Cincinnati Bell 2006 Annual Report Download - page 199

As of December 31, 2006, the Company had approximately $1.6 billion of federal operating loss tax
carryforwards, with a deferred tax asset value of approximately $559.4 million and approximately $155.3 million
in deferred tax assets related to state and local operating loss tax carryforwards. The majority of the remaining
tax loss carryforwards will generally expire between 2017 and 2023. U.S. tax laws limit the annual utilization of
tax loss carryforwards of acquired entities. These limitations should not materially impact the utilization of the
tax carryforwards. The Company had a valuation allowance of $150.7 million and $183.9 million for the years
ended December 31, 2006 and 2005, respectively. The net decrease in the valuation allowance of $33.2 million
during 2006 was primarily due to a change in future utilization estimates of state net operating loss carryforwards
and the impact of Texas legislation instituting a gross margin tax while eliminating the Texas corporate income
tax.
The ultimate realization of the deferred income tax assets depends upon the Company’s ability to generate
future taxable income during the periods in which basis differences and other deductions become deductible, and
prior to the expiration of the net operating loss carryforwards. The Company concluded, due to the sale of the
broadband business and the historical and future projected earnings of the remaining businesses, that the
Company will utilize future deductions and available net operating loss carryforwards prior to their expiration.
The Company also concluded that it was more likely than not that certain state tax loss carryforwards would not
be realized based upon the analysis described above and therefore provided a valuation allowance.
14. Stock-Based Compensation Plans
The Company generally grants performance-based awards, time-based restricted shares and stock options.
The numbers of shares authorized and available for grant under these plans were approximately 78.3 million and
33.8 million, respectively, at December 31, 2006.
Performance-Based Awards
Awards granted generally vest over three years and upon the achievement of certain cash flow objectives. Prior
to January 1, 2006, performance-based awards were accounted for under APB 25. Upon the adoption of SFAS
123(R), performance-based awards are now expensed based on its grant date fair value if it is probable that the
performance conditions will be achieved. The Company granted, in 2006, performance units that provide for the
recipients to receive up to 819,750 shares, of which 273,250 shares vested in 2006. The fair value of the
performance units on the date of grant was $4.29 per share. During 2005, the Company granted 809,700 shares of
performance-based stock awards, of which 360,000 shares were vested in 2005. Of the awards granted in 2005,
171,130 shares vested and 5,836 shares were forfeited in 2006. The fair value of the 2005 performance-based
awards was $4.30 per share. There were no performance-based awards granted in 2004. The Company recognized
expense of $2.2 million in 2006 and $1.4 million in 2005, related to these awards. As of December 31, 2006,
unrecognized compensation expense related to performance-based awards was $0.3 million, which is expected to be
recognized in 2007.
Time-Based Restricted Shares
The Company issued 253,199 of time-based restricted shares in December 2006, which vest in one-third
increments over a period of three years and have a fair value of $4.74 per share at the grant date. In 2005, the
Company issued 27,400 shares of time-based restricted shares, of which 23,600 vested in 2006 and the remaining
3,800 awards were forfeited. The fair value of the time-based restricted shares granted in 2005 was $4.60 per
share at the date of grant. The Company granted 140,000 shares of time-based restricted shares during 2004 with
a two-year vesting period, of which 10,000 shares were forfeited in 2005 and 130,000 shares vested in 2006. The
fair value of the shares granted in 2004 was $5.43 per share at the date of grant. The Company recognized
compensation expense of $0.1 million in 2006, $0.4 million in 2005 and $0.3 million in 2004, related to time-
based restricted shares. As of December 31, 2006, unrecognized compensation expense related to these shares
was $0.8 million, which is expected to be recognized over the next three years.
Stock Option Awards
Generally, stock options have ten-year terms and vesting terms of three years. On December 30, 2005, the
Company accelerated the vesting of all “out-of-the-money” options, defined as those options for which the option
exercise price was greater than the closing market price on December 30, 2005 of the Company’s common stock.
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