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BROADWING COMMUNICATIONS INC. FORM 10-K For the Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS 2

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

BROADWING COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)

        1122 Capital of Texas Highway South, Austin, Texas 78746-6426

        (Registrant's telephone number, including area code): (512) 328-1112

Securities registered pursuant to Section 12(b) of the Act:

        Securities registered pursuant to Section 12(g) of the Act: None

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        All outstanding shares of the Registrant's common stock are owned by Broadwing Inc.

        The aggregate market value of the Preferred Stock of the Registrant held by non-affiliates of the Registrant on February 28, 2002 based on the closing price of the Preferred Stock on the New York Stock Exchange on such date, was $213,413,400.

        The number of shares of Preferred Stock outstanding was 395,210 on February 28, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Information Statement to be filed with the Securities and Exchange Commission within 120 days of December 31, 2001.

BROADWING COMMUNICATIONS INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2001

TABLE OF CONTENTS

This report contains trademarks, service marks and registered trademarks and registered marks of the Company and its subsidiaries, as indicated.

Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement

        This form 10-K contains "forward-looking" statements, as defined in federal securities laws including the Private Securities Litigation Reform Act of 1995 that are based on Broadwing Communications Inc.'s (together with its consolidated subsidiaries, "the Company" or "Broadwing Communications") current expectations, estimates and projections. Statements that are not historical facts, including statements about the beliefs, expectations and future plans and strategies of the Company, are forward-looking statements. These statements involve potential risks and uncertainties; therefore, actual results may differ materially from those expressed or implied in forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. The Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

        Important factors that may affect the Company's expectations include, but are not limited to: changes in the overall economy; world and national events that may affect the ability of the Company to provide services; changes in competition in markets in which the Company operates; advances in communications technology; the ability of the Company and its parent company, Broadwing Inc., to generate sufficient cash flow to fund its business plan and maintain and strategically grow its optical network; changes in the communications regulatory environment; changes in the demand for the services and products of the Company; the ability of the Company to introduce new service and product offerings in a timely and cost effective basis; the ability of the Company to attract and retain qualified employees; the ability of the Company's parent company, Broadwing Inc., to access capital markets and the successful execution of restructuring initiatives.

ITEM 1. BUSINESS

Overview

        Broadwing Communications is an Austin, Texas based provider of data and voice communications services. These services are provided over approximately 18,500 route miles of fiber-optic transmission facilities. The Company's revenue is generated by broadband transport through private line and indefeasible right of use ("IRU") agreements, Internet services utilizing technology based on Internet protocol ("IP"), and switched voice services provided to both wholesale and retail customers. The Company also offers data collocation, information technology consulting ("IT consulting"), network construction and other services. As further discussed in Note 4 of the Notes to Consolidated Financial Statements, the Company announced its intention to exit the network construction business through the November 2001 Restructuring Plan.

        The Company is a wholly owned subsidiary of Broadwing Inc. ("Broadwing" or "the Parent Company"). On November 9, 1999 the Company was merged with a wholly owned subsidiary of Broadwing ("the Merger"). The Merger was accounted for as a purchase business combination and, accordingly, the purchase accounting adjustments, including goodwill, have been pushed down and are reflected in these financial statements subsequent to November 9, 1999. The financial statements for periods ended prior to November 9, 1999 were prepared using the Company's historical basis of accounting and are designated as "Predecessor." The comparability of operating results for the Predecessor periods, the period from November 10 to December 31, 1999 and fiscal year 2000 are affected by the purchase accounting adjustments.

        In 2001 and 2000, Broadwing Communications' results include the results of Broadwing IT Consulting Inc., as the Parent Company contributed the capital stock of the information technology consulting business to the Company during 2000. Broadwing IT Consulting Inc. began operating under the name Broadwing Technology Solutions ("BTS") in 2001. In addition, the 2001 and 2000 results include the revenue and expenses related to servicing the former Cincinnati Bell Long Distance Inc.

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("CBLD") customers outside of the Cincinnati, Ohio area. This change was further described in each of the Company's Reports on Form 10-Q during 2000. The contribution of the Broadwing IT Consulting Inc. stock resulted in approximately $11 million in assets and $12 million in liabilities (at historical cost) being contributed to the Company in January 2000, representing net liabilities of approximately $1 million.

        Broadband transport services, which accounted for 39% of the Company's revenue in both 2001 and 2000, primarily represents monthly recurring revenue relating to the long-haul transmission of voice, data and Internet traffic over dedicated circuits. The majority of this revenue is generated by private line, monthly recurring revenue. However, approximately one-fourth of the revenue is provided by IRU agreements, which cover a fixed period of time and represent the lease of capacity or network fibers. The buyer of IRU services typically pays cash upon execution of the contract. The Company's policy and practice is to amortize these payments into revenue over the life of the contract.

        Switched voice services, which accounted for 32% and 41% of the Company's total 2001 and 2000 revenue, respectively, consist of billed minutes of use, primarily for the transmission of voice long-distance services on behalf of both wholesale and retail customers. This revenue has been decreasing as a percentage of total revenue as the Company has focused its efforts on optimizing profitability of this revenue source. Therefore, the Company has minimized sales to less creditworthy customers, tightened credit to wholesale customers in the wake of increasing bankruptcies and exited its telemarketing operations which were directed at a low-end customer base. Switched voice services also includes revenue associated with certain customers of the former CBLD in 2000 and 2001.

        Data and internet services consist of the sale of high-speed data transport services and equipment utilizing technology based on Internet protocol ("IP"), ATM/frame relay, data collocation and web hosting. These services continued to grow as a percentage of total Company revenue, increasing from 6% in 2000 to nearly 10% in 2001. The Company envisions a growing market for these types of services and it expects that data and internet services will provide a greater share of total revenue in the future.

        IT consulting, which accounted for 12% and 7% of the Company's 2001 and 2000 revenue, respectively, consists of information technology consulting services and associated equipment sales. These services are provided by BTS.

        Network construction and other services consists of large, joint-use network construction projects, the receipt of warrants in 2000 related to a field trial of optical equipment and residual revenue in 1999 from a prior sale of dark fiber. The Company typically gains access to rights-of-way or additional fiber routes through its network construction activities. In both 2001 and 2000, network construction projects and other services provided 7% of total Company revenue. The Company expects to complete its remaining ongoing project in 2002, and will subsequently exit the network construction line of business.

        The centerpiece of the Company's assets is its next-generation network. This network is fully operational, includes an Internet backbone and is one of the first in the United States of America to incorporate optical switching technology. In order to maintain its network, the Company relies on supplies from certain key external vendors and a variety of other sources.

        As the Company's revenue is primarily generated by usage-based and monthly service fees, the operations of the Company follow no particular seasonal pattern. However, the Company does receive approximately 50% of its revenue from interexchange carriers that have or are capable of constructing their own network facilities, but utilize the Company's broadband transport, switched voice and network construction services to augment their own networks. Remaining revenue of the Company is generated by business enterprise customers through the purchase of broadband transport, internet, switched voice and IT consulting services.

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        Prices and rates for the Company's service offerings are primarily established through contractual agreements. Accordingly, the Company is influenced by competitive conditions such as the number of competitors, availability of comparable service offerings and the amount of fiber network capacity available from these competitors.

        The Company faces significant competition from other fiber-based communications companies such as AT&T, WorldCom, Sprint, Level 3 Communications, Qwest Communications International, Williams Communications and several emerging competitors. These competitors attempt to compete on the basis of price, quality, service and product breadth.

Employees

        At December 31, 2001, the Company employed 2,100 people, of whom 800 provided operational and technical services, 200 provided engineering services, and the balance engaged in sales, administration and marketing. These employees are not represented by labor unions, and the Company considers employee relations to be good.

Risk Factors

Increased Competition Could Affect Profitability and Cash Flow

        There is substantial competition in the telecommunications industry. Through mergers and various service integration strategies, major providers, including the Company, are striving to provide integrated services across all geographical markets. The Company expects competition to intensify as a result of the entrance of new competitors and the rapid development of new technologies, products and services. The Company cannot predict which of many possible future technologies, products and services will be important to maintain its competitive position or what expenditures will be required to develop and provide these technologies, products and services. The Company's ability to compete successfully will depend on the Company's ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing by competitors. To the extent the Company does not keep pace with technological advances or fails to timely respond to changes in competitive factors in the industry, it could lose market share or experience a decline in its revenue and profit margins.

        The Company faces significant competition from companies such as AT&T, WorldCom, Sprint, Level 3 Communications, Qwest Communications International, Williams Communications and several emerging competitors. The significant capacity of these competitors could result in decreasing prices even as the demand for higher-bandwidth services increases. Increased network capacity and traffic optimization could place downward pressure on prices, thereby making it difficult for the Company to maintain current revenue and profit margins.

        The Company's failure against these competitors would have a material adverse impact on its business, financial condition and results of operations. This would result in increased reliance on borrowed funds and could impact the Company's ability to maintain and strategically expand its optical network.

Insufficient Cash Flow for Planned Investing and Financing Activities Could Impact the Company's Liquidity

        The Company is committed to the maintenance and strategic expansion of its national optical network. To accomplish these goals, the Company expects to incur approximately $130 million in capital expenditures in 2002. Since the Company does not expect to generate sufficient cash flow to provide for its operating and investing activities, it is dependent on the Parent Company for funding.

        In order to provide for these cash requirements, the Parent Company obtained a $2.3 billion credit facility from a group of banking and nonbanking institutions. The Company has used funds borrowed

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by the Parent Company from the credit facility and funds borrowed directly by the Company from the credit facility to finance its operations and investing activities. Both the Parent Company and the Company anticipate additional borrowings from this credit facility during 2002. At the end of 2001, the Parent Company had approximately $350 million in available borrowing capacity from the credit facility. Total availability under this credit facility will decrease throughout 2002 to approximately $1.8 billion due to approximately $335 million related to prepayment of the outstanding term debt facilities from the proceeds of the sale a subsidiary of the Parent Company, $5 million due to scheduled amortization of the term debt facilities and $135 million due to scheduled availability reductions of the revolving credit facility. The Company believes that the Parent Company's borrowing availability will be sufficient to provide for its financing requirements in excess of amounts generated by operations during 2002.

        However, the ability to borrow from this credit facility is predicated on the Parent Company's compliance with certain debt covenants that have been negotiated with its lenders. Failure to satisfy these debt covenants could severely constrain the Company's and the Parent Company's ability to borrow from the credit facility without receiving a waiver from its lenders. The Parent Company obtained an amendment to its credit facility to exclude charges associated with the November 2001 Restructuring Plan (described in Note 4 of the Notes to Consolidated Financial Statements) from the financial covenant calculations. As of December 31, 2001, the Parent Company was in compliance with all of the covenants of the credit facility.

        If the Company is unable to meet its cash flow targets going-forward, the Company could experience a material adverse impact on its business, financial condition and results of operations.

Network Utilization is Dependent on Maintaining Rights-of-Way and Permits

        The utilization of the Company's network depends on maintaining rights-of-way and required permits from railroads, utilities, governmental authorities and third-party landlords on satisfactory terms and conditions. The Company cannot guarantee that it will be able to maintain all of the existing rights and permits. Although the Company expects to maintain and renew its existing agreements, the loss of a substantial number of existing rights and permits would have a material adverse impact on the Company's business, financial condition and results of operations. Furthermore, the Company may incur significant future expenditures in order to remove its facilities upon expiration of related rights-of-way agreements.

Significant Capital Expenditures Will be Required to Maintain and Strategically Expand the Network

        The Company is committed to the maintenance and strategic expansion of its national optical network and the deployment of high-speed data transport services. The Company's current plans call for a significant reduction in capital spending in 2002 from $461 million in 2001 to approximately $130 million, as the optical overbuild of the national network has been largely completed.

        The actual amount of capital required to maintain or expand the Company's network to meet customer demands may vary materially from the Company's estimates. The Company may incur significant additional capital expenditures in 2002 and thereafter as a result of unanticipated expenses, regulatory changes and other events that impact the business. If the Company fails to adequately maintain its network or expand it to meet customer needs, there could be a material adverse impact on the Company's business, financial condition and results of operations.

Regulatory Initiatives May Impact the Company's Profitability

        The Company is subject to regulatory oversight of varying degrees at the state and federal levels. Regulatory initiatives that would put the Company at a competitive disadvantage or mandate lower rates for its services could result in lower profitability and cash flow. This could compromise the

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Company's ability to maintain and strategically expand its national optical network, which would have a material adverse effect on the Company's business, financial condition and results of operations.

The Company's Recently Announced Restructuring Initiative is Critical to the Company's Success

        The Company announced a restructuring initiative on November 29, 2001 that included initiatives to close eight of the Company's eleven data centers; reduce the Company's expense structure; and exit the network construction line of business and other non-strategic operations. In addition, the web hosting operations of the Parent Company will be consolidated into the Company's operations effective January 1, 2002. The Company recorded a one-time charge of $220 million in the fourth quarter of 2001 related to these initiatives and expects the restructuring plan will reduce costs by approximately $77 million annually, compared to 2001. Successfully completing this initiative by executing the various business strategies that embody the initiative, retaining valued customers and maintaining the employee base will be critical to the Company's profitability. Failure to successfully implement this initiative could have an adverse impact on the Company's business, financial condition and results of operations.

Attracting and Retaining Highly Qualified Employees is Necessary for Competitive Advantage

        The Company seeks to achieve competitive advantage by hiring and retaining highly skilled personnel. The Company believes this is of particular importance in an industry which depends on innovation and execution in order to attract and retain valuable customers. If the Company fails to attract or retain these skilled personnel, the Company's financial condition and results of operations could be materially impacted.

The Company's Success Depends on the Introduction of New Products and Services

        The Company's success depends on being able to anticipate the needs of current and future enterprise and carrier customers. The Company seeks to meet these needs through new product introductions, service quality and technological superiority. If the Company fails to anticipate the needs of these customers and does not introduce the new products and services necessary to attract or retain these customers, it would have a material adverse impact on the Company's business, financial condition and results of operations.

Continuing Softness in the Economy is Having a Disproportionate Effect in the Telecommunications Industry

        The downturn in general economic conditions, and particularly in the telecommunications services industry, has forced several of the Company's competitors and customers to file for protection from creditors under existing bankruptcy laws and others to reconfigure their capital structure. These companies had significant debt servicing requirements and were unable to generate sufficient cash from operations to both service their debt and maintain their networks. If general economic conditions in the United States remain at current levels for an extended period of time or worsen, there could be a material adverse impact on the Company's business, financial condition and results of operations.

A Significant Portion of the Company's Revenue Is Derived From Telecommunications Carriers

        Eight of the Company's top ten customers, which as a group, accounted for approximately 29% of total revenue, are large telecommunications carriers. The Company's largest customer, who accounted for approximately 9% of revenue in 2001, is in Chapter 11 bankruptcy proceedings. Non-IRU revenue from this customer approximated 2% of consolidated revenue. The remaining revenue from this customer, approximating 7% of revenue, was generated by the amortization of IRU agreements for which consideration had been previously received. In addition, interexchange carriers generate approximately 50% of the Company's revenue. Most of the Company's arrangements with large customers do not provide the Company with guarantees that customer usage will be maintained at current levels. In addition, construction of their own facilities by certain of the Company's customers, construction of additional facilities by competitors or further consolidation in the telecommunications industry involving the Company's customers could lead such customers to reduce or cease their use of

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the Company's network. To the extent these large customers cease to employ the Company's network to deliver their services, or cannot pay outstanding accounts receivable balances, the Company could experience a material adverse impact on its business, financial condition and results of operations.

Terrorist Attacks and Other Acts of Violence 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 terrorist attacks and subsequent events, there has been considerable uncertainty in world financial markets. The full effect of these events, as well as concerns about future terrorist attacks, on the financial markets is not yet known, but could adversely affect the Parent Company's and the Company's ability to obtain financing on terms acceptable to it, or at all, to finance the Company's capital expenditures or working capital.

        Terrorist attacks may negatively affect the Company's operations and financial condition. There can be no assurance that there will not be further terrorist attacks against the United States of America or U.S. businesses. These attacks or armed conflicts may directly impact the Company's physical facilities or those of its customers and vendors. These events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and world financial markets and economy. They could result in an economic recession in the United States or abroad. Any of these occurrences could have a material adverse impact on the Company's business, financial condition and results of operations.

The Company is Dependent on Limited Sources of Supply for Certain Key Network Components

        Where possible and practical, the Company utilizes commercially available 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 core of its long-haul network. There can be no assurance that the Company will be able to obtain such equipment from Corvis in the future. If the Company cannot obtain adequate replacement equipment or service from Corvis, or an acceptable alternate vendor, the Company could experience a material adverse impact on its business, financial condition and results of operations.

Network Failure and Transmission Delays and Errors 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 the high-speed transmission of data and voice traffic among various locations. The Company is held to high quality and delivery standards in its customer contracts. Network failures or delays in data delivery could cause service interruptions resulting in losses to the Company's customers. Failures or delays could expose the Company to claims by its customers that could have a material impact on the financial condition and operating results of the Company's business.

The Parent Company Expects to Refinance Existing Indebtedness

        In order for the Parent Company to maintain compliance with the covenants of its $2.3 billion credit facility and refinance existing indebtedness, the Parent Company expects to access the capital markets during or before 2003. The Parent Company cannot be certain that it will be able to refinance its indebtedness when required or that satisfactory terms of any refinancing will be available. If the Parent Company is unable to refinance its indebtedness or obtain new financing under these circumstances, the Parent Company and the Company will be required to consider asset sales, equity financing, debt restructuring and any other options available.

Capital Additions

        The Company's capital additions have historically been for its national optical network and construction of data centers to meet the anticipated demand for web hosting and data collocation

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services. As a result of these additions, the Company expects to be able to introduce new products and services, respond to competitive challenges and increase its operating efficiency and productivity. Capital additions totaled $461 million and $592 million in 2001 and 2000, respectively.

ITEM 2. PROPERTIES

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

        The gross investment in property, plant and equipment, in millions of dollars, at December 31, 2001 and 2000 is comprised of the following ($ in millions):

        The gross investment in property, plant, and equipment includes $19.1 million and $16.3 million of assets accounted for as capital leases in 2001 and 2000, respectively. These assets are included in "Transmission facilities."

ITEM 3. LEGAL PROCEEDINGS

        The information required by this item is included in Note 15 of the Notes to Consolidated Financial Statements that are contained in Item 8 of this Report on Form 10-K, "Financial Statements and Supplementary Data."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of the Company's security holders during the quarter ended December 31, 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

        At December 31, 2001, all of the Company's common stock was held by Broadwing Inc. As such, there is no established public trading market for this common stock.

Dividend Policy

        The Company does not pay dividends on its common stock. Dividends on the Company's 12¹/2% Junior Exchangeable Preferred Stock (the "Preferred Stock") are payable quarterly at the annual rate of 12¹/2% of the aggregate liquidation preference (which amounted to $401.4 million at December 31, 2001 including accrued dividends of $6.2 million). Historically, the Company paid dividends in additional shares of the Preferred Stock. Effective November 16, 1999, the Company elected to switch to a cash payment option for the Preferred Stock rather than issue additional shares of the Preferred Stock, and made its first cash payment on February 15, 2000.

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ITEM 6. SELECTED FINANCIAL DATA

        The following table sets forth Broadwing Communications' selected historical financial data. The historical financial data have been derived from the audited Consolidated Financial Statements. The selected historical financial data set forth below are qualified in their entirety by, and should be read in conjunction with, Item 1, "Business;" Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations;" and the Company's Consolidated Financial Statements, related notes thereto and other financial information included herein.

(1)

On November 9, 1999 (the "Merger Date"), the Company completed a merger with a wholly owned subsidiary of Broadwing. This Merger was accounted for as a purchase business combination and, accordingly, purchase accounting adjustments, including goodwill, have been pushed down and are reflected in the Company's financial statements subsequent to the Merger Date. The financial statements for periods before the Merger Date were prepared using the Company's historical basis of accounting and are designated as "Predecessor." The financial statements for periods after the Merger are designated as "Company." The comparability of operating results for the Predecessor and Company periods are affected by the purchase accounting adjustments. The 2001 and 2000 results presented include the results of BTS as the Parent Company contributed the capital stock of the information technology consulting business to the Company during 2000. The 2001 and 2000 results also reflect an agreement with the former CBLD to service its customers outside of the Cincinnati, Ohio area. All revenue and expenses associated with the former CBLD's customers outside the Cincinnati area were assigned to Broadwing Communications. This change was further described in the Company's Reports on the Form 10-Q during 2000.

(2)

See Note 5 of the Notes to Consolidated Financial Statements.

(3)

Extraordinary losses of $67.0 million in 1998 and $6.6 million in 1999 relate to the early extinguishment of debt and were recorded net of tax.

(4)

See Note 6 of the Notes to Consolidated Financial Statements.

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(5)

See Note 8 of the Notes to Consolidated Financial Statements.

(6)

See Note 9 of the Notes to Consolidated Financial Statements.

(7)

EBITDA represents net income (loss) from continuing operations before interest, income tax expense (benefit), depreciation, amortization, merger and other infrequent costs, restructuring and other charges (credits), minority interest expense (income), equity loss in unconsolidated entities, loss (gain) on investments, other expense (income), extraordinary items and the effect of changes in accounting principles. EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or as an alternative to cash flows as a source of liquidity, and may not be comparable with EBITDA as defined by other companies. The Company has presented certain information regarding EBITDA because the Company believes that EBITDA is generally accepted as providing useful information regarding a company's ability to service and incur debt. In addition, the Parent Company uses EBITDA as a key measurement of operating performance of its subsidiaries

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The "Management's Discussion and Analysis of Financial Condition and Results of Operations" which follows should be read in conjunction with the "Risk Factors," Consolidated Financial Statements and Notes to Consolidated Financial Statements.

        Broadwing Communications provides data and voice communications services nationwide. These services are provided over approximately 18,500 route miles of fiber-optic transmission facilities. The Company's revenue is generated by broadband transport, switched voice services, data and internet services, information technology consulting and network construction and other services.

        Broadband transport services consist of long-haul transmission of data, voice and Internet traffic over dedicated circuits. The majority of this revenue is generated by private line, monthly recurring revenue; however, approximately one-fourth of the revenue is provided by IRU agreements, which cover a fixed period of time and represent the lease of capacity or network fibers. The buyer of IRU services typically pays cash upon execution of the contract. The Company's policy and practice is to amortize these payments into revenue over the life of the contract. Switched voice services consist of billed minutes of use, primarily for the transmission of voice long-distance services on behalf of both wholesale and retail customers. Data and internet services consist of the sale of high-speed data transport services utilizing technology based on Internet protocol ("IP"), ATM/frame relay, data collocation and web hosting. IT consulting consists of information technology consulting services and related hardware sales. Network construction and other services consists of large, joint-use network construction projects, the receipt of warrants in 2000 related to a field trial of optical equipment and residual revenue in 1999 from a prior sale of dark fiber.

        This report and the related consolidated financial statements and accompanying notes contain certain forward-looking statements that involve potential risks and uncertainties. Broadwing Communications Inc.'s future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to review or update these forward-looking statements or to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

        As previously discussed, a wholly owned subsidiary of Broadwing merged with the Company as of November 9, 1999 and the Company became a wholly owned subsidiary of Broadwing. For purposes of the following discussion of the results of operations, the financial information for the Predecessor period has been combined with the financial information for the period from November 10, 1999 to

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December 31, 1999. The comparability of operating results for the Predecessor and Company periods are affected by purchase accounting adjustments.

Critical Accounting Policies

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

        The Company believes the following critical accounting policies impact its more significant judgments and estimates used in the preparation of its consolidated financial statements. For a more detailed discussion of these and other accounting policies, please see Note 1 of the Notes to Consolidated Financial Statements:

        Revenue Recognition—The Company generally recognizes revenue as services are provided. Revenue from product sales is generally recognized upon performance of contractual obligations, such as shipment, delivery, installation or customer acceptance. Indefeasible right-of-use agreements, or "IRU's", represent the lease of network capacity or dark fiber and are recorded as unearned revenue at the earlier of the acceptance of the applicable portion of the network by the customer or the receipt of cash. The buyer of IRU services typically pays cash upon execution of the contract, and the associated IRU revenue is then recognized over the life of the agreement as services are provided, beginning on the date of customer acceptance.

        For certain long-term construction contracts, the Company recognizes revenue and the associated cost of that revenue using the percentage of completion method of accounting. This method of accounting relies on estimates of total expected contract revenue and costs. The method is used as the Company can make reasonably dependable estimates of revenue and costs applicable to various stages of a contract. As the financial reporting of these contracts depends on estimates that are continually assessed throughout the terms of the contracts, revenue recognized is subject to revision as the contract nears completion. Revisions in estimates are reflected in the period in which the facts that give rise to the revision become known. Revisions have the potential to impact both revenue and cost of services and products. Construction projects are considered substantially complete upon customer acceptance.

        Since its merger with the Parent Company in November 1999, the Company has not entered into any significant fair value fiber exchange agreements. For certain pre-Merger fiber exchange agreements with other carriers, the Company recognizes the fair value of revenue earned and the related expense in offsetting amounts over the life of the agreement. In no instances has the Company recognized revenue upon execution of any fiber exchange agreements or capitalized any expenses associated therewith.

        Deferred Tax Asset—As of December 31, 2001, the Company had operating loss tax carryforwards with a related tax benefit of $276 million. For certain state and local jurisdictions that the Company has determined it is more likely than not that the loss carryforwards will not be realized, the Company has provided a valuation allowance, which amounted to $61 million as of December 31, 2001. The Company prepares the tax provision based upon the modified separate return method under which an income tax benefit is recorded for losses based upon the potential to be realized by the Company, as well as any affiliated members of the federal income tax consolidated group of the Parent Company. The income-producing members of the consolidated group compensate the Company for losses as they are realized in the consolidated tax return. In evaluating the amount of valuation allowance, the Company considers prior operating results, future taxable income projections, expiration of tax loss

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carryforwards and ongoing prudent and feasible tax planning strategies. Based on this evaluation and on assumptions used as of December 31, 2001, the Company believes the realization of this deferred tax asset for federal and unitary state purposes is reasonably assured. The Company's tax loss carryforwards will generally expire between 2010 and 2020.

        Asset Impairments—As of December 31, 2001, the Company had fixed assets with a net carrying value of $2.2 billion, intangible assets of $0.3 billion and goodwill of $2.0 billion. The value of these assets is evaluated when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount, with the loss measured based on discounted expected cash flows. The Company performed an evaluation of both its tangible and intangible assets as of December 31, 2001 and determined that the assets were not impaired under the accounting guidance then in effect.

        As disclosed in Note 1 of the Notes to Consolidated Financial Statements, the Company is required to implement Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002. The Company expects the implementation will require a write-down of its goodwill in excess of $1.0 billion. The carrying value of goodwill was $2.0 billion as of December 31, 2001. The Company will record the goodwill impairment as a change in accounting principle as permitted under SFAS 142. After June 30, 2002, revisions to the estimated cash flows and profitability used to assess the carrying value of fixed assets, goodwill and intangible assets would impact operating expense in the period recorded.

Merger with Broadwing Inc. and Related Restructuring

        On November 9, 1999, the Company merged with a wholly owned subsidiary of Broadwing and became a wholly owned subsidiary of Broadwing. The Merger was accounted for as a purchase business combination and, accordingly, purchase accounting adjustments, including goodwill, were pushed down and reflected in the Company's financial statements after November 9, 1999. The financial statements for periods before November 9, 1999 were prepared using the Company's historical basis of accounting and are designated as "Predecessor." The comparability of operating results before and after the Merger is affected by the purchase accounting adjustments.

        Broadwing's cost to acquire the Company was allocated to the assets acquired and liabilities assumed according to their estimated fair values at the Merger Date. During 2000, the Company adjusted the fair values of certain assets acquired and liabilities assumed based on the receipt of additional information which was outstanding at the date of the acquisition. These adjustments did not have a material impact on the purchase price allocation. Property, plant and equipment was recorded at fair market value based on appraisal results, and useful lives were assigned to the assets. Other intangibles such as customer lists and fiber exchange agreements were valued at fair market value and are being amortized using the straight-line method over five to twenty years. The excess of cost over the fair value assigned to the net assets acquired was recorded as goodwill and is being amortized using the straight-line method over 30 years.

        Included in the allocation of the cost to acquire the Company are restructuring costs associated with initiatives to integrate operations of the Company with the Parent Company. The restructuring costs accrued in 1999 included the costs of involuntary employee separation benefits related to 263 employees of the Company. As of December 31, 2000, all of the employee separations had been completed. The restructuring plans also included costs associated with the closure of a variety of technical and customer support facilities, the decommissioning of certain switching equipment, and the termination of contracts with vendors. The Company expects that these restructuring actions will be substantially complete by June 30, 2002, and will result in cash outlays of $1.3 million during 2002.

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Acquisition Transactions

        Prior to the Merger, the Company made acquisitions that resulted in goodwill and other intangibles being recorded in the Company's financial statements. Effective with this Merger, all previously acquired goodwill and other intangibles were eliminated as part of purchase accounting. Further discussion of the acquisition of the Company by Broadwing follows in Note 2 of the Notes to Consolidated Financial Statements that are contained in Item 8 of this report.

        On May 10, 1999, the Company acquired a retail long-distance reseller, Coastal Telecom Limited Company, and other related companies under common control ("Coastal"), for a purchase price of approximately $110 million. This acquisition was treated as a purchase for accounting purposes and, as such, results of operations for the Company include Coastal after the acquisition date. This acquisition is described more fully in Note 3 of the Notes to Consolidated Financial Statements that are contained in Item 8 of this report.

Fiber Sales and IRUs

        The Company has entered into various agreements to sell fiber and capacity usage rights. Sales of these rights are recorded as unearned revenue and are included in other current and other noncurrent liabilities in the accompanying consolidated balance sheets when the fiber or capacity is accepted by the customer or cash is received. The buyer of IRU services typically pays cash upon execution of the contract. The Company's policy and practice is to amortize these payments into revenue over the life of the contract. The Company received approximately $61.4 million, $22.9 million and $262.5 million in cash in 2001, 2000 and 1999, respectively, from these sales and recognized revenue of $118.8 million, $42.1 million and $12.2 million, respectively.

Consolidated Overview

        In accordance with Statement of Financial Accounting Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information," the operations of the Company comprise a single segment and are reported as such to the Chief Executive Officer of the Parent Company, who functions in the role of chief operating decision maker for the Company. A tabular presentation of the Company's financial results can be found in Item 6, "Selected Financial Data" on page 8 and in the Consolidated Statements of Operations and Comprehensive Income (Loss) on page 26 of this Report on Form 10-K.

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

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2001 Compared to 2000

Revenue

        Total revenue grew 19% during 2001 versus 2000, representing an increase of $191 million. Nearly 40% of the revenue growth came from IT consulting while an additional 38% came from the broadband transport line of business. These increases more than offset a decline in switched voice services. Despite 19% annual revenue growth in comparison to 2000, results during the last two quarters of 2001 indicated a slowing of momentum, as revenue declined sequentially in both the third and fourth quarters.

        In comparison to 2000 amounts, broadband transport revenue increased $73 million in 2001, growing 19% to $467 million. Approximately two-thirds of the increase was driven by the renegotiation of IRU contracts with one of the Company's customers. In order for these contracts to survive the customer's bankruptcy, the contracts were adjusted to reduce the services provided, update the operations and maintenance fees to a current market rate and shorten the lives of the agreements. Revenue also increased due to sales to new and existing customers, but the increases were partially offset by circuit disconnects during the second half of the year.

        Switched voice services revenue decreased 7% for 2001 from $409 million to $381 million. This was the result of a continued focus on data services and accompanying de-emphasis on sales of voice services to the lower end of the switched voice services customer base. At the same time, the Company made an effort to minimize sales to less creditworthy customers in the wake of increasing bankruptcies in the wholesale segment of this market. The Company expects switched voice services revenue to continue to decline in 2002.

        Data and internet revenue increased $50 million, or 77%, as revenue continued to increase on the strength of demand for dedicated IP and ATM/frame relay services. These increases were further supplemented by additional collocation revenue. Despite the growth in collocation revenue, the Company's recently announced November 2001 Restructuring Plan included the closure of eight of the Company's eleven data centers due to growth failing to meet expectations. As a result, the Company expects a year-over-year decrease of approximately $10 million with regard to collocation revenue in 2002.

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

        Network construction and other services revenue increased $20 million, or 30%, during 2001 as a result of a large, joint-use construction project that is expected to be complete in 2002. The increase was partially offset by the nonrecurring receipt of warrants associated with a field trial of optical equipment in 2000. As further discussed in Note 4 of the Notes to Consolidated Financial Statements, the Company's November 2001 Restructuring Plan included plans to exit the network construction business upon completion of that large project. Accordingly, the Company will treat the network construction business as a discontinued operation once its obligations are substantially complete, thereby reducing revenue for this segment in future reporting periods.

Costs and Expenses

        Cost of services primarily reflects access charges paid to local exchange carriers and other providers, transmission lease payments to other carriers, costs incurred for network construction projects and personnel costs for IT consulting. In 2001, cost of services amounted to $653 million, a 20% increase over the $542 million incurred during 2000. These increases were driven primarily by incremental costs needed to support the revenue growth, as described above, in broadband transport, data and internet, network construction and IT consulting.

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        Cost of products is primarily comprised of hardware costs for IT consulting. These expenses, which increased nearly 85%, from $55 million in 2000 to $101 million in the current year, were attributable to corresponding hardware revenue growth of 93% over 2000.

        Selling, general and administrative ("SG&A") expenses increased 1% to $326 million in 2001. Increased employee expenses attributable to higher headcount during the first half of the year were almost entirely offset by lower advertising expenses and efforts to decrease consulting and contracted labor services.

        Depreciation expense of $269 million increased $73 million, or 37% during the year as a result of placing assets related to the optical overbuild into service. Amortization expense, which primarily relates to the amortization of goodwill as a result of the Merger, remained flat at approximately $111 million in 2001 and $110 million in 2000. Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") as required on January 1, 2002, the Company will stop amortizing goodwill and reevaluate the lives of its intangible assets. Once adopted, the Company expects amortization expense to decrease to approximately $42 million annually.

        In November 2001, the Company's management approved restructuring plans which included initiatives to close eight of the Company's eleven data centers, reduce the expense structure, exit the network construction business and other non-strategic operations; and consolidate web hosting operations of the Parent Company into the Company. Total restructuring and other costs of $220 million were recorded in 2001 related to these initiatives. The $220 million consisted of restructuring liabilities in the amount of $73 million and related noncash asset impairments in the amount of $147 million. The restructuring-related liabilities of $73 million were comprised of $11 million related to involuntary employee separation benefits (including severance, medical insurance and other benefits) for 760 employees and approximately $62 million related to lease and other contractual terminations. In total, the Company expects this restructuring plan to result in cash outlays of $72 million and noncash items of $148 million. Through December 31, 2001, the Company has utilized $4 million of the $73 million reserve, nearly all of which was cash expended. The Company expects to realize approximately $77 million in annual expense and capital expenditure savings from this restructuring plan relative to expenses incurred in 2001. The Company expects to complete this plan by December 31, 2002. Please see Note 4 of the Notes to Consolidated Financial Statements for a detailed discussion of restructuring and other charges.

        The operating loss of $489 million recorded in 2001 represents a $264 million increase over the $225 million operating loss in 2000. The higher loss is due to the increase in depreciation associated with the optical network assets placed in service and to the November 2001 restructuring charges, offset slightly by an improvement in gross profit.

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

        Interest expense, primarily consisting of interest paid to the Parent Company, decreased approximately 3% in 2001 to $68 million from $70 million in 2000. Although total borrowings increased during 2001, a decrease of nearly 4% in the average interest rate charged on the borrowings offset the volume increase. Interest expense related to $42 million borrowed directly from the Parent Company's credit facility was insignificant as the funds were borrowed at the end 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 $17 million

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gain from the sale of the Company's investment in PSINet, partially offset by mark-to-market adjustments and losses on the sale of the Applied Theory investment. The $395 million loss in 2000 resulted from recognized losses on the PSINet and Applied Theory investments. See Note 5 of the Notes to Consolidated Financial Statements for a detailed discussion of investments.

        Other expense (income) was minimal during both 2001 and 2000.

        The income tax benefit of $171 million decreased $70 million from the benefit of $241 million in 2000. This was primarily the result of the $152 million decrease in pretax losses from continuing operations.

        As a result of the above, the Company reported a net loss of $382 million for the year ended December 31, 2001, representing decreased losses of $81 million, or 18%, as compared to the loss in 2000 of $463 million.

2000 Compared to 1999

Revenue

        Revenue increased 50% to reach $1 billion in 2000, with all revenue categories contributing to the $333 million in growth. The broadband transport category contributed an additional $92 million in revenue, increasing 31% to $393 million. The Company continued to experience increased demand for higher-bandwidth services from its enterprise customers and benefited from higher IRU revenue in 2000.

        Switched voice services revenue increased by $102 million or 33% in 2000, with $80 million and $22 million, respectively, in additional revenue being generated by the retail and wholesale voice components of this business. Approximately $59 million of the increase in retail switched voice services is the result of an agreement between Broadwing Communications and the former CBLD, a subsidiary of the Parent Company. On January 1, 2000, the Company began recording revenue and expenses associated with an agreement whereby the Company began servicing the former CBLD's customers outside of the Cincinnati, Ohio area (during 1999 these revenue and expenses were included in the Parent Company's operating results). Switched wholesale voice revenue increased 14%, as higher volumes resulting from the service agreement with CBLD customers were further supplemented by an increase in international minutes carried. In switched retail voice, 3% higher minutes of use were offset by a 3% lower rate per minute.

        Data and internet revenue increased 176% or $41 million in comparison to 1999. This revenue continued to grow on the strength of demand for Internet-based, ATM/frame relay, data collocation and web hosting services.

        IT consulting revenue increased from zero in 1999 to nearly $66 million in 2000. The increase was attributable to Broadwing IT Consulting (now operating as Broadwing Technology Solutions), as the Parent Company contributed the capital stock of the information technology consulting business to the Company during 2000.

        Network construction and other services revenue of $67 million in 2000 was the result of two construction projects undertaken during the year and the receipt of warrants associated with a field trial of optical equipment. The increase in revenue of $32 million in this category was partially offset by nonrecurring, residual revenue from a prior sale of dark fiber in 1999.

Costs and Expenses

        In 2000, costs of services amounted to $542 million, a 27% increase over 1999. These increases were driven primarily by revenue growth, but were held to a minimum due to a decreased reliance on transmission charges from other carriers as the Company continued to expand its own nationwide optical network.

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        Costs of products increased to $55 million in 2000 from zero in 1999. These increases were driven primarily by the sales of hardware by Broadwing Technology Solutions, as the Parent Company contributed the capital stock of the information technology consulting business to the Company during 2000.

        SG&A expenses were 29% higher in 2000, increasing $73 million, to $322 million. This was primarily due to the addition of more than 600 employees as a result of the expansion of the Company's sales force in support of new products and of the retail and information technology consulting businesses. Broadwing Communications also incurred significant advertising expenditures in early 2000 in order to introduce the new "Broadwing" brand. Of the $22 million increase in advertising expense in 2000, $17 million was attributable to the initial nationwide advertising campaign that ran in the first quarter of 2000. The Company incurred additional advertising expenditures in support of new and existing products and services. In addition, the contribution of the IT consulting business by the Parent Company and the service agreement with CBLD resulted in higher personnel costs in 2000. In the aggregate, SG&A expenses as a percentage of revenue decreased by five percentage points to approximately 32%.

        Depreciation and amortization expenses of $306 million represented a $112 million increase over 1999, $72 million of which was attributable to amortization of goodwill recorded on the Company's books following the Merger. The remainder of the increase, or $40 million, was attributable to the depreciation of network and other assets.

        Restructuring expense decreased $20 million from 1999. In the second quarter of 1999, the Company initially recorded a charge of approximately $13 million to exit certain operations in the switched wholesale business ("the Second Quarter Charge"). The restructuring charge consisted of severance and various other costs associated with workforce reduction, network decommissioning and various terminations. The workforce reduction of 94 people included employees contributing to the sales function and employees contributing to the network operations. These restructuring activities were completed during 2001, and the reserve is now considered closed.

        Due to the Merger, it was determined that the Company would need the switches that had been marked for decommissioning in the Second Quarter Charge. Additionally, it was determined that the total period contemplated for lease payments relating to an abandoned office would not be required. Consequently, the Second Quarter Charge was reduced by $1.2 million during the third quarter of 1999 related to decommissioning the switches and $0.4 million related to a reduction in the lease pay off requirement.

        In the third quarter of 1999, the Company recorded a charge of approximately $8 million relating to the restructuring of the organization and the exiting of certain foreign operations. The plan was developed by the previous Chief Executive Officer after reviewing the Company's operations. The workforce reduction of 15 employees included management, administrative and foreign sales personnel. The employees were notified of this program during July and August of 1999. These restructuring activities are expected to be substantially completed by the fourth quarter of 2002. Other charges decreased from $38 million in 1999 to zero in 2000. These charges resulted from costs related to the Merger, which did recur in 2000.

        The Company's operating loss decreased from $261 million in 1999 to $225 million in 2000 due to a reduction in operating expenses as a percentage of revenue. Gross profit and operating margins improved in 2000 as a result.

        In order to continue expansion of the optical network, the Company increased borrowings from the Parent Company and depleted the cash it had on hand throughout most of 1999. As a result of this and higher average interest rates on borrowings, interest expense increased $26 million to $70 million in 2000, a 59% increase over 1999.

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        The Company recorded equity losses in unconsolidated entities in both 2000 and 1999. These losses amounted to $16 million in 2000, or $5 million more than the $11 million recorded in 1999. This reduction is the result of $5 million in additional equity losses on the Applied Theory investment recorded in 2000.

        The Company incurred a $395 million pretax loss on investments in 2000 compared to $24 million in 1999. This was the result of recognized losses on the PSINet and Applied Theory investments during the fourth quarter of 2000. The 1999 losses were due to the writedown of the Unidial and DCI investments of $11 million and $13 million, respectively.

        Other expense (income) was an expense of less than $1 million in 2000 versus income of $6 million in 1999. The decrease is due to interest income in 1999, which did not recur in 2000, as cash was used to fund capital expenditures.

        The income tax benefit of $241 million represented a $228 million increase in comparison to the $13 million tax benefit recorded in 1999. This was primarily the result of the pretax losses from continuing operations, which includes the recognized losses on minority-owned investments previously discussed, somewhat offset by the effect of certain nondeductible expenses such as goodwill amortization and preferred stock dividends treated as minority interest expense.

        The net loss was $463 million in 2000, compared to $327 million reported in 1999. This was due to the investment losses previously discussed, offset by improved operating results. The $327 million net loss in 1999 included an extraordinary charge of approximately $7 million, recorded net of tax and pertaining to an early extinguishment of the Company's debt as a result of the Merger. No extraordinary items were incurred in 2000.

Capital Investment, Resources and Liquidity

        The Company has invested significant capital in order to expand the reach of its national broadband network. Now that the Company has largely completed the optical overbuild of its national network, increased the lit capacity on that network, and is nearing completion of a large, joint-use network construction contract, capital spending will be more closely tied to the maintenance and optimization of its network. Prospectively, the Company will incur capital expenditures associated with specific customer requirements that provide an acceptable return to the Parent Company's shareholders. However, the Company does not anticipate a significant amount of these types of expenditures in light of a general decline in the overall economic outlook. As a result, the Company expects capital spending in the near term to be considerably less than in prior years. Capital expenditures to maintain and strategically expand the network are expected to be approximately $130 million in 2002.

        Since the Merger, the Company has relied on a $2.3 billion credit facility with a group of lending institutions, secured by the Parent Company, in order to support the Company's cash deficit. The credit facility consists of $900 million in revolving credit, which matures in 2004, $750 million in term loans from banking institutions and $650 million in term loans from nonbanking institutions. At December 31, 2001, the Parent Company had drawn approximately $1.95 billion from the credit facility in order to refinance its existing debt and debt assumed as part of the Merger with the Company and to provide for both the Parent Company's and the Company's capital investment needs.

        In December 2001, the Company began borrowing directly from the Parent Company's credit facility. Of the $1.95 billion, which had been borrowed under the credit facility by the Parent Company as of December 31, 2001, $42 million had been borrowed directly by the Company. At December 31, 2001, the Parent Company had approximately $350 million in additional borrowing capacity from the credit facility. Total availability under this credit facility will decrease throughout 2002 to approximately $1.8 billion due to approximately $335 million related to prepayment of the outstanding term debt facilities from the proceeds of the sale of a subsidiary of the Parent Company, $5 million due to scheduled amortization of the term debt facilities and $135 million due to scheduled amortization of

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the revolving credit facility. The Company believes that its and its Parent Company's borrowing availability will be sufficient to provide for its financing requirements in excess of amounts generated by operations during 2002.

        The interest rates to be charged on borrowings from the credit facility can range from 100 to 275 basis points above the London Interbank Offering Rate ("LIBOR"), and are currently between 225 and 275 basis points above LIBOR as a result of the Parent Company's credit rating. The Parent Company incurs commitment fees in association with this credit facility that range from 37.5 basis points to 75 basis points, applied to the unused amount of borrowings of the facility.

        The Parent Company is also subject to financial covenants in association with the credit facility. These financial covenants require that the Parent Company maintain certain debt to EBITDA, debt to capitalization, senior secured debt to EBITDA and interest coverage ratios. This facility also contains certain covenants which, among other things, may restrict the Parent Company's ability to incur additional debt or liens; pay dividends; repurchase Parent Company common stock; sell, transfer, lease, or dispose of assets; make investments or merge with another company. The Parent Company obtained an amendment to its credit facility to exclude the charges associated with the November 2001 Restructuring Plan from the covenant calculations. The Parent Company is in compliance with all covenants set forth in its credit facility and other indentures. Please refer to Note 6 of the Notes to Consolidated Financial Statements contained in this report for a complete discussion of debt and the related covena