASB issued Statement of FinancialAccounting Standards No. 146, “Accounting for Exit or Disposal Activities”(“SFAS 146”).  SFAS 146 addresses therecognition, measurement, and reporting of costs that are associated with exitand disposal activities, including costs related to terminating contracts that are not capital leases andtermination benefits that involuntarily terminated employees receive in certaininstances.  SFAS 146 supersedes EmergingIssues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)” (“EITF94-3”) and requires liabilities associated with exit and disposal activities tobe expensed as incurred.  SFAS 146 is effectivefor exit or disposal activities of the Company that are initiated afterDecember 31, 2002.

 

In December 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standard No. 148“Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS148”).  SFAS 148 amends FASB StatementNo. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) to provide foralternative methods of transition for an entity that voluntarily changes to thefair value based method of accounting for stock-based employee compensation andrequires disclosure of the impact in interim financial information.  In addition, it amends the disclosureprovisions of SFAS 123 to require prominent disclosure about the effects onreported net income of an entity’s accounting policy decisions with respect tostock-based employee compensation.  TheCompany adopted the disclosure provisions of SFAS 148 in December 2002, butcurrently does not intend to adopt SFAS 123 and therefore, has not selected atransition approach.

 

In November 2002, the FASB issued FinancialInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN45”).  FIN 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  FIN 45 does not prescribe aspecific approach for subsequently measuring the guarantor’s recognizedliability over the term of the related guarantee.  FIN 45 is effective for all guarantees issued or modified afterDecember 31, 2002, irrespective of the guarantor’s fiscal year.  The Company is currently evaluating theimpact, if any, that FIN 45 will have on its future consolidated financialstatements, but could be required to record a liability for indemnificationsrelated to the sale of substantially all of its assets discussed further inNote 18.

 

In December 2002, FASB issued Financial InterpretationNo. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  This interpretation of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements” (“ARB 51”), addressesconsolidation by business enterprises of variable interest entities.  ARB 51 requires that an enterprise’sconsolidated financial statements include subsidiaries in which the enterprisehas a controlling financial interest. FIN 46 requires existing unconsolidated variable interest entities to beconsolidated by their primary beneficiaries if the entities do not effectivelydisperse risks among parties involved. FIN 46 is effective in the first fiscal year or interim period beginningafter June 15, 2003, for variable interest entities in which an enterpriseholds a

 

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variable interest that it acquired before February 1,2003.  As the Company does not have anyvariable interest entities, FIN 46 is expected to have no impact on theCompany’s consolidated financial statements.

 

**2.****              Goodwill and Intangible Assets**

 

On June 29, 2001 the FASB issued SFAS 142, whichrequired cessation of the amortization of goodwill and indefinite-livedintangible assets and annual impairment testing of those assets.  Intangible assets that have finite usefullives continue to be amortized.  TheCompany adopted SFAS 142 on January 1, 2002, as required.  The Company completed the initial impairmenttest during the first quarter of 2002, which indicated that goodwill wasimpaired as of January 1, 2002.  In thesecond quarter of 2002, the Company recorded an impairment charge of $2,008.7million, net of taxes, effective as of January 1, 2002.  The impairment charge is reflected as acumulative effect of change in accounting principle, net of taxes, in theConsolidated Statements of Operations and Comprehensive Income (Loss).

 

The following table reconciles the Company’s 2002,2001 and 2000 net loss, adjusted to exclude amortization of goodwill andindefinite lived intangible assets pursuant to SFAS 142, to the 2002 reportedamounts:

 
|                                                                                                   |   | **For the Year Ended  December 31,** |     |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
| **($ in millions):**                                                                                   |   | **2002**                             |     | **2001** |   | **2000** |   |
|                                                                                                   |   |                                 |     | **(as adjusted)** | ** ** | **(as adjusted)** | ** ** |
| Loss before  cumulative effect of change in accounting principle                                       |   | $                                    | (2,533.7 | ) | $ | (388.4 | ) | $ | (464.6 | ) |
| Add back:  Goodwill amortization                                                                       |   | —                               |     | 72.5 |   | 76.9 |   |
| Add back:  Assembled workforce amortization, net of taxes                                              |   | —                               |     | 5.2 |   | 5.9 |   |
| Adjusted loss  before cumulative effect of change cumulative effect of change in accounting  principle |   | $                                    | (2,533.7 | ) | $ | (310.7 | ) | $ | (381.8 | ) |
|                                                                                                   |   |                                 |     |   |   |   |   |
| Net loss                                                                                               |   | $                                    | (4,542.4 | ) | $ | (388.4 | ) | $ | (464.6 | ) |
| Add back:  Goodwill amortization                                                                       |   | —                               |     | 72.5 |   | 76.9 |   |
| Add back:  Assembled workforce amortization, net of taxes                                              |   | —                               |     | 5.2 |   | 5.9 |   |
| Adjusted net  loss                                                                                     |   | $                                    | (4,542.4 | ) | $ | (310.7 | ) | $ | (381.8 | ) |

 

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The following table details the components of thecarrying amount of intangible assets. Intangible assets subject to amortization expense primarily relate toacquired customer relationships.  TheCompany adopted Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”),on January 1, 2002 as required.  In thefourth quarter of 2002, the Company recorded a non-cash intangible assetimpairment charge of $298.3 million (refer to Note 1):

 
| **($ in millions):**                        |   | **December 31,  2002** |   | **December 31,  2001** |   |
|---------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                        |   |                   |   |                   |   |
| Intangible  assets subject to amortization: |   |                   |   |                   |   |
| Gross carrying  amount                      |   | $                      | 409.0  |                   | $      | 426.2 |   |
| Reclassification  of assembled workforce    |   | (24.0                  | )      | —                 |   |
| Asset  impairment                           |   | (298.3                 | )      | —                 |   |
| Accumulated  amortization                   |   | (86.7                  | )      | (79.0                  | )      |
| Total  intangible assets, net               |   | $                      | — |                   | $      | 347.2 |   |

 
|                                                         |   | **For the  Year Ended** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|
| **($ in  millions)**                                         |   | **2002**                |   | **2001** |   | **2000** |   |
|                                                         |   |                    |   |   |   |   |   |
| Amortization expense of finite-lived other intangible assets |   | $                       | 24.8   |   | $ | 38.2 |   | $ | 32.9 |   |
|                                                              |        |                         |        |  |  |  |  |  |  |  |

 

 

The estimated intangible asset amortization expensefor each of the fiscal years 2003 through 2007 is zero.  

 

The following table presents a rollforward of theactivity related to goodwill:

 

 
| **($ in millions):**                                                             |   | **Year Ended  December 31, 2002** |    | **Year Ended  December 31, 2001** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
|                                                                             |   |                              |    |                              |   |
| Goodwill,  beginning of year                                                     |   | $                                 | 2,007.7 |                              | $      | 2,007.7 |   |
|                                                                             |   |                              |    |                              |   |
| Reclassification  of Assembled Workforce, net  of  accumulated amortization |   | 4.1                               |    | —                            |   |
|                                                                             |   |                              |    |                              |   |
| Impairment  charge                                                               |   | (2,011.8                          | )       | —                            |   |
|                                                                             |   |                              |    |                              |   |
| Goodwill, end  of year                                                           |   | $                                 | —  |                              | $      | 2,007.7 |   |

 

**3.****              Restructuring and Other Charges**

** **

**October2002 Restructuring Charge**

 

In October 2002, the Company initiated a restructuringthat is intended to reduce annual expenses by approximately $200 millioncompared to 2002 and enable the business to become cash flow positive.  The plan includes initiatives to reduce theworkforce by approximately 500 positions; reduce line costs by approximately25% through network grooming, optimization, and rate negotiations; and exit the

 

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international wholesale voice business.  The Company recorded restructuring chargesof $12.8 million, consisting of $7.5 million related to employee separationbenefits and $5.3 million related to contractual terminations.  As of December 31, 2002, 428 employeeseparations had been completed which utilized reserves of $5.0 million, all ofwhich was cash.  The Company expects tocomplete the plan by June 30, 2003.

 

The following table illustrates the activity in thisreserve since its inception: 

 
| **Type of costs ($ in  millions)** |   | **Initial Charge** |   | **Utilizations** |   | **Balance  December 31,  2002** |   |
|------------------------------------|--------|--------------------|--------|------------------|--------|---------------------------------|--------|
|                               |   |               |   |             |   |                            |   |
| Employee  separations              |   | $                  | 7.5    |             | $      | (5.0                            | )      | $ | 2.5 |   |
| Terminate  contractual obligations |   | 5.3                |   | —           |   | 5.3                             |   |
| Total                              |   | $                  | 12.8   |             | $      | (5.0                            | )      | $ | 7.8 |   |

 

 

**September2002 Restructuring Charge**

 

During the third quarter of 2002, the Company recordedrestructuring charges of $5.5 million. The restructuring charge comprised $0.5 million related to employeeseparation benefits and $5 million related to contractual terminationsassociated with the Company’s exit of a product line (for a further discussionof the contractual termination refer to Note 14).  The restructuring costs include the cost of employee separationbenefits, including severance, medical and other benefits, related to twoemployees of the Company.  Total cashexpenditures during 2002 amounted to $5.5 million.  This restructuring is completed and closed.

 

The following table illustrates the activity in thisreserve since its inception:

 
| **Type of  costs ($ in millions)** |   | **Initial  Charge** |   | **Utilizations** |   | **Balance  December 31,  2002** |   |
|------------------------------------|--------|---------------------|--------|------------------|--------|---------------------------------|--------|
|                               |   |                |   |             |   |                            |   |
| Employee separations               |   | $                   | 0.5    |             | $      | (0.5                            | )      | $ | — |   |
| Terminate contractual obligations  |   | 5.0                 |   | (5.0             | )      | —                          |   |
| Total                              |   | $                   | 5.5    |             | $      | (5.5                            | )      | $ | — |   |

 

 

**November 2001 Restructuring Plan**

 

In November 2001, the Company’s management approvedrestructuring plans which included initiatives to close eight of the Company’seleven data centers; reduce the Company’s expense structure; and exit thenetwork construction line of business and other non-strategic operations.  In addition, the web hosting operations of asubsidiary of the Parent Company were transferred into a subsidiary of theCompany effective January 1, 2002. Total restructuring and impairment costs of $222.0 million were recordedin 2001 related to these initiatives. The $222.0 million consisted of restructuring liabilities in the amountof $73.9 million and related noncash asset impairments in the amount of $148.1million.  The restructuring charge wascomprised of $11.2 million related to involuntary employee separation benefits,$62.4 million related to lease and other contractual terminations and $0.3million relating to other restructuring charges.

 

During the first quarter of 2002, the Company recordedadditional restructuring charges of $15.9 million resulting from employee separationbenefits and costs to terminate contractual obligations,

 

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which were actions contemplated in the original planfor which an amount could not be reasonably estimated at that time.  During fourth quarter of 2002, a $1 millionreversal was made to the restructuring reserve due to a change in estimaterelated to the termination of contractual obligations.  In total, the Company expects thisrestructuring plan to result in cash outlays of $88.1 million and noncash itemsof $148.8 million.  The Company expectsto complete the plan by December 31, 2002, except for certain leaseobligations, which are expected to continue through December 31, 2005.

 

The restructuring costs include the cost ofinvoluntary employee separation benefits, including severance, medical andother benefits related to 720 employees across all areas of the Company.  As of December 31, 2002, all employeeseparations had been completed which utilized reserves of $11.7 million, $11.0million of which was cash.  Total cashexpenditures in 2002 amounted to $50.6 million.

 

In connection with the restructuring plan, the Companyperformed a review of its long-lived assets to identify any potentialimpairments in accordance with Statement of Financial Accounting Standard No.121, “Accounting for the Impairment of Long-Lived Assets to be Disposed of”(“SFAS 121”).  The Company recorded a$148.1 million charge as an expense of operations according to SFAS 121,resulting from the write-off of certain assets related to the closing of datacenters, consolidation of office space and curtailment of other Companyoperations.

 

The following table illustrates the activity in thisreserve since the initial charge in November of 2001:  

 
| **Type of costs ($ in millions):** |   | **Intial  Charge** |   | **Utilizations** |   | **Balance  December 31,  2001** |   | **Utilizations** |   | **Adjustments** |   | **Balance  December 31,  2002** |   |
|------------------------------------|--------|--------------------|--------|------------------|--------|---------------------------------|--------|------------------|--------|-----------------|--------|---------------------------------|--------|
|                               |   |               |   |             |   |                            |   |             |   |            |   |                            |   |
| Employee  separations              |   | $                  | 11.2   |             | $      | (3.1                            | )      | $                | 8.1    |            | $      | (8.6                            | )      | $ | 0.5 |   | $ | — |   |
| Terminate  contractual obligations |   | 62.4               |   | (2.3             | )      | 60.1                            |   | (42.4            | )      | 14.4            |   | 32.1                            |   |
| Other exit costs                   |   | 0.3                |   | —           |   | 0.3                             |   | (0.4             | )      | 0.1             |   | —                          |   |
| Total                              |   | $                  | 73.9   |             | $      | (5.4                            | )      | $                | 68.5   |            | $      | (51.4                           | )      | $ | 15.0 |   | $ | 32.1 |   |

 

**1999 Restructuring Plan**

** **

Included in the allocation of the cost to acquire theCompany in the fourth quarter of 1999 were restructuring costs associated withinitiatives to more closely integrate operations of the Company with those ofother subsidiaries of the Parent Company. The total restructuring costs recorded in 1999 of $7.7 million includedthe costs of involuntary employee separation benefits related to 263 employeesof the Company, costs associated with the closure of a variety of technical andcustomer support facilities, the decommissioning of certain switchingequipment, and the termination of contracts with vendors.  As of December 31, 2000, all of the employeeseparations had been completed.  Totalcash expenditures during the first nine months of 2002 amounted to $0.8million.  These restructuring activitieswere completed in the third quarter of 2002, and the remaining balance of $0.5million related to facility closure costs was reversed.

 

The following table illustrates the activity in thisreserve since December 31, 1999: 

 

50

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| **Type of costs  ($ in millions):** |   | **Balance  December 31,  1999** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  2000** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  2001** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  2002** |       |
|-------------------------------------|--------|---------------------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|
|                                |   |                            | ** ** |             | ** ** |            | ** ** |                            | ** ** |             | ** ** |            | ** ** |                            | ** ** |             | ** ** |            | ** ** |                            | ** ** |
| Employee separations                |   | $                               | 2.0        |             | $          | (2.5            | )          | $                               | 0.5        |             | $          | —          |       | $                               | —     |             | $          | —          |       | $                               | —     |   | $ | — |   | $ | — |   | — |   |   |
| Facility closure cost               |   | 2.1                             |       | (0.3             | )          | —          |       | 1.8                             |       | (0.5             | )          | —          |       | 1.3                             |       | (0.8             | )          | (0.5            | )          | —                          |       |
| Relocation                          |   | 0.2                             |       | —           |       | (0.1            | )          | 0.1                             |       | —           |       | (0.1            | )          | —                          |       | —           |       | —          |       | —                          |       |
| Other exit cost                     |   | 3.2                             |       | (1.9             | )          | 0.2             |       | 1.5                             |       | (1.5             | )          | —          |       | —                          |       | —           |       | —          |       | —                          |       |
| Total                               |   | $                               | 7.5        |             | $          | (4.7            | )          | $                               | 0.6        |             | $          | 3.4             |       | $                               | (2.0       | )                | $          | (0.1            | )          | $                               | 1.3        |   | $ | (0.8 | ) | $ | (0.5 | ) | $ | — |   |   |
|                                     |        |                                 |            |                  |            |                 |            |                                 |            |                  |            |                 |            |                                 |            |                  |            |                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

**1999 Predecessor Restructuring Plan**

 

In the third quarter of 1999,the predecessor company recorded a charge of approximately $8.3 millionrelating to the restructuring of the organization and to exit certain foreignoperations.  The workforce reduction of15 employees included management, administrative and foreign sales personnel.  The employees were notified of this programduring July and August of 1999.  During2000, the severance reserve was increased by $1.9 million due to higher thanexpected outplacement costs and higher than expected benefits for certainemployees.  The reduction of $0.4million for exiting facilities is due to lower than expected costs uponcompletion of those activities.  Theserestructuring activities were completed in the fourth quarter of 2002, and theremaining balance of $0.2 million related to employee severance was reversed.

 

A summary of the initial chargesfor the 1999 predecessor restructuring and activity in those reserves in 1999and 2000, is as follows:  

 
| **Type of  costs  ($ in millions):**                  |   | **Initial Charge** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  1999** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  2000** |       |
|-------------------------------------------------------|--------|--------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|
|                                                  |   |               | ** ** |             | ** ** |            | ** ** |                            | ** ** |             | ** ** |            | ** ** |                            | ** ** |
| Employee separations                                  |   | $                  | 7.5        |             | $          | (4.6            | )          | $                               | —     |             | $          | 2.9             |       | $                               | (2.8       | ) | $ | 1.9 |   | $ | 2.0 |   |
| Terminate contractual obligations and exit facilities |   | 0.8                |       | (0.3             | )          | —          |       | 0.5                             |       | (0.1             | )          | (0.4            | )          | —                          |       |
| Total                                                 |   | $                  | 8.3        |             | $          | (4.9            | )          | $                               | —     |             | $          | 3.4             |       | $                               | (2.9       | ) | $ | 1.5 |   | $ | 2.0 |   |

 

A summary of the 2001 and 2002 activity in the accruedrestructuring liabilities associated with the 1999 predecessor restructuring isas follows:  

 

 
| **Type of costs  ($ in millions):**                    |   | **Balance  December 31,  2000** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  2001** |       | **Utilizations** |       | **Adjustments** |       | **Balance  December 31,  2002** |       |
|--------------------------------------------------------|--------|---------------------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|------------------|------------|-----------------|------------|---------------------------------|------------|
|                                                   |   |                            | ** ** |             | ** ** |            | ** ** |                            | ** ** |             | ** ** |            | ** ** |                            | ** ** |
| Employee  separations                                  |   | $                               | 2.0        |             | $          | (1.3            | )          | $                               | (0.1       | )                | $          | 0.6             |       | $                               | (0.4       | ) | $ | (0.2 | ) | $ | — |   |
| Terminate  contractual obligations and exit facilities |   | —                          |       | —           |       | —          |       | —                          |       | —           |       | —          |       | —                          |       |
| Total                                                  |   | $                               | 2.0        |             | $          | (1.3            | )          | $                               | (0.1       | )                | $          | 0.6             |       | $                               | (0.4       | ) | $ | (0.2 | ) | $ | — |   |

 

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**4.     Investmentsin Other Entities**

 

**Investments in Equity Method Securities**

 

As of December 31, 2000, the market value of theCompany’s investment in Applied Theory Communications Inc. (a New York-basedInternet service provider) was approximately $11.7 million, following therecording of an impairment charge on this security at the end of 2000.  This impairment charge was recorded becausethe Company believed that the decrease in value of Applied Theory shares was“other than temporary.”

 

The Company recorded a $4.0 million decrease in thevalue of the Applied Theory investment in 2001 as a result of the Company’s useof the equity method of accounting. During 2001, the Company sold its shares of this investment anddiscontinued equity method accounting in May 2001 due to a decrease in itsownership percentage to less than 20%, the resignation of the Company’s seat onApplied Theory’s board of directors and the Company’s belief that it no longerexerted significant influence over the operations of Applied Theory.

 

In accordance with SFAS 115, the Company reclassifiedthis investment to a trading security in 2001. As such, fluctuations in the market value of Applied Theory werereflected in the Consolidated Statements of Operations and Comprehensive Income(Loss) under the caption “Loss (gain) on investments.”  Accordingly, the Company recognized pretaxlosses of $5.9 million, representing the difference between the market valueand the Company’s recorded basis of the investment.  This investment was completely liquidated during 2001, generatingproceeds of $1.8 million.

 

**Investments in Marketable Securities**

 

The Company’s investment in PSINet totaled $15 millionas of December 31, 2000 and zero as of December 31, 2001 as the Companyliquidated its entire investment through settlement of a forward sale (refer toNote 6) and sale of shares in the open market. The Company received proceeds of $28 million and recorded a realizedpretax gain of $17 million in 2001 related to these transactions.  The cost basis was calculated based on therelated cost.  There was no unrealizedgain or loss related to the investment included in “Other Comprehensive Income”as of December 31, 2000 or 2001.  During1999, the Company recorded a pretax unrealized holding gain of $85 million,which was completely reversed during 2000 as the value of the investmentdeclined.  During 2000, the Companydetermined that its investment had been impaired and that the impairment was“other than temporary.”  Accordingly,the Company recorded a realized pretax loss totaling $342 million.

 

**Marca-Tel –**TheCompany held an indirect investment equal to 28.8% of Grupo Marca-Tel S.A. deC.V. (“Marca-Tel”) as a result of its ownership of 65.4% of ProgressInternational, LLC (“Progress”) which, in turn, owned 44.0% of Marca-Tel.  The remaining 56.0% of Marca-Tel is owned bya Mexican individual, Marca Beep, S.A. de C.V. and Siemens.  The other owner of Progress is WestelInternational, Inc.  Although theCompany had previously written this investment down to zero, the Company soldits ownership in Marca-Tel in 2001 and recorded a gain on investment of $0.4million. 

 

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**5.     Debt**

 

The Company’s debtconsists of the following:  

 
| **($ in millions)**                              |   | **December 31, 2002** |    | **December 31, 2001** |   |
|--------------------------------------------------|--------|-----------------------|---------|-----------------------|--------|
|                                             |   |                  |    |                  |   |
| Short-term  debt:                                |   |                  |    |                  |   |
| Intercompany  payable to Parent Company, net     |   | $                     | 1,492.7 |                  | $      | — |   |
| Short-term  notes                                |   | 2.6                   |    | —                |   |
| Capital lease  obligations, current portion      |   | 2.2                   |    | 3.2                   |   |
|                                             |   |                  |    |                  |   |
| Total  short-term debt                           |   | $                     | 1,497.5 |                  | $      | 3.2 |   |
|                                             |   |                  |    |                  |   |
| Long-term  debt:                                 |   |                  |    |                  |   |
| Bank notes                                       |   | $                     | 193.0   |                  | $      | 42.0 |   |
| Intercompany  payable to Parent Company, net     |   |                  | —  |                  |   | 1,468.8 |   |
| 9% Senior  subordinated notes                    |   | 46.0                  |    | 46.0                  |   |
| Capital lease  obligations, less current portion |   | 0.7                   |    | 2.7                   |   |
| 121⁄2% Senior  notes                          |   | 0.8                   |    | 0.8                   |   |
|                                             |   |                  |    |                  |   |
| Total  long-term debt                            |   | $                     | 240.5   |                  | $      | 1,560.3 |   |

 

**Bank Notes**

 

The Parent Company’s credit facility, which alsoprovides for direct borrowings from the facility by the Company’s subsidiaryBroadwing Communications Services Inc. (“BCS”), was obtained in November 1999with total availability of $1.8 billion from a group of lending institutions.  The credit facility was increased to $2.1billion in January 2000 and increased again to $2.3 billion in June 2001.  The total credit facility availabilitydecreased to $1.825 billion as of December 31, 2002 following a $335 millionprepayment of the outstanding term debt facilities in the first quarter of 2002(resulting from the sale of substantially all of the assets of a subsidiary ofthe Parent Company), $5 million in scheduled repayments of the term debtfacilities and $135 million in scheduled amortization of the revolving creditfacility.  As of December 31, 2002, thecredit facility availability consisted of $765 million in revolving credit,maturing in various amounts during 2003 and 2004, $569 million in term loansfrom banking institutions, maturing in various amounts during 2003 and 2004,and $491 million in term loans from nonbanking institutions, maturing invarious amounts between 2003 and 2007.

 

At December 31, 2002, BCS and the Parent Company haddrawn approximately $1.648 billion from the credit facility capacity of $1.825billion, and had outstanding letters of credit totaling $13.1 million, leaving$163.9 million in additional borrowing capacity under the facility.  Credit facility borrowings have been used bythe Parent Company to refinance its debt and debt assumed as part of the mergerwith the Company in November 1999 and to fund both the Company’s and ParentCompany’s capital expenditure program and other working capital needs.  The amount refinanced included approximately$404 million borrowed in order to redeem a large portion of the outstanding 9%Senior Subordinated Notes assumed during the Merger as part of a tender offerand $391 million in outstanding debt of IXC assumed during the Merger.  The tender offer was required under thechange in control provision of the indenture governing the 9% SeniorSubordinated Notes.

 

The credit facility’s financial covenants require thatthe Parent Company maintain certain debt to EBITDA (as defined in the creditfacility agreement), senior secured debt to EBITDA, debt to capitalization, andinterest coverage ratios.  The facilityalso contains covenants, which, among other

 

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things, restrict the ability to incur additional debtor liens; pay dividends; repurchase Parent Company common stock; sell, lease,transfer or dispose of assets; make investments; and merge with anothercompany.  As of December 31, 2002, theParent Company was in compliance with all of the covenants of the creditfacility.

 

Prior to December 2001, the Company relied solely onadvances from the Parent Company for funding of its operations and capitalprogram in excess of cash provided by its own operations.  In December 2001, the Company’s BCS subsidiarybegan borrowing funds directly from the Parent Company’s credit facility.  At December 31, 2002 2001, the Company’ssubsidiary BCS had drawn $193 million and $42 million, respectively, directlyfrom the credit facility.  At December31, 2002, the Company and the Parent Company had $163.9 million in additionalborrowing capacity under this facility.

 

In December 2001, the Parent Company obtained anamendment to the credit facility to exclude substantially all of the chargesassociated with the November 2001 restructuring plan (refer to Note 3) from thecovenant calculations.  In March 2002,the Parent Company obtained an additional amendment to allow for the sale ofsubstantially all of the assets of a subsidiary of the Parent Company, excludecharges related to SFAS 142 (refer to Note 2), increase its ability to incuradditional indebtedness and amend certain defined terms.

 

Historically, the credit facility was secured only bya pledge of stock certificates of certain subsidiaries of the ParentCompany.  Upon downgrades of the ParentCompany’s corporate credit rating in the first quarter of 2002, the ParentCompany became obligated to provide certain subsidiary guarantees and liens onthe assets of the Parent Company and certain subsidiaries in addition to thepledge of the stock certificates of the subsidiaries.  In May 2002, the Parent Company obtained an amendment to thecredit facility to exclude certain subsidiaries from the obligation to securethe credit facility with subsidiary guarantees and asset liens, extend the timeto provide required collateral and obtain the ability to issue senior unsecuredindebtedness and equity under specified terms and conditions.  The amendment also placed additionalrestrictions on the Parent Company under the covenants related to indebtednessand investments, required the Parent Company to transfer its cash managementsystem to a wholly-owned subsidiary and increased the interest rates on thetotal credit facility by 50 basis points. In December 2002, the Parent Company obtained a waiver to exclude chargesrelated to SFAS 144 from its pertinent covenant calculations through March 30,2003.  In March 2003, as discussed inNote 18, the Parent Company amended and restated its credit facility to, amongother things, exclude charges related to SFAS 144 going forward.

 

In February 2002, the Parent Company’s corporatecredit rating was downgraded by Moody’s Investors Service to Ba3 from itsprevious level of Ba1.  In March 2002,the Parent Company’s corporate credit rating was downgraded by Standard andPoor’s and Fitch Rating Service to BB from its previous level of BB+.  In December 2002, the Parent Company’scorporate credit rating was downgraded again by Standard and Poor’s to B- fromits previous level of BB.  In January2003, Moody’s downgraded the Company’s corporate credit rating to B1 fromBa3.  Prior to the downgrades, theParent Company’s credit facility was secured only by a pledge of the stockcertificates of certain subsidiaries, including Broadwing CommunicationsInc.  Upon the downgrades, the ParentCompany also became obligated to provide certain guarantees and liens on theassets of both the Parent Company and the Company.

 

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The interest rates that could be charged on borrowingsfrom the credit facility as of December 31, 2002 ranged from 150 to 350 basispoints above the London Interbank Offering Rate (“LIBOR”) and were at 275 to325 basis points above LIBOR, or 4.13% and 4.63%, respectively, based on theParent Company’s credit rating.  The ParentCompany incurs banking fees in association with this credit facility that rangefrom 37.5 basis points to 75 basis points, applied to the unused amount ofborrowings under the revolving credit facility.

 

**Intercompany Payable to Parent Company**

 

Intercompany advances payable to the Parent Companytotaled $1,492.7 million and $1,468.8 million as of December 31, 2002 andDecember 31, 2001, respectively.  As ofDecember 31, 2002, the intercompany note to the Parent Company was payable upondemand and was therefore classified as a current liability.

 

**9% Senior Subordinated Notes**

 

In 1998, the predecessor company issued $450 millionof 9% senior subordinated notes due 2008 (“the 9% notes”).  In January 2000, $404 million of the 9%senior subordinated notes were redeemed through a tender offer due to thechange of control provision of the related indenture.  Accordingly, $46 million of the 9% notes remain outstanding atDecember 31, 2002.  

 

The 9% notes are general unsecured obligations and aresubordinate in right of payment to all existing and future senior indebtednessof the Company’s subsidiaries. The 9% notes indenture includes a limitation onthe amount of indebtedness that the Company can incur based upon themaintenance of either debt to operating cash flow or debt to capitalratios.  The 9% indenture also providesthat if the Company incurs any additional indebtedness secured by liens on itsproperty or assets that are subordinate to or equal in right of payment withthe 9% notes, then the Company must secure the outstanding 9% notes equally andratably with such indebtedness.  As ofDecember 31, 2002, the Company had the ability to incur additional debt.

 

**Capital Lease Obligations**

 

The Company leases facilities and equipment used inits operations, some of which are required to be capitalized in accordance withStatement of Financial Accounting Standard No. 13, “Accounting for Leases”(“SFAS 13”).  SFAS 13 requires thecapitalization of leases meeting certain criteria, with the related asset beingrecorded in property, plant and equipment and an offsetting amount recorded asa liability.  The Company had $2.9million in total indebtedness relating to capitalized leases as of December 31,2002, $0.7 million of which was considered long-term.

** **

**121⁄2% Senior Notes**

 

As of December 31, 2002, theCompany had outstanding $0.8 million of 121⁄2% senior notes maturing in 2005.

 

**Other Short-Term Debt**

 

The Company maintains ashort-term revolving vendor financing arrangement for its BTS subsidiary, whichhad an outstanding balance of $2.6 million as of December 31, 2002.  The Company has the ability to borrow up to$6.0 million under this arrangement, which is secured by an irrevocable $2.0million letter of credit against  theParent’s revolving credit facility.  Theinterest rate charged on the borrowings is variable based on the prime rate andwas 6.0% as of December 31, 2002.  Theagreement expires on June 21, 2003.

 

The following table summarizes the Company’smaturities of long-term debt and minimumpayments under capital leases, excluding interest, for the five yearssubsequent to December 31, 2002 ($ in millions):

 

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| **at December 31  Year of Maturity** |   | **Debt** |   | **Capital  Leases** |   | **Total** |   |
|--------------------------------------|--------|----------|--------|---------------------|--------|-----------|--------|
|                                 |   |     |   |                |   |      |   |
| 2003                                 |   | 1,495.3  |   | 2.2                 |   | 1,497.5   |   |
| 2004                                 |   | 193.0    |   | 0.5                 |   | 193.5     |   |
| 2005                                 |   | 0.8      |   | 0.2                 |   | 1.0       |   |
| 2006                                 |   | —   |   | —              |   | —    |   |
| 2007                                 |   | —   |   | —              |   | —    |   |
| Thereafter                           |   | 46.0     |   | —              |   | 46.0      |   |
|                                 |   | 1,735.1  |   | 2.9                 |   | 1,738.0   |   |
| Less current  portion                |   | (1,495.3 | )      | (2.2                | )      | (1,497.5  | )      |
| Long-term debt                       |   | $        | 239.8  |                | $      | 0.7       |   | $ | 240.5 |   |
|                                      |        |          |        |                     |        |           |        |  |  |  |

 

**6.    ****Financial Instruments**

 

The Company adopted Statement of Financial AccountingStandard SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” (“SFAS 133”) on January 1, 2001. SFAS 133 requires that all derivative instruments be recognized on thebalance sheet at fair value.  Fairvalues are determined based on quoted market prices of comparable instruments,if available, or on pricing models using current assumptions.  On the date the financial instrument isentered into, the Company designates it as either a fair value or cash flowhedge.

 

Upon adoption of SFAS 133 on January 1, 2001,offsetting transition adjustments related to the PSINet forward sale and theunderlying six million shares of PSINet (further described below) werereclassified from other comprehensive income (loss) to net loss.  Accordingly, there was no net cumulativeeffect adjustment to either net loss or other comprehensive income (loss)related to these items.  As of December31, 2002 and 2001, the Company was not a party to any derivative instruments.

 

**Marketable Equity Forward Contracts -**Fromtime to time the Company enters into forward contracts on the sale ofmarketable equity securities held in the Company’s investment portfolio.  It is the Company’s intent to manage itsexposure to fluctuations in U.S. equity markets related to theseinvestments.  Forward contracts arecontractual agreements between two parties for the sale of borrowed shares tobe settled by delivery of the equivalent number of shares owned by the Companyat an agreed upon future date.  

 

**PSINet -** In June and July 1999, the Companyreceived approximately $111.8 million representing amounts from a financialinstitution in connection with two prepaid forward sale contracts on sixmillion shares of PSINet common stock. This amount was accounted for as notes payable and was collateralized bysix million shares of PSINet common stock owned by the Company.  Given the significant decline in the valueof PSINet common stock during 2000, the Company adjusted the carrying value ofthis liability to approximately $3 million during the fourth quarter of2000.  This adjustment resulted in anunrealized gain on the liability that substantially offset the unrealized lossrecorded in “Other comprehensive income (loss)” on the underlying six millionshares of PSINet being hedged.

 

In 2001, the Company designated this arrangement as afair value hedge with both the underlying shares reclassified to tradingsecurities under SFAS 115 and related forward sale liability subject tomark-to-market adjustments through the income statement each period.  During the first quarter of

 

56

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2001, the Company settled the forward sale liabilityfor approximately 5.8 million shares of PSINet common stock.  The difference between the six millionshares collateralized and the 5.8 million shares required to settle theliability were sold in the open market, generating a pretax gain of $0.5 million.

 

**7.     RedeemablePreferred Stock**

 

In 1997, the Company issued 300,000 shares of 121⁄2% Junior ExchangeablePreferred Stock (“121⁄2% Preferreds”).  The121⁄2% Preferreds are mandatorilyredeemable on August 15, 2009 at a price equal to their liquidation preferenceof $1,000 a share, plus accrued and unpaid dividends.  Through November 15, 1999, dividends on the 121⁄2% Preferreds were being effectedthrough additional shares of the 121⁄2% Preferreds.  On November 16, 1999, the Company convertedto a cash pay option for these dividends, and subsequently made its first cashpayment on February 15, 2000.  AtDecember 31, 2002, 395,210 shares of theredeemable preferred stock issue were outstanding with a carrying value of$414.4 million.  This preferred stock isnot included in shareowners equity because it is mandatorily redeemable.

 

The Companyannounced that it would defer the August 15, 2002 and November 15, 2002 cashdividend payments on its 121⁄2% Preferreds , in accordance with the terms of thesecurity, conserving $24.7 million in cash during the second half of 2002.  The dividends were accrued in the third andfourth quarter of 2002. The status of future quarterly dividend payments on the121⁄2% Preferreds  will be determinedquarterly by the Company’s board of directors. In November 2002, the 121⁄2% Preferreds rating  was downgraded by Standard and Poor’s to D from its previouslevel of B.

 

**8.     Concentrationsof Credit Risk and Major Customers**

 

The Company may be subject to credit risk due to concentrations ofreceivables from companies that are communications providers, internet serviceproviders and cable television companies. The Company performs ongoing credit evaluations of customers’ financialcondition and typically does not require significant collateral.

 

Revenue from the Company’s ten largest customers accounted forapproximately 38%, 40%, and 35% of total revenue in 2002, 2001 and 2000,respectively.  Four of the Company’s tenlargest customers were in Chapter 11 bankruptcy proceedings as of December 31, 2002.  Total revenue from these customersapproximated 14% of consolidated revenue during 2002.  Revenue from these bankrupt customers generated by theamortization of IRU agreements and the early termination of two IRUs asdiscussed in Note 1, approximated 7% of total revenue in 2002.  In addition, a significant portion of theCompany’s revenue is derived from telecommunications carriers.  Revenue from telecommunications carriersaccounted for 57%, 64%, and 67% of total revenue in 2002, 2001 and 2000, respectively.

 

As discussed in Note 1 and Note 14, the Company had an unbilled accountreceivable of $50.5 million as of December 31, 2002 from a single customer thatwas in dispute.

 

**9.     Shareowner’sEquity**

 

**Common Stock**

 

The Company’s common shares that were outstanding at the date of theMerger were retired on the Merger Date and were replaced by 500,000 shares ofthe Company’s common stock that are entirely owned by the Parent Company.

 

57

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**AdditionalPaid-In Capital and Accumulated Deficit**

 

The Company’s pre-Merger additional paid-in capital and accumulateddeficit were eliminated at the Merger Date. At December 31, 2002 and 2001, the additional paid-in capital balanceincludes approximately $2.4 billion representing consideration paid by theParent Company for Broadwing Communications in the Merger.  Additional amounts of approximately $580million at December 31, 2002 relate to the retirement of $404 million of theCompany’s 9% Notes and additional Parent Company capital contributions.  Offsetting these amounts are approximately$139.8 million in preferred stock dividends on the 121⁄2% Junior ExchangeablePreferred Stock.  The accumulateddeficit balance of approximately $5.4 billion at December 31, 2002 reflects theactivities of the Company subsequent to the November 9, 1999 Merger Date.

 

**Stock-BasedCompensation**

 

Prior to the Merger, the Company maintained incentive plans for selectedemployees.  The Company’s plans includedincentive stock options and non-qualified stock options issued at prices equalto the fair market value of the Company’s common stock at the date of grantwhich expire upon the earlier of 10 years from the date of grant or terminationof employment, death, or disability. Effective with the Merger, options outstanding under the Company’s planswere converted into options to acquire Broadwing common stock, with the numberof shares and exercise price being adjusted in accordance with the exchangeratio of 2.0976 established in the Merger Agreement.  All outstanding options under the Company’s plans becameexercisable and fully vested upon the change in control except for thoseoptions issued under the 1998 plan.  Themajority of options issued under the 1998 plan maintained the original vestingschedule.  A few selected option grantsto executives became exercisable and fully vested according to theiragreements.

 

Presented below isa summary of the status of outstanding Company stock options issued toemployees, options issued in the Merger and related transactions (shares inthousands):

 
|                                                              |   | **Year Ended December  31,** |   |
|-------------------------------------------------------------------|--------|------------------------------|--------|
|                                                              |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                              |   | **Options  (millions)**      |   | **Weighted  Average  Excerise  Price** |   | **Options  (millions)** |   | **Weighted  Average  Excerise  Price** |   | **Options  (millions)** |   | **Weighted  Average  Excerise  Price** |   |
|                                                              |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                                |   | 14.2                         |   | $ | 19.10 |   | 11.1 |   | $ | 20.90 |   | 14.4 |   | $ | 18.00 |   |
| Granted                                                           |   | 2.9                          |   | $ | 3.83 |   | 7.7 |   | $ | 16.71 |   | 3.1 |   | $ | 30.20 |   |
| Exercised                                                         |   | —                       |   | $ | — |   | (0.9 | ) | $ | 12.76 |   | (3.7 | ) | $ | 33.03 |   |
| Forfeited                                                         |   | (4.4                         | )      | $ | 17.87 |   | (3.7 | ) | $ | 24.11 |   | (2.7 | ) | $ | 23.36 |   |
| Outstanding at end of period                                      |   | 12.7                         |   | $ | 15.99 |   | 14.2 |   | $ | 19.10 |   | 11.1 |   | $ | 20.90 |   |
| Weighted average fair value of options  granted during the period |   | $                            | 2.66   |   |   |   | $ | 7.66 |   |   |   | $ | 12.75 |   |   |   |
|                                                                   |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table summarizes outstanding options at December 31, 2002by price range:

 

58

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|                          |   | **Outstanding**         |   | **Exercisable**                        |   |
|-------------------------------|--------|-------------------------|--------|----------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Options  (millions)** |   | **Weighted  Average  Excerise  Price** |   | **Weighted  Average  Contractual  Life** |   | **Options  (millions)** |   | **Weighted  Average  Excerise  Price** |   |
|                          |   |                    |   |                                   |   |   |   |   |   |   |   |
| $1.44 to $9.65                |   | 5.3                     |   | $                                      | 9.50   |   | 9.24 |   | 0.7 |   | $ | 9.09 |   |
| $9.90 to $16.78               |   | 1.2                     |   | $                                      | 13.18  |   | 6.32 |   | 1.0 |   | $ | 12.66 |   |
| $17.50 to $24.94              |   | 3.7                     |   | $                                      | 21.01  |   | 7.16 |   | 2.7 |   | $ | 20.77 |   |
| $24.97 to $38.19              |   | 2.5                     |   | $                                      | 29.88  |   | 7.15 |   | 1.5 |   | $ | 29.80 |   |
|                          |   |                    |   |                                   |   |   |   |   |   |   |   |
| Total                         |   | 12.7                    |   | $                                      | 15.99  |   | 7.95 |   | 5.9 |   | $ | 20.31 |   |

 

**10.  Employee Benefit Plans**

 

**Pensionand Postretirement Plans**

 

Effective January1, 2001, the Company’s employees were covered by the Parent Company’s employeebenefit plans including the defined benefit pension plan, the definedcontribution plan and the health care and group life insurance benefit plans.

 

The pension planis sponsored and managed by the Parent Company and includes employees from allsubsidiaries of the Parent Company. The Company’s proportionate pension benefitexpense is allocated through an intercompany expense allocation.  The pension benefit formula for the definedbenefit plan is determined by a combination of compensation based credits andannual guaranteed interest credits. Funding for this plan is achieved through contributions to anirrevocable trust fund.  Detaileddisclosures regarding the pension plan can be found in the Parent Company’s annualreport.

 

The health careand group life benefit plans are funded through Voluntary Employee BenefitAssociation (“VEBA”) trusts managed by the Parent Company.  The Parent Company funds amounts as deemedappropriate from time to time.  Totalexpenses for the Company related to the pension, health care and life benefitplans during 2002, 2001 and 2000 were $9.8 million, $13.7 million, and $10.2million, respectively.

 

**Savings Plans**

** **

Contributions bythe Company to the defined contribution plan are based on matching a portion ofthe employee contributions or on a percentage of employee earnings.  Total contributions by the Company to thedefined contribution plan for 2002, 2001 and 2000 were $4.6 million, $5.3million and $2.6 million, respectively. 

 

59

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**11.  Income Taxes**

** **

Income tax provision (benefit) consists of the following:  

 
|                                 |   | **Year Ended December  31,** |   |
|--------------------------------------|--------|------------------------------|--------|
| **($ in millions)**                  |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                 |   |                         |   |   |   |   |   |
| Intercompany credit in lieu of taxes |   | $                            | (204.6 | ) | $ | (93.1 | ) | $ | (58.7 | ) |
|                                 |   |                         |   |   |   |   |   |
| Deferred:                            |   |                         |   |   |   |   |   |
| Federal                              |   | (688.3                       | )      | (75.9 | ) | (151.7 | ) |
| State and local                      |   | (189.3                       | )      | (18.4 | ) | (62.5 | ) |
| Total deferred                       |   | (877.6                       | )      | (94.3 | ) | (214.2 | ) |
| Valuation allowance                  |   | 1,108.5                      |   | 13.2 |   | 31.6 |   |
| Total                                |   | $                            | 26.3   |   | $ | (174.2 | ) | $ | (241.3 | ) |

 

The following is a reconciliation of the income tax benefit at the U.S.federal statutory tax rate to the income tax provision (benefit) computed usingthe Company’s effective tax rate for each respective period ($ in millions):

 
|                                                  |   | **December 31,** |   |
|-------------------------------------------------------|--------|------------------|--------|
|                                                  |   | **2002**         |   | **2001** |   | **2000** |   |
| Tax benefit at  federal statutory rate                |   | $                | (877.6 | ) | $ | (196.9 | ) | $ | (246.6 | ) |
| State and  local income taxes, net of federal benefit |   | (123.9           | )      | (11.3 | ) | (28.8 | ) |
| Change in  valuation allowance                        |   | 1,039.8          |   | 8.6 |   | 8.8 |   |
| Amortization  of nondeductible intangible assets      |   | —           |   | 25.2 |   | 24.3 |   |
| Other  differences, net                               |   | (12.0            | )      | 0.2 |   | 1.0 |   |
| Provision  (benefit) for income taxes                 |   | $                | 26.3   |   | $ | (174.2 | ) | $ | (241.3 | ) |

 

The income tax provision (benefit) relating to other comprehensive income(loss) components was $0 in 2002 and 2001, and ($56.3) million in 2000.

 

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Deferred income taxes reflect the tax effect of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant componentsof the Company’s deferred tax assets and liabilities are as follows ($ inmillions):

 
|                              |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
| Deferred tax  assets:             |   |     |   |     |   |
| Net operating  loss carryforwards |   | $        | 405.1  |     | $      | 275.5 |   |
| Depreciation  and amortization    |   | 627.3    |   | —   |   |
| Investments                       |   | 10.6     |   | 51.4     |   |
| Unearned revenue                  |   | 86.4     |   | 159.0    |   |
| Restructuring  related items      |   | 22.6     |   | 104.4    |   |
| Other                             |   | 33.2     |   | 35.1     |   |
| Total deferred  tax assets        |   | 1,185.2  |   | 625.4    |   |
| Valuation  allowance              |   | (1,169.8 | )      | (61.3    | )      |
| Net deferred  income tax assets   |   | $        | 15.4   |     | $      | 564.1 |   |
|                              |   |     |   |     |   |
| Deferred tax  liabilities:        |   |     |   |     |   |
| Depreciation  and amortization    |   | $        | — |     | $      | 324.6 |   |
| Other                             |   | 15.4     |   | 6.3      |   |
| Total deferred  tax liabilities   |   | 15.4     |   | 330.9    |   |
| Net deferred  tax asset           |   | $        | — |     | $      | 233.2 |   |

 

As of December 31,2002, the Company had approximately $800.6 million of federal operating losstax carryforwards, with a deferred tax asset value of $280.2 million, and$124.9 million in deferred tax assets related to state and local operating losstax carryforwards.  Tax losscarryforwards will generally expire between 2010 and 2021.  U.S. tax laws limit the annual utilizationof tax loss carryforwards of acquired entities.  These limitations should not materially impact the utilization ofthe tax carryforwards.  

 

The Company had a valuation allowance of $1,169.8 million and $61.3 millionfor the years ended December 31, 2002 and 2001, respectively.  The valuation allowance is necessary due tothe uncertainty of the ultimate realization of such future benefits.

 

In evaluating theamount of valuation allowance required, the Company considered prior operatingresults, future taxable income projections, expiration dates of net operatingloss carryforwards and ongoing prudent and feasible tax planningstrategies.Based upon this evaluation, which included the uncertaintysurrounding the Company’s future operations, the Company determined that therealization of certain deferred tax assets (including federal and state taxloss carryforwards) were not considered to be more likely than not, andtherefore provided a valuation allowance. In the event that the Company determines that it is more likely than notthat the deferred assets will be realized, an adjustment to the deferred taxasset would be recorded, which would positively impact net income in the periodsuch determination was made.  TheCompany is pursuing several alternatives and the resolution of uncertaintiesrelated to the Company that may result in the realization of these reserved taxassets.

 

61

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**12.  Related PartyTransactions**

 

In the ordinary course of business, the Company provides services to andreceives services from other wholly owned subsidiaries of the ParentCompany.  The Company provideslong-distance services over its national optical network to customers of theParent Company’s Cincinnati Bell Any Distance (“CBAD”) subsidiary.  Transactions with CBAD generated $43.5million, $41.2 million and $33.0 million in revenue for the Company in 2002,2001 and 2000, respectively.  Inaddition, the Parent Company’s Cincinnati Bell Telephone (“CBT”) subsidiarymarkets the Company’s broadband services in its Greater Cincinnati, Ohiofranchise area.  The Company recordsrevenue from customers in Greater Cincinnati, net of commissions due to CBT equalto 20% of total revenue.  Such commissions,which reduced revenue, totaled $7.1 million, $2.7 million and $0.2 million in2002, 2001 and 2000, respectively.

 

The Parent Company provides financial and treasury services, planning andfinancial analysis, corporate communications, human resources support and legalsupport.  The Parent Company bills theCompany for services performed on its behalf.These noncash service feesamounted to $8 million, $5 million, and zero in 2002, 2001 and 2000,respectively.

 

The Parent Company’s CBT subsidiary provides accounts payable processing,payroll processing and benefit related services on behalf of the Company.  Total fees charged to the Company for theseservices during 2002, 2001 and 2000 were $0.3 million, $0.9 million, and $0.7million, respectively.

 

The Companyparticipates in the Parent Company’s centralized cash management system tofinance operations.  Cash deposits fromthe Company and its subsidiaries are transferred to a subsidiary of the ParentCompany on a daily basis, and the Parent Company funds the Company’sdisbursement accounts as required.  Allrelated party transactions, including receivables and payables, are clearedthrough an intercompany account, which is ultimately settled at the ParentCompany level.

 

The Company relieson advances from the Parent Company for the funding of operating and investingactivities in excess of cash generated by its own operations.  Advances from the Parent Company bearinterest at market rates, with the related interest expense being included in“Interest expense” in the Consolidated Statements of Operations andComprehensive Income (Loss).  Theaverage interest rate on these advances during 2002 was approximately4.47%.  The amounts due to the ParentCompany upon demand of $1,492.7 million at December 31, 2002 and $1,468.8million at December 31, 2001 are presented net of the amounts due to or fromother subsidiaries of the Parent Company. As of December 31, 2002, the intercompany note from the Parent Companywas payable upon demand and is therefore classified as a current maturity oflong-term debt.  In 2002, 2001 and 2000, the Parent Company contributed additional capitalto the Company, which was accounted for as a reduction in the intercompany notepayable, of $1.9 million, $65.3 million and $520.5 million, respectively.

 

The Company’s  tax provision is based upon the modifiedseparate return method under which an income tax benefit is recorded for lossesbased upon the potential to be realized by the Company, as well as any affiliatedmembers of the federal income tax consolidated group of the ParentCompany.  The income-producing membersof the consolidated group compensate the Company for losses as they arerealized in the consolidated tax return, which amounted to $204.6 million,$93.1 million and $58.7 million in 2002, 2001 and 2000, respectively. 

 

62

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The following table summarizes the Company’s intercompany revenue,corporate allocations and shared services allocations ($ in millions):

 
|                                                                                                |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                |   | **2002**                     |       | **2001** |   | **2000** |   |
| **Statements  of Operations Data:**                                                                 |   |                         | ** ** |   | ** ** |   | ** ** |
| Intercompany  revenue                                                                               |   |                         |       |   |   |   |   |
| Cincinnati Bell  Any Distance                                                                       |   | $                            | 43.5       |   | $ | 41.2 |   | $ | 33.0 |   |
| Other                                                                                               |   | 0.1                          |       | 0.2 |   | 0.5 |   |
|                                                                                                |   |                         |       |   |   |   |   |
| Total  intercompany revenue                                                                         |   | $                            | 43.6       |   | $ | 41.4 |   | $ | 33.5 |   |
|                                                                                                |   |                         |       |   |   |   |   |
| Commissions paid  to CBT, netted against revenue                                                    |   | $                            | 7.1        |   | $ | 2.7 |   | $ | 0.2 |   |
| Intercompany  cost of services                                                                      |   | 11.2                         |       | 10.0 |   | 7.5 |   |
| Intercompany  selling, general and administrative expenses                                          |   |                         |       |   |   |   |   |
| Corporate  allocations                                                                              |   | 8.0                          |       | 5.0 |   | — |   |
| Shared service  allocations                                                                         |   | 0.3                          |       | 0.9 |   | 0.7 |   |
| Intercompany  interest expense, net of capitalized interest of $8.1, $22.9 and $22.4,  respectively |   | 59.7                         |       | 63.5 |   | 58.6 |   |
| Intercompany  credit in lieu of taxes                                                               |   | (204.6                       | )          | (93.1 | ) | (58.7 | ) |
|                                                                                                |   |                         |       |   |   |   |   |
| Total  intercompany expenses (benefit)                                                              |   | $                            | (118.3     | ) | $ | (11.0 | ) | $ | 8.3 |   |
|                                                                                                |   |                         |       |   |   |   |   |
|                                                                                                |   | **December 31,**             | ** ** |   | ** ** |
|                                                                                                |   | **2002**                     | ** ** | **2001** | ** ** |   | ** ** |
| **Balance  Sheet Data:**                                                                            |   |                         | ** ** |   | ** ** |   | ** ** |
| Intercompany  payable to Parent Company                                                             |   | $                            | 1,492.7    |   | $ | 1,468.8 |   |   |   |

 

The revenue and expenses allocated to the Company for the transactionsand services provided are not necessarily indicative of the revenue andexpenses that would have been incurred if BCI had been a separate, stand-aloneentity.

 

**13.  Fair Value ofFinancial Instruments**

 

The following methods and assumptions were used to estimate, wherepracticable, the fair value of each class of financial instruments:

 

Cash and cashequivalents, and short-term debt — The carrying amount approximates fair valuebecause of the short-term maturity of these instruments.

 

Accountsreceivable and accounts payable — The carrying amounts approximate fair value.

 

Marketable securities — The fair values ofmarketable securities are based on quoted market prices.

 

Long-term debt —The fair value is estimated based on year-end closing market prices of theCompany’s debt and of similar liabilities. The carrying amounts at December 31,2002 and 2001, including the intercompany payable to the Parent Company, were$1,731.0 million and $1,557.1 million, respectively.  The estimated fair values at December 31, 2002 and 2001,including the intercompany payable to the Parent Company at carrying value,were $1,507.3 million and $1,510.1 million, respectively.  

 

 

 

63

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Convertible preferred stock — Thefair value of the 121⁄2% Exchangeable Preferred Stock was $27.7 million and$245.0 million, and was based on the trading value of this instrument atDecember 31, 2002 and 2001, respectively.

 

**14.  Commitmentsand Contingencies**

 

**Lease Commitments**

 

The Company leasescertain circuits, facilities and equipment used in its operations.  Total operating lease rental expenses(excluding circuit leases) was approximately $28.7 million, $28.2 million, and$23.5 million for the years ending December 31, 2002, 2001, and 2000,respectively.

 

At December 31,2002, the total minimum annual rental commitments under noncancelable leases,excluding interest, are as follows:

 
| **($ in millions)** |   | **Operating  Leases** |   | **Capital  Leases** |   | **Total** |   |
|---------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
| 2003                |   | $                     | 100.9  |                | $      | 2.2       |   | $ | 103.1 |   |
| 2004                |   | 87.6                  |   | 0.5                 |   | 88.1      |   |
| 2005                |   | 63.2                  |   | 0.2                 |   | 63.4      |   |
| 2006                |   | 44.2                  |   | —              |   | 44.2      |   |
| 2007                |   | 21.4                  |   | —              |   | 21.4      |   |
| Thereafter          |   | 55.9                  |   | —              |   | 55.9      |   |
| Total               |   | $                     | 373.2  |                | $      | 2.9       |   | $ | 376.1 |   |

 

**Commitments**

 

In 2000, theCompany entered into a purchase commitment with Corvis Corporation, a Columbia,Maryland-based manufacturer of optical network equipment.  The agreement specifies that the Companywill purchase $200 million in optical network equipment from Corvis Corporationover a two-year period beginning in July 2000. As of December 31, 2002 and 2001, the Company’s remaining purchasecommitment was zero and $20 million, respectively.  In 2000, the Company also entered into a separate agreementgiving it the right to purchase Series H preferred stock at $80.53 per share,which had a fair value $30 million, and $5 million of the common stock ofCorvis at the initial public offering price. The Company subsequently exercised these rights during the second andthird quarters of 2000. The established prices for these Corvis equity purchasesreflect the contemporaneous fair value of the equity, as evidenced byindependent third party investor purchases of this equity in the sametimeframe.

 

In 2001, theCompany entered into an agreement with Teleglobe Inc. (“Teleglobe”), a Reston,Virginia-based telecommunications company which stated that the Company wouldpurchase $90 million of services and equipment from Teleglobe over fouryears.  In September 2002, the Companyterminated the agreement for a payment of $4.25 million to Teleglobe, whichreleased the Company from $63.0 million of future commitments (refer to Note1).

 

In 2001 and 2000,the Company entered into agreements with two vendors to provide bundledInternet access to the Company’s customers based on a monthly maintenancefee.  These services were previouslypurchased from other vendors on a usage basis. In March 2002, the Company terminated its contract with one of thevendors as part of its fourth quarter 2001 restructuring (refer to Note 3).

 

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This contracttermination reduced the Company’s future commitments by approximately $60million.  In September 2002, the Companyterminated its remaining contract as part of its third quarter restructuring(refer to Note 3), which eliminated the remaining $13 million of futurecommitments related to bundled Internet access.

 

The Company hascertain contractual obligations to utilize network facilities, including accesslines, from various interexchange and local exchange carriers.  These contracts are based on a fixed monthlyrate with terms on certain agreements extending through 2021.  As of December 31, 2002, the Company hadcommitted to approximately $230 million in operating leases related to networkutilization.  The buyer of substantially all of the assets of the broadband business,as discussed in Note 18, has agreed to assume approximately $3 million incapital lease commitments and approximately $316 million in operating leaseobligations including the obligations associated with network utilization.

 

**Contingencies**

 

In the normalcourse of business, the Company is subject to various regulatory proceedings,lawsuits, claims and other matters. Such matters are subject to many uncertainties and outcomes are notpredictable with assurance.

 

During 2002,several purported class action lawsuits were filed in the United StatesDistrict Court for the Southern District of Ohio on behalf of purchasers of thesecurities of the Parent Company between January 17, 2001 and May 20, 2002,inclusive (the “Class Period”).  Thecomplaints alleged that the Parent Company, its former Chief ExecutiveOfficer  (“CEO”), its current CEO, andseveral board members violated federal securities laws arising out of allegedlyissuing material misrepresentations during the Class Period which resulted inartificially inflating the market price of the Parent Company’ssecurities.  The Parent Company intendsto defend these claims vigorously.

 

In June 2000, theCompany entered into a long-term construction contract to build a 1,550-milefiber route system.  During the secondquarter of 2002, the customer alleged a breach of contract and requested theCompany to cease all construction activities, requested a refund of $62 millionin progress payments previously paid to the Company, and requested conveyanceof title to all routes constructed under the contract.  Subsequently, the Company notified thecustomer that such purported termination was improper and constituted amaterial breach under the terms of the contract, causing the Company toterminate the contract.  As a result ofthe contract termination, the Company expensed $13 million in both costsincurred under the contract and estimated shutdown costs during 2002, whichhave been reflected in cost of services in the Condensed ConsolidatedStatements of Operations and Comprehensive Income (Loss).  In addition, the Company’s balance sheetincluded $51 million in unbilled accounts receivable (including both signedchange orders and claims) at December 31, 2002 related to this contract.  Based on information available as ofDecember 31, 2002, the Company believes it is due significant amountsoutstanding under the contract, including unbilled accounts receivable.  The Company expects this matter to beresolved through arbitration.  Thetiming and outcome of these issues are not currently predictable.  An unfavorable outcome could have a materialeffect on the financial condition and results of operations of the Company.

 

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**15.  QuarterlyResults (Unaudited)**

 
|                                                 |   | **2002 Quarter Ended** |     | **2001 Quarter Ended** |       |
|------------------------------------------------------|--------|------------------------|----------|------------------------|------------|
|                                                 |   | **Mar 31**             |     | **Jun 30**             | ** ** | **Sep 30** | ** ** | **Dec 31** | ** ** | **Mar 31** | ** ** | **Jun 30** | ** ** | **Sep 30** | ** ** | **Dec 31** | ** ** |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Statement of Operations  Data ($ in millions):**   |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                              |   | $                      | 269.0    |                   | $          | 278.2 |   | $ | 296.2 |   | $ | 224.7 |   | $ | 298.5 |   | $ | 320.6 |   | $ | 306.1 |   | $ | 272.4 |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                  |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of services and products                        |   | 172.2                  |     | 177.2                  |       | 162.7 |   | 143.5 |   | 181.2 |   | 195.2 |   | 194.9 |   | 188.8 |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                  |   | 77.3                   |     | 77.3                   |       | 76.6 |   | 69.8 |   | 86.1 |   | 89.9 |   | 78.2 |   | 75.4 |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                        |   | 77.9                   |     | 78.0                   |       | 80.0 |   | 80.0 |   | 87.8 |   | 92.4 |   | 100.0 |   | 103.9 |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restructuring                                        |   | 15.9                   |     | —                 |       | 5.0 |   | 11.7 |   | — |   | — |   | — |   | 73.9 |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Asset impairments and other charges                  |   | —                 |     | —                 |       | — |   | 2,200.6 |   | — |   | — |   | 3.9 |   | 148.1 |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                       |   | (74.3                  | )        | (54.3                  | )          | (28.1 | ) | (2,280.9 | ) | (56.6 | ) | (56.9 | ) | (70.9 | ) | (317.7 | ) |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative effect of change in  accounting principle |   | 2,008.7                |     | —                 |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                 |   |                   |     |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                      | (2,066.1 | )                      | $          | (46.9 | ) | $ | (29.3 | ) | $ | (2,400.0 | ) | $ | (47.7 | ) | $ | (55.7 | ) | $ | (63.9 | ) | $ | (221.1 | ) |
|                                                      |        |                        |          |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In the fourthquarter of 2001, the Company incurred pre-tax charges of $73.9 million related to restructuring activities and$148.1 million related to asset impairments (refer to Note 3).

 

In the first quarterof 2002, the Company incurred a charge of $2,008.7 million, net of taxes,associated with the adoption of SFAS 142 (refer to Note 2).  The impairment charge is reflected as acumulative effect of change in accounting principle, net of taxes, in the CondensedConsolidated Statements of Operations and Comprehensive Income (Loss).

 

In the secondquarter of 2002, the Company incurred a non-recurring charge of $13.3 millionfor costs associated with the termination of the Company’s uncompleted networkconstruction contract further discussed in Note 14.

 

In the second andthird quarter of 2002, the Company terminated IRU contracts with two customers(refer to Note 1), which contributed $18 million and $41 million of revenue andoperating income.

 

In the fourth quarterof 2002, the Company recorded a $2.2 billion non-cash pretax impairment chargeto reduce the carrying value of its assets to estimated fair market value.

 

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**16.  SegmentReporting**

** **

In accordance withStatement of Financial Accounting Standard No. 131, “Disclosures About Segmentsof an Enterprise and Related Information,” the operations of the Companycomprise a single segment and are reported as such to the Chief ExecutiveOfficer of the Parent Company, who functions in the role of chief operatingdecision maker for the Company.

 

The table belowpresents revenue for groups of similar products and services ($ inmillions):  

 
|                                     |   | **Year Ended December  31,** |    |
|------------------------------------------|--------|------------------------------|---------|
|                                     |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                     |   |                         |    |   |   |   |   |
| Broadband  transport                     |   | $                            | 461.6   |   | $ | 466.5 |   | $ | 393.2 |   |
| Switched voice  services                 |   | 328.6                        |    | 380.5 |   | 408.6 |   |
| Data and  internet                       |   | 132.9                        |    | 121.9 |   | 69.7 |   |
| IT consulting                            |   | 143.7                        |    | 141.3 |   | 65.8 |   |
| Network  construction and other services |   | 1.3                          |    | 87.4 |   | 67.3 |   |
| Total revenue                            |   | $                            | 1,068.1 |   | $ | 1,197.6 |   | $ | 1,004.6 |   |

 

**17.  AdditionalFinancial Information** 

 

**Balance Sheet**

 
| **($ in millions)**                      |   | **Year ended December  31** |   | **2002** |   | **2001** |   | **Depreciable  Lives (Years)** |   |
|------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|--------------------------------|--------|
| **Property Plant and  Equipment:**       |   |                        |   |     |   |     |   |                           |   |
| Land and rights of way                   |   |                        |   | $        | 0.6    |     | $      | 153.7                          |   | 20 - Indefinite |   |
| Buildings and leasehold improvements     |   |                        |   | 7.2      |   | 209.1    |   | 2 - 40                         |   |
| Transmission facilities                  |   |                        |   | 30.8     |   | 2,057.7  |   | 3 - 20                         |   |
| Furniture, fixtures, vehicles, and other |   |                        |   | 0.6      |   | 49.6     |   | 2 - 15                         |   |
| Fiber usage rights                       |   |                        |   | 8.2      |   | 51.4     |   | 5 - 20                         |   |
| Construction in process                  |   |                        |   | 7.3      |   | 214.1    |   | —                         |   |
| Subtotal                                 |   |                        |   | 54.7     |   | 2,735.6  |   |                           |   |
| Less:   Accumulated depreciation    |   |                        |   | —   |   | (553.6   | )      |                           |   |
| Property plant and equipment, net*       |   |                        |   | $        | 54.7   |     | $      | 2,182.0                        |   |   |   |

 

----

*  Includes $3.0 and $5.9,respectively, of assets accounted for as capital leases, net of accumulateddepreciation of $15.7 and $13.2, respectively, included in Transmissionfacilities.

 

 
| **($ in millions)**                   |   | **Year ended December 31** | ** ** | **2002** | ** ** | **2001** | ** ** | **Amortization  Lives (Years)** |   |
|---------------------------------------|--------|----------------------------|------------|----------|------------|----------|------------|---------------------------------|--------|
| **Other intangibles:**                |   |                       |       |     |       |     |       |                            |   |
| Assembled workforce                   |   |                       |       | —   |       | 24.0     |       | 2 - 4                           |   |
| Installed customer base               |   |                       |       | —   |       | 399.0    |       | 2 - 20                          |   |
| Other intangibles                     |   |                       |       | —   |       | 3.2      |       | 2 - 20                          |   |
| Subtotal                              |   |                       |       | —   |       | 426.2    |       |                            |   |
| Less:   Accumulated amortization |   |                       |       | —   |       | (79.0    | )          |                            |   |
| Other intangibles, net                |   |                       |       | $        | —     |     | $          | 347.2                           |   |   |   |
|                                       |        |                            |            |          |            |          |            |                                 |        |  |  |

 

The Company recordeda non-cash impairment charge of $2.2 billion to state both tangible andintangible assets at estimated fair value as of December 31, 2002.  Of the total charge, $1,901.7 millionrelated to tangible property, plant and equipment and $298.3 million related tofinite-lived intangible assets.

 

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**18.  SubsequentEvents**

 

On February 22,2003, certain subsidiaries of the Parent Company entered into a definitiveagreement to sell substantially all of the assets of the broadband business,excluding the information technology consulting assets, to C III Communications(“C III”), for up to $129 million in cash and the assumption of certainlong-term operating contractual commitments. The contractual commitments to beassumed include approximately $3 million in capital lease commitments andapproximately $316 million in operating lease obligations. The sale issubject to certain closing conditions, including approval by the FederalCommunications Commission (“FCC”) and relevant state public utilitycommissions.  The Parent Company expectsto close the sale in 2003.  The Companywill retain a 3% minority interest in the new company.  The carrying value of the current andlong-lived assets to be purchased totaled $102.7 million and $40.8 million,respectively as of December 31, 2002. The carrying value of the current and long-term liabilities to beassumed totaled $179.7 million and $293.2 million, respectively, as of December31, 2002.

 

On March 26, 2003,the Parent Company issued $350 million of mezzanine financing through SeniorSubordinated Discount Notes Due 2009 (the “Mezzanine Financing”).  Proceeds from the Mezzanine Financing, netof fees, were used to pay down borrowings under the Company’s creditfacility.  Interest on the MezzanineFinancing will be payable semi-annually on June 30 and December 31, whereby 12%is paid in cash and 4% is accreted on the aggregate principal amount.  In addition, purchasers of the Mezzanine Financingwill receive 17.5 million common stock warrants, each to purchase one share ofBroadwing Common Stock.  

 

The Mezzanine Financing contains certain financial and non-financialcovenants including restrictions on the Parent Company’s ability to makeinvestments in the Company.  Specifically,Broadwing and its other subsidiaries may not make investments in or fund theoperations of the Company beyond an aggregate amount of $118 million afterOctober 1, 2002.  This restriction doesnot apply to guarantees by Broadwing of Company borrowings under the creditfacilities, liens on assets of Broadwing securing Company borrowings under thecredit facilities, scheduled interest payments made or guaranteed by Broadwingin respect of Company borrowings under the credit facilities, and certain otheritems.  As of February 28, 2003, theCompany had the ability to invest an additional $58 million in the Company tofund operations based on these provisions. 

 

In conjunctionwith the Mezzanine Financing, the Parent Company’s credit facility was alsoamended and restated to, among other things, extend the revolving commitment,revise the financial covenants and allow for the sale of substantially all ofthe assets of the broadband business. As a result of the  terms of the amendment, the total borrowingcapacity will decrease from $1.825 billion as of December 31, 2002 toapproximately $1.343 billion as of December 31, 2003 due to $262 million ofscheduled repayments of the term debt facilities and a $220 million prepaymentof the outstanding term debt and revolving credit facility from the MezzanineFinancing proceeds. After the credit facility amendment, the Parent Company’sdebt maturities total $285.1 million in 2003 and $287.1 million in 2004.

 

In March 2003, theParent Company entered into a supplemental indenture to its 63⁄4% Convertible Subordinated Notes Due2009. The supplemental indenture allows for the sale of substantiallyall of the assets of the Company, provides that a bankruptcy of the Companywould not constitute an event of default, amends the definition of change incontrol by increasing the ownership threshold deemed to be a change in controlfrom 20% of outstanding shares to 45% of outstanding shares of the ParentCompany and includes certain covenants restricting the ability of the Company toincur debt and consummate certain asset dispositions.  The supplemental indenture also increases the paid-in-kindinterest by 21⁄4% from March 2003 through redemption in July 2009, resulting in aper annum interest rate of 9%.  Interestexpense will be paid in cash semi-annually on January 21 and July 21 of eachyear at a rate of 63⁄4% per annum, commencing on January 21, 2005.

 

68

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The additional 21⁄4%will accrete, or be added to the principal balance, through the redemption datein July 2009.

 

In addition, inMarch 2003, the Parent Company reached an agreement with holders of more thantwo-thirds of the Company’s 121⁄2 percent preferred stock and 9 percent seniorsubordinated notes to exchange these instruments for common stock of the ParentCompany.  In order to consummate theexchange offers, the Parent Company expects to issue approximately 26 millionnew shares of Broadwing Inc. common stock assuming 100% redemption of theoutstanding instruments, which represents an increase of 11 percent in thenumber of shares.

 

**ITEM 9. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

The Company has had no disagreements with its accountants on anyaccounting or financial disclosure, auditing scope or procedure during theperiods covered by this report.

 

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Set forth in thetable below are the names, ages (as of December 31, 2002) and current officesheld by all executive officers and the sole director of the Company.

 

 
| **NAME**            |   | **AGE** |   | **POSITION WITH COMPANY**                                               |   | **EXECUTIVE  OFFICER SINCE** |   |
|---------------------|--------|---------|--------|-------------------------------------------------------------------------|--------|------------------------------|--------|
|                |   |    |   |                                                                    |   |                         |   |
| Kevin W. Mooney     |   | 44      |   | Chief Executive Officer                                                 |   | 1999                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| John F. Cassidy     |   | 48      |   | Chief Operating Officer                                                 |   | 2002                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| Thomas L. Schilling |   | 39      |   | Chief Financial Officer and Director                                    |   | 2002                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| Robert Shingler     |   | 45      |   | President                                                               |   | 2002                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| Mary E. McCann      |   | 40      |   | Senior Vice President, Internal Controls                                |   | 2001                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| Jeffrey C. Smith    |   | 51      |   | Chief Human Resources Officer, General Counsel and  Corporate Secretary |   | 1997                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| David A. Torline    |   | 53      |   | Chief Information Officer                                               |   | 1999                         |   |
|                |   |    |   |                                                                    |   |                         |   |
| Michael R. Jones    |   | 48      |   | Chief Technology Officer                                                |   | 2001                         |   |

 

Executive officersof the Company are elected by and serve at the discretion of the Board.  None of the executive officers has anyfamily relationship to any nominee for director or to any other executiveofficer of the Company.  Set forth belowis a brief description of the business experience for the previous five yearsof all executive officers.

 

**KEVIN W. MOONEY,**Chief Executive Officer of the Company since September 2002, Chief OperatingOfficer of the Company from November 2001 to September 2002; Executive VicePresident and Chief Financial Officer of the Company from September 1998 toNovember 2001; Senior Vice President and Chief Financial Officer of CincinnatiBell Telephone from January 1998 to September 1998; Vice President andController of the Company, 1996-1998; Vice President of Financial Planning andAnalysis of the Company, 1994-1996; Director of Financial Planning and Analysisof the Company, 1990-1994.

 

**JOHN F. CASSIDY,** Chief Operating Officer and Directorof the Company and President of Cincinnati Bell since September 2002, Presidentand Chief Operating Officer of Cincinnati Bell since May 2000; President ofCincinnati Bell Enterprises since August, 1999; President of Cincinnati BellWireless since 1996; Senior Vice President, National Sales & Distributionof Rogers Cantel in Canada from 1992-1996; Vice President, Sales and Marketing,Ericsson Mobile Communications from 1990-1992; Vice President, Sales andMarketing, General Electric Company from 1988-1990.

 

**THOMAS L. SCHILLING**, Chief Financial Officer and Directorof the Company since July 2002; Senior Vice President and Chief FinancialOfficer of the Company from 1999-2002; Chief Financial Officer ofAutoTrader.com from 1998-1999; Managing Director of MCI Systemhouse from1997-1998; Director of Finance of MCI Communications from 1995-1997.

 

**ROBERTSHINGLER,**President of the Company since October 2002;President of Voice Operations of the Company from April 2002 to October2002.  Prior to April 2002, Chairman/CEO of Albion Connect, a telecommunications software provider, and employedfor 20 years at Bell South Corporation and its subsidiaries in a variety ofleadership positions.

 

**MARYE. McCANN**, Senior Vice President, Internal Controls of theCompany since July 2002; Senior Vice President, Corporate Finance of theCompany from December 2001 to July 2002; Vice President, Controller of theCompany from February 1999 to December 2001; Director of Financial

 

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Planning ofCincinnati Bell Telephone from April 1998 to February 1999; Manager ofFinancial Reporting and Analysis of Cincinnati Bell Telephone from August 1996to April 1998; Senior Financial Analyst from May 1995 to August 1996.

 

**JEFFREY C. SMITH**,Chief Human Resources Officer of the Company since November 2001; General Counseland Corporate Secretary of the Company since February 2001; ChiefLegal/Administrative Officer of the Company since November 1999; Senior VicePresident of IXC Communications, Inc. from September 1997 until November1999; Vice President, General Counsel and Secretary of IXC Communications, Inc.from January 1997 until September 1997; Vice President Planning and Developmentfor Times Mirror Training, a subsidiary of Times Mirror, from August 1994 toDecember 1996.  Served in a variety oflegal capacities, including five years as General Counsel to the Baltimore Sunnewspaper and Associate General Counsel and Assistant Secretary at Times Mirrorfrom 1985 through August 1994.  Prior to1985, employed for seven years in private law practice as a trial and businessattorney.

 

**DAVIDA. TORLINE**, ChiefInformation Officer of Broadwing Communications and Broadwing Inc. sinceNovember 1999; Vice President, Information Technology of Cincinnati BellTelephone from January 1995 to November 1999; President, Cincinnati BellSupply, a subsidiary of Broadwing Inc., from October 1992 to January 1995;Director, Corporate Development of Cincinnati Bell Inc., from October 1989 toOctober 1992.

 

**MICHAELR. JONES**, Chief Technology Officer of the Company sinceOctober 2001; Senior Vice President, Network Engineering and Operations of theCompany from February 2000 to October 2001; Vice President, Network Facilitiesand Construction of the Company from November 1999 to February 2000; VicePresident, Network Facilities and Construction of IXC Communications Inc. fromJuly 1997 to November 1999; Vice President, Network Business Development ofDiamondback International Inc. from 1996 to July 1997.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

The information required by this item will be contained in the Company’sInformation Statement to be filed with the Commission within 120 days afterDecember 31, 2002, and is incorporated herein by reference.

 

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND  MANAGEMENT**

 

The information required by this item will be contained in the Company’sInformation Statement to be filed with the Commission within 120 days afterDecember 31, 2002, and is incorporated herein by reference.

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

** **

The information required by this item will be contained in the Company’sInformation Statement to be filed with the Commission within 120 days afterDecember 31, 2002, and is incorporated herein by reference.

 

**ITEM 14.  INTERNAL CONTROLS AND PROCEDURES**

** **

Within the 90 daysprior to the date of this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief

 

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Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures pursuant to Exchange ActRule 13a-14.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective.  The Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s periodic Securities and Exchange Commissionfilings.  No significant deficiencies ormaterial weaknesses were identified in the evaluation and therefore, nocorrective actions were taken.  Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation. 

 

**ITEM 15****.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K**

** **

**(a)  Exhibits**

** **

Exhibits identified inparenthesis below, on file with the Securities and Exchange Commission(“Commission”) are incorporated herein by reference as exhibits hereto:

 
| **EXHIBIT**  NUMBER |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1                 |   | Agreement and Plan of Merger dated as of July 20,  1999, among Cincinnati Bell Inc., IXC Communications, Inc. and Ivory Merger  Inc. (incorporated by reference to Exhibit 2.1 of Cincinnati Bell Inc.’s Form  8-K dated July 22, 1999 and filed with the Commission on July 23, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2                 |   | Amendment No. 1 dated as of October 13, 1999, among  Cincinnati Bell Inc., IXC Communications, Inc. and Ivory Merger Inc.  (incorporated by reference to Exhibit 2.1 of Form 8-K dated October 14, 1999  and filed with the Commission on October 14, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1                 |   | Restated Certificate of Incorporation of Broadwing  Communications Inc., as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2                 |   | Bylaws of Broadwing Communications Inc., as amended  (incorporated by reference to Exhibit 3.2 of Form 10-Q for the quarter ended  September 30, 1999 and filed on January 7, 2000, file number 1-5367).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1                 |   | Indenture dated as of October 5, 1995, by and among  IXC Communications, Inc., on its behalf and as successor-in-interest to  I-Link Holdings, Inc. and IXC Carrier Group, Inc., each of IXC Carrier, Inc.,  on its behalf and as successor-in-interest to I-Link, Inc., CTI Investments,  Inc., Texas Microwave Inc. and WTM Microwave Inc., Atlantic States Microwave  Transmission Company, Central States Microwave Transmission Company, Telecom  Engineering, Inc., on its behalf and as successor-in-interest to SWTT Company  and Microwave Network, Inc., Tower Communication Systems Corp., West Texas  Microwave Company, Western States Microwave Transmission Company, Rio Grande  Transmission, Inc., IXC Long Distance, Inc., Link Net International, Inc.  (collectively, the “Guarantors”), and IBJ Schroder Bank & Trust Company,  as Trustee (the “Trustee”), with respect to the 12 1⁄2% Series A and Series B  Senior Notes due 2005 (incorporated by reference to Exhibit 4.1 of IXC  Communications, Inc.’s and each of the Guarantor’s Registration Statement on  Form S-4 filed with the Commission on April 1, 1996 (File No. 333-2936) (the  “S-4”)). |

 

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| 4.2    |   | Form of 121⁄2% Series A Senior Notes due 2005  (incorporated by reference to Exhibit 4.6 of the S.4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3    |   | Form of 121⁄2% Series B Senior Notes due 2005 and  Subsidiary Guarantee (incorporated by reference to Exhibit 4.8 of IXC  Communications, Inc.’s Amendment No. 1 to Registration Statement on Form S-1  filed with the Commission on June 13, 1996 (File No. 333-4061) (the “S-1  Amendment”).                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4    |   | Amendment No. 1 to Indenture and Subsidiary  Guarantee dated as of June 4, 1996, by and among IXC Communications, Inc.,  the Guarantors and the Trustee (incorporated by reference to Exhibit 4.11 of  the S-1 Amendment).                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.5    |   | Indenture dated as of August 15, 1997, between IXC  Communications, Inc. and The Bank of New York (incorporated by reference to  Exhibit 4.2 of IXC Communications, Inc.’s Current Report on Form 8-K dated  August 20, 1997, and filed with the Commission on August 28, 1997 (the  “8-K”).                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.6    |   | First Supplemental  Indenture dated as of October 23, 1997, among IXC Communications,  Inc., the Guarantors, IXC International,  Inc. and IBJ Shroder Bank & Trust Company (incorporated by reference to  Exhibit 4.13 of IXC Communications, Inc.’s Annual Report on Form 10-K for the  year ended December 31, 1997, and filed with the Commission on March 16, 1998  (the “1997 10-K”).                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.7    |   | Second Supplemental Indenture dated as of December  22, 1997, among IXC Communications, Inc., the Guarantors, IXC Internet  Services, Inc., IXC International, Inc. and IBJ Schroder Bank & Trust  Company (incorporated by reference to Exhibit 4.14 of the 1997 10-K).                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.8    |   | Third Supplemental Indenture dated as of January 6,  1998, among IXC Communications, Inc., the Guarantors, IXC Internet Services,  Inc., IXC International, Inc. and IBJ Schroder Bank & Trust Company  (incorporated by reference to Exhibit 4.15 of the 1997 10-K).                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.9    |   | Fourth Supplemental Indenture dated as of April 3,  1998, among IXC Communications, Inc., the Guarantors, IXC Internet Services,  Inc., IXC International, Inc., and IBJ Schroder Bank & Trust Company  (incorporated by reference to Exhibit 4.15 of IXC Communications, Inc.’s  Registration Statement on Form S-3 filed with the Commission on May 12, 1998  (File No. 333-52433).                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.10   |   | Indenture dated as of April 21, 1998, between IXC  Communications, Inc. and IBJ Schroder Bank & Trust Company, as Trustee  (incorporated by reference to Exhibit 4.3 of the April 22, 1998 8-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1+  |   | Credit Agreement dates as of November 9, 1999,  amended and restated as of March 26, 2003, among Broadwing Inc. (f/k/a  Cincinnati Bell) and Broadwing Communications Services Inc. (f/k/a IXC  Communications Services, Inc.) as Borrowers, the Initial Lenders, Initial  Issuing Banks and Swing Line Banks named therein, Bank of America, N.A. as  Syndication Agent, Citicorp USA, Inc. as Administrative Agent, Credit Suisse  First Boston and The Bank of New York, as Co-Documentation Agents, PNC Bank,  N.A., as Agent and Salomon Smith Barney Inc. and Banc of America Securities  LLC, as Joint Lead Arrangers and Joint Book Managers. |

 

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|   |   | N.A., as Agent and Salomon Smith Barney Inc. and  Banc of America Securities LLC, as Joint Lead Arrangers (incorporated by  reference to Exhibit 10.1 of Cincinnati Bell Inc.’s Form 8-K dated November  9, 1999 and filed with the Commission on November 12, 1999).                                                                                                                                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2   |   | IRU Agreement dated as of November 1995 between  WorldCom, Inc. and IXC Carrier, Inc. (incorporated by reference to Exhibit  10.11 of Amendment No. 1 to the S-4).                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.3   |   | Asset Purchase Agreement among Broadwing  Communications Services Inc. and CIII Communications dated as of February 22,  2003.  (Exhibit (99)(i) to Form 8-K,  date of report February 28, 2003, File No. 1-15307)                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.4+  |   | Indenture dated as of March 26, 2003, by and among  Broadwing Inc., as Issuer, Cincinnati Bell Public Communications, Inc.,  ZoomTown.com Inc, Cincinnati Bell Any Distance Inc., Cincinnati Bell  Telecommunications Services Inc., Broadwing Financial LLC, Cincinnati Bell  Wireless Company, Cincinnati Bell Wireless Holdings LLC and Broadwing  Holdings Inc. as Guarantors, and The Bank of New York, as trustee, in connection  with $350,000,000 of Broadwing Inc. Senior Subordinated Discount Notes Due  2009. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 99.1+  |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 99.2+  |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 99.3+  |   | Exchange and Voting Agreement, dated as of March 24, 2003, by and  among Broadwing Inc., and the beneficial owners of (or investment managers or  advisors for accounts or funds that own) the 9% Senior Subordinated Notes due  2008 of Broadwing Communications Inc., a subsidiary of the Company.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 99.4+  |   | Exchange and Voting Agreement, dated as of March 24, 2003, by and  among Broadwing Inc., and the beneficial owners of (or investment managers or  advisors for accounts or funds that own) the 121⁄2% Series B Junior Exchangable  Preferred Stock due 2009 of Broadwing Communications Inc., a subsidiary of  the Company.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 12.1+  |   | Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 21.1+  |   | Subsidiaries of Broadwing Communications Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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+ Filed herewith.

 

* Management contract or compensatory plan required to be filed as anexhibit pursuant to Item 14(c) of Form 10-K.

 

The Company’s reports on Form 10-K, 10-Q, and 8-K are available free ofcharge at the following website: http://www.broadwing.com/.  Uponrequest, the Company will furnish a copy of the Proxy Statement to its securityholders without charge, portions of which are incorporated herein byreference.  The Company will furnish anyother exhibit at cost.

 

**(b)  Reports on Form 8-K.**

 

Form 8-K, date of report October 29,2002, reporting that Robert Shingler was appointed President of BroadwingCommunications Inc. and announced that the Company has deferred cash payment ofthe quarterly dividend, due November 15, 2002, on its 121⁄2% preferred shares, inaccordance with the terms of the security.

 

Form 8-K, date of report February 25,2003, reporting the Company issued a Press Release announcing that it hasreached an agreement to sell substantially all the assets of its Broadbandbusiness, Broadwing Communications Services Inc., including the Broadwing name,to privately held C III Communications, LLC, for up to $129 million in cash.

 

Form 8-K, date of report February 28, 2003,reporting the Agreement for Purchase and Sale of Assets reached between theCompany and C III Communications LLC.

 

Form 8-K, date of report March 28, 2003, reporting the Parent Companyissued a press release announcing a comprehensive recapitalization thatincludes the successful completion of an amendment to its bank credit facilityfor, among other things, the extension of its scheduled maturities, providingthe company with sufficient liquidity to meet its obligations until 2006.

 

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Schedule II

 

BROADWING COMMUNICATIONSINC.

VALUATION AND QUALIFYING ACCOUNTS

($ in millions)

 

 
|                                  |   | **Balance at  Beginning  of Period** |   | **Charged to  Expenses** |   | **Charged  to Other  Accounts** |   | **Deductions** |   | **Balance  At End  of Period** |   |
|---------------------------------------|--------|--------------------------------------|--------|--------------------------|--------|---------------------------------|--------|----------------|--------|--------------------------------|--------|
|                                  |   |                                 |   |                     |   |                            |   |           |   |                           |   |
| **Allowance  for Doubtful Accounts**  |   |                                 |   |                     |   |                            |   |           |   |                           |   |
| Year 2002                             |   | $                                    | 22.6   |                     | $      | 33.0                            |   | $              | — |                           | $      | 22.8 |   | $ | 32.8 |   |
| Year 2001                             |   | $                                    | 32.2   |                     | $      | 77.0                            |   | $              | — |                           | $      | 86.6 |   | $ | 22.6 |   |
| Year 2000                             |   | $                                    | 36.3   |                     | $      | 52.0                            |   | $              | — |                           | $      | 56.1 |   | $ | 32.2 |   |
|                                  |   |                                 |   |                     |   |                            |   |           |   |                           |   |
| **Deferred  Tax Valuation Allowance** |   |                                 |   |                     |   |                            |   |           |   |                           |   |
| Year 2002                             |   | $                                    | 61.3   |                     | $      | 1,108.5                         |   | $              | — |                           | $      | — |   | $ | 1,169.8 |   |
| Year 2001                             |   | $                                    | 48.1   |                     | $      | 13.2                            |   | $              | — |                           | $      | — |   | $ | 61.3 |   |
| Year 2000                             |   | $                                    | 16.5   |                     | $      | 31.6                            |   | $              | — |                           | $      | — |   | $ | 48.1 |   |

 

 

75

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**Signatures**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|           | BROADWING  COMMUNICATIONS INC. |                    |
|----------------|--------------------------------|-------------------------|
|           |
|           |
| March 31, 2002 | By                             | /s/ Thomas L. Schilling |   |
|           |                           | Thomas L. Schilling     |
|           |                           | Chief Financial Officer |
|                |                                |                         |  |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.

 

 
| **Signature**           |   | **Title**                    |                | **Date**       |
|-------------------------|--------|------------------------------|---------------------|----------------|
|                    |   |                         |                |           |
|                    |   | Principal Executive Officer; |                | March 31, 2003 |
| /s/ Kevin W. Mooney     |   |                         | Chief Executive     |           |   |
| Kevin W. Mooney         |   | Officer and Director         |                |           |
|                    |   |                         |                |           |
|                    |   |                         |                |           |
|                    |   | Principal Financial and      |                | March 31, 2003 |
| /s/ Thomas L. Schilling |   |                         | Accounting Officer; |           |   |
| Thomas L. Schilling     |   | Chief Financial Officer      |                |           |

 

76

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**Certifications**

 

 

I, Kevin W. Mooney, ChiefExecutive Officer, certify that:

 

1.          I have reviewed thisannual report on Form 10-K of Broadwing Communications Inc;

 

2.          Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, notmisleading with respect to the period covered by this annual report;

 

3.          Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4.          The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.          designed  such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries is made known to us by others within those entities,particularly during the period in which this annual report is being prepared

b.         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c.          presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.          The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

b.         all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

c.          any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.          The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 31, 2003 |   |   |   |   | /s/ Kevin W. Mooney      |   |
|----------------------|--------|--------|--------|--------|--------------------------|--------|
|                 |   |   |   |   | Kevin W. Mooney          |
|                 |   |   |   |   | Chief Executive  Officer |

 

77

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**Certifications**

 

 

I, Thomas L. Schilling,Chief Financial Officer, certify that:

 

1.          I have reviewed thisannual report on Form 10-K of Broadwing Communications Inc;

 

2.          Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, notmisleading with respect to the period covered by this annual report;

 

3.          Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4.          The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared

b.         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c.          presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.          The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a.          all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.          The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 31, 2003 |   | /s/ Thomas L. Schilling |   |
|----------------------|--------|-------------------------|--------|
|                 |   | Thomas L. Schilling     |   |
|                 |   | Chief Financial Officer |   |

 

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