Cincinnati Bell 2007 Annual Report Download - page 163

Anthem Demutualization Claim
In November 2007, a class action complaint was filed against the Company and Wellpoint Inc., formerly
known as Anthem, Inc. The complaint alleges that the Company improperly received stock as a result of the
demutualization of Anthem and that a class of insured persons should have received the stock instead. In
February 2008, the Company filed a response in which it denied all liability and raised a number of defenses. The
Company believes that it has meritorious defenses and intends to vigorously defend this action. The Company
does not believe this claim will have a material effect on its financial condition.
Other
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” which
provides interpretive guidance on how registrants should quantify financial statement misstatements. Under SAB
No. 108, registrants are required to consider both a “rollover” method, which analyzes the impact of the
misstatement on the financial statements based on the amount of the error originating in the income statement
being analyzed, and the “iron curtain” method, which analyzes the impact of the misstatement on the financial
statements based on the cumulative effect of the error on the income statement being analyzed. The transition
provisions of SAB No. 108 permit a registrant to adjust retained earnings for the cumulative effect of immaterial
errors relating to prior years. The Company was required to adopt SAB No. 108 in 2006.
The Company recorded a net adjustment of $9.0 million to the 2006 opening accumulated deficit balance,
comprised of $14.2 million in regulatory tax liabilities, net of expected refunds, offset by the income tax effects
of $5.2 million. The Company has determined that its past filing positions should have resulted in an accrual of a
contingent liability in prior years. Historically, the Company has evaluated uncorrected differences utilizing the
rollover approach. The Company believes the impact of not recording the regulatory taxes was not material to
prior fiscal years under the rollover method. However, under SAB No. 108, the Company must assess materiality
using both the rollover method and the iron-curtain method, which resulted in the $9.0 million adjustment to the
2006 opening accumulated deficit balance.
At December 31, 2006, regulatory tax liabilities, net of expected refunds, related to the past filing positions
being questioned totaled $18.0 million. As a result of payments made in 2007, at December 31, 2007, the
Company’s liability has decreased to $2.5 million. The issues have not been resolved, and the Company believes
it has meritorious defenses related to the payment of these regulatory taxes and intends to defend its position in
order to limit the ultimate payment of the fees.
The cumulative error expense arose from the following periods:
(dollars in millions) 2005 2004
Prior
to 2004
Expense adjustment before income taxes ..................... $5.3 $3.1 $5.8
Expense adjustment after income taxes ...................... $3.3 $2.0 $3.7
13. Income Taxes
Income tax provision (benefit) consists of the following:
Year Ended December 31,
(dollars in millions) 2007 2006 2005
Current:
Federal .................................................. $ 3.0 $ 2.6 $ 1.0
State and local ............................................ 2.4 3.7 1.2
Total current .............................................. 5.4 6.3 2.2
Investment tax credits ........................................ (0.4) (0.4) (0.5)
Deferred:
Federal .................................................. 48.7 50.1 (21.2)
State and local ............................................ 13.7 45.5 34.1
Total deferred ............................................. 62.4 95.6 12.9
Valuation allowance .......................................... (10.7) (33.2) 39.7
Total ...................................................... $56.7 $ 68.3 $ 54.3
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Form 10-K