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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] 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 1-8519
CINCINNATI BELL INC.
DBA
BROADWING INC.
An Ohio I.R.S. Employer
Corporation No. 31-1056105
201 East Fourth Street, Cincinnati, Ohio 45202
Telephone Number 513 397-9900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Common Shares (par value $0.01 per share) New York Stock Exchange
Preferred Share Purchase Rights Cincinnati Stock Exchange
6.75% Preferred Shares New York Stock Exchange
7.25% Preferred Shares New York Stock Exchange
Securities requested 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 X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. [ ]
At February 25, 2000, there were 202,550,808 Common Shares outstanding.
At February 25, 2000, the aggregate market value of the voting shares owned
by non-affiliates was $5,880,482,640.
----------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's definitive proxy statement dated March 17, 2000
issued in connection with the annual meeting of shareholders (Part III)
TABLE OF CONTENTS
PART I
Page
Item 1. Business ................................................................................ 1
Item 2. Properties .............................................................................. 9
Item 3. Legal Proceedings ....................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 9
Item 4A. Executive Officers of the Registrant .................................................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................... 12
Item 6. Selected Financial Data ................................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 28
Item 8. Financial Statements and Supplementary Schedules ........................................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 57
PART III
Item 10. Directors and Executive Officers of the Registrant ...................................... 57
Item 11. Executive Compensation .................................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 57
Item 13. Certain Relationships and Related Transactions .......................................... 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 58
Signatures ......................................................................................... 63
This report contains trademarks, service marks and registered marks of the
Company and its subsidiaries, as indicated.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
Form 10-K contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the beliefs and expectations of the Company
and its subsidiaries, are forward-looking statements. These statements involve
potential risks and uncertainties; therefore, actual results may differ
materially. 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 these expectations include, but are not
limited to: changes in the overall economy; changes in competition in markets in
which the Company and its subsidiaries operate; advances in telecommunications
technology; the ability of the Company to generate sufficient cash flow to fund
its business plan and expand its fiber-optic network; changes in the
telecommunications regulatory environment; changes in the demand for the
services and products of the Company and its subsidiaries; the ability of the
Company and its subsidiaries to introduce new service and product offerings in a
timely and cost effective basis; and integration of the Company's new Broadwing
Communications subsidiary.
Part I
ITEM 1. BUSINESS
GENERAL
As a result of its merger with IXC Communications Inc., Cincinnati Bell
Inc., an Ohio corporation, announced it would begin doing business as Broadwing
Inc. ("the Company") on November 15, 1999.
The Company is a diversified telecommunications services holding company.
The Company's segments are strategic business units that offer distinct products
and services to targeted market segments of customers.
The Local Communications segment provides local service, network access,
data networking, Internet-based services, sales of communications equipment,
local toll, and other ancillary telecommunications services through its
Cincinnati Bell Telephone ("CBT") and ZoomTown.com ("ZT") subsidiaries. These
two subsidiaries function as a fully integrated wireline communications
provider.
The Broadband segment utilizes an advanced fiber-optic network to provide
data transport, Internet, private line, switched access and other services.
Additionally, network capacity is leased (in the form of indefeasible
right-to-use agreements) to other telecommunications providers and to Internet
service providers.
The Wireless segment comprises the operations of Cincinnati Bell Wireless
LLC (an 80%-owned venture with AT&T Wireless PCS, Inc.), which provides advanced
digital personal communications services to customers in its Cincinnati and
Dayton, Ohio operating areas.
The Directory segment comprises the operations of Cincinnati Bell Directory,
which publishes Yellow Pages directories and sells directory advertising and
informational services in Cincinnati Bell Telephone's franchise area. These
services are available to the customer in the form of traditional printed
directories, an Internet-based service known as "Cincinnati Exchange," and on
CD-Rom.
Other Communications combines the Cincinnati Bell Long Distance (CBLD) (also
doing business as Cincinnati Any Distance), Cincinnati Bell Supply (CBS), and
Broadwing IT Consulting segments. CBLD resells long distance, voice, data, frame
relay, and Internet access services to small- and medium-sized business and
residential customers in a six-state area of the midwest. CBS sells new
computers and resells telecommunications equipment. Broadwing IT Consulting
provides network integration and consulting services as well as the sale of
related equipment.
The Company is incorporated under the laws of Ohio and has its principal
executive offices at 201 East Fourth Street, Cincinnati, Ohio 45202 (telephone
number (513) 397-9900).
1
STRATEGY
The Company believes that its reputation for service quality, well-regarded
brand name, telecommunications industry knowledge and focus, and marketing and
provisioning expertise can be successfully transferred to a national audience
via its newly acquired, nationwide fiber-optic network and Internet backbone.
Additionally, the Company seeks to expand on its existing capabilities by
partnering with targeted industry leaders with different capabilities such as
Cisco Systems, PSINet, ZeroPlus.com, Corvis, Lucent Technologies and AT&T.
By leveraging these competitive strengths, the Company believes that it can
increase the market penetration of its existing services, effectively market new
services, establish and deliver its data network solutions and wireless
capabilities, and capture the full benefit of its strategic relationships.
The Company is focusing its efforts on several key initiatives:
- use its advanced telecommunications network consisting of
more than 18,000 total fiber route miles to facilitate the
widespread deployment of high-speed data transport
services,
- stimulate and service the demand for wireless
communications services,
- maintain market share in voice communications,
- create unique product-bundling solutions from the products
and services of its subsidiaries.
LOCAL COMMUNICATIONS
Local Communications services are provided by the Company's Cincinnati Bell
Telephone (CBT) and ZoomTown.com subsidiaries. CBT's product and service
offerings are generally classified into three major categories: local service,
network access, and other services. Revenues from this segment were 66%, 81% and
80%, respectively, of consolidated Company revenues for 1999, 1998 and 1997.
CBT provides telecommunications services to business and residential
customers in the Cincinnati metropolitan market area. This market is about 2,400
square miles located approximately within a 25-mile radius of Cincinnati and it
includes all or significant parts of four counties of southwestern Ohio, six
counties in northern Kentucky and two counties in southeastern Indiana.
Approximately 98% of Cincinnati Bell Telephone's network access lines are in one
local access transport area.
Local service revenues are primarily from end-user charges for use of the
public switched telephone network and for value-added services and
custom-calling features. These services are provided to business and residential
customers and represented 57% of CBT's total revenues for 1999. Network access
revenues accounted for 25% of CBT's 1999 revenues and are from interexchange
carriers for access to CBT's local communications network and from business
customers for customized access arrangements. Other services represent the
remaining 18% of CBT's 1999 revenues and are for the sale of telecommunications
equipment, Internet access, sales and installation of communications equipment,
commissions from sales agency agreements and other ancillary services.
CBT has successfully leveraged its embedded network investment to provide
value-added services and unique product bundling packages, resulting in
additional revenue with minimal incremental costs. CBT's plant, equipment and
network are modern and capable of handling new service offerings as they are
developed. Of its network access lines, 97% are served by digital switches, 100%
have ISDN capability and 100% have Signaling System 7 capability, which supports
enhanced features such as Caller ID, Call Trace and Call Return. The network
also includes more than 2,800 route miles of fiber-optic cable, with nine rings
of cable equipped with SONET technology linking Cincinnati's downtown and other
major business centers. These SONET rings offer increased reliability and
redundancy to CBT's major business customers. CBT's capital investment has been
held relatively constant in recent years, normally ranging between $130 million
and $150 million per year. However, the Company's desire to facilitate
widespread deployment of its high-speed digital subscriber line service
(Zoomtown) and equip its entire network for these types of high-speed data
transport services has required, and will continue to require, additional
capital investment.
In order to maintain its network, CBT relies on readily available supplies
from a variety of external vendors. Since the majority of CBT's revenues result
from use of the public switched telephone network, its operations follow no
particular seasonal pattern. CBT's franchise area is granted under regulatory
authority, and is subject to increasing competition from a variety of
competitors. CBT is not aware of any regulatory initiative that would restrict
the franchise area in which it is able
2
to operate. A significant portion of its revenues are derived from pricing plans
that require regulatory overview and approval. In recent years, these pricing
plans have resulted in decreasing or fixed rates for some services, offset by
price increases and more flexibility for other services. As of December 31,
1999, 42 companies were certified to offer telecommunications services in CBT's
local franchise area and have sought interconnection agreements with CBT (13 of
which are still in negotiations). CBT seeks to maintain competitive advantage
over these carriers through its service quality, technologically equivalent or
superior network, innovative products and services, creative bundling ideas for
product and customer billing, and value pricing. CBT continues to report net
gains in access lines in spite of this increased level of competition.
CBT had approximately 1,055,000 network access lines in service on December
31, 1999, an increase of 2.1% or 22,000 lines from December 31, 1998.
Approximately 68% of CBT's network access lines serve residential customers and
32% serve business customers. In addition, voice-grade equivalents, a measure
used to express the sale of higher-bandwidth services, increased 34% and 40% in
1999 and 1998, respectively.
BROADBAND
The Broadband segment was created as a result of the Company's merger with
IXC Communications, Inc. (IXC) on November 9, 1999, and reflects the operations
of Broadwing Communications Inc. (formerly IXC) from that date forward.
Broadband revenues constituted only 8.8% of consolidated Company revenues in
1999, which does not fully reflect this segment's importance to the Company's
future operations.
Broadwing Communications Inc. is a nationwide provider of data and voice
communications services. These services are provided over approximately 16,000
route miles of fiber optic transmission facilities. Revenues for the Broadband
segment come chiefly from its private line and switched services, categories
constituting 46.3% and 48.9%, respectively, of Broadband segment revenues in the
post-merger period.
Private line services provided by this segment represent the long-haul
transmission of voice, data and Internet traffic over dedicated circuits, and
are provided under bulk contracts with customers. Additionally, the private-line
category includes revenues resulting from indefeasible right-to-use ("IRU")
agreements. IRU agreements typically cover a fixed period of time and represent
the lease of network fibers. The Company currently maintains enough network
capacity and believes that the sale of IRU agreements has no negative impact on
its ability to carry traffic for its retail customers. IRU agreements are
standard practice among Broadwing Communication's competitors.
Switched services represent billed minutes per use for long distance
services and consist of sales to both retail and wholesale customers. The
Company currently believes that the best opportunity for switched services
margin improvement lies with its retail customers. Accordingly, the Company is
de-emphasizing the sale of switched services to wholesale customers. In the
post-merger period, revenues from wholesale customers represented 42% of
switched services revenue, a significantly smaller percentage than reported for
the comparable 1998 period.
Data and Internet services represent the sale of high-speed data transport
services such as frame relay, Internet access, and Internet-based services such
as Web hosting to retail customers. In the post-merger period, these revenues
constituted a relatively small 4.8% of Broadband segment revenues. However, the
Company envisions a growing market for these types of services and it expects
that the Data and Internet category will provide a greater share of Broadband
segment revenues in the future.
The centerpiece of the Broadband segment is its next-generation, fiber-optic
network. This network is not yet fully constructed, and will require significant
expenditures to complete and to maintain. The construction of this network
relies on a supply of readily-available materials and supplies from an
established group of vendors. Construction of the network also relies on the
ability to secure and retain land and rights-of-way for the location of network
facilities, and the Company may incur significant future expenditures in order
to remove these facilities upon expiration of these rights-of-way agreements.
Since revenues from this segment are conditioned primarily on telephone
usage and the ratable recognition of contract revenues, its operations follow no
particular seasonal pattern. However, this segment does receive a significant
portion of its revenues from a relatively small group of interexchange carriers
that are capable of constructing their own network facilities.
In order to satisfy the contractual commitments that Broadwing has entered
into with respect to IRU agreements, approximately 1,700 fiber route miles must
still be constructed at an estimated cost of $82 million.
3
Prices and rates for this segment's services offerings are primarily
established through contractual agreements. Accordingly, they are influenced
by marketplace conditions such as the number of competitors, availability of
comparable service offerings, and the amount of fiber network capacity
available from these competitors. Broadwing faces significant competition
from other fiber-based telecommunications companies such as Level 3
Communications, Qwest Communications International, Global Crossings and
Williams Communications. These companies have similarly equipped fiber
networks, are well-financed, and have enjoyed certain competitive advantages
over Broadwing Communications in the past. Broadwing Communications is
confident that it is able to match these competitors on the basis of
technology and is currently pursuing dramatic improvement with regard to
critical processes, systems, and the execution of its business strategy.
WIRELESS
The Wireless Segment comprises the operations of Cincinnati Bell Wireless
LLC, an 80%-owned venture with AT&T PCS, Inc. The Company acquired its 80%
ownership interest from AT&T PCS on December 31, 1998.
Revenues for the Wireless segment arise primarily from two sources:
provision of wireless communications services to its subscribers and the sale
of handsets and associated equipment and accessories. In 1999, approximately
88% of revenues for the segment were from services and the remaining 12% were
from equipment sales and other. The Wireless segment as a whole contributed
8.1% of current year consolidated Company revenues and also supplied more
than 37% of the growth in consolidated revenues versus the prior year.
Service revenues are generated through subscriber use of the Company's
wireless communications network. This network is maintained by the Company
with respect to the Greater Cincinnati and Dayton, Ohio operating areas with
wireless calls beyond these areas being terminated on AT&T PCS' national
wireless network. Service revenues are generated through a variety of rate
plans, which typically include a fixed number of minutes for a flat monthly
rate, with additional minutes being charged at a per-minute-of-use rate.
Additional revenues are generated by this segment when subscribers of other
wireless providers initiate wireless calls using their own handsets on the
Company's network. However, significant expenses are also incurred by this
segment as its own wireless subscribers use their handsets in the operating
territory of other wireless providers.
Nearly all service revenues are primarily generated on a post-paid basis,
in that subscribers pay in arrears, based on usage. In October 1999, the
Company introduced a new prepaid wireless service known as i-Wireless-SM-.
This service is targeted primarily at youth and allows for the purchase of a
specific number of minutes, in advance, at a fixed price. Since this service
leverages the Company's existing network and requires no billing
capabilities, it does not require significant incremental capital investment.
Sales of handsets and associated equipment take place primarily at the
Company's retail locations, which consist of store locations and kiosks in
high-traffic shopping malls and commercial buildings in the Cincinnati and
Dayton, Ohio areas. The Company sells handsets and equipment from a variety
of vendors; the Nokia brand is most popular with its customers. The Company
maintains a supply of equipment and does not envision any shortages that
would compromise its ability to add new customers. Unlike service revenues
(which are a function of wireless handset usage), some degree of seasonality
is experienced with respect to sales of equipment. Reasons for this
phenomenon are two-fold: (1) handsets and equipment are often given as gifts
during holiday seasons, and (2) the Company focuses a considerable amount of
its marketing and promotional efforts towards these seasons. In order to
attract customers, handsets are typically subsidized by the Company, i.e.,
sold for less than direct costs. This is a typical practice in the wireless
industry.
The Wireless segment offers its services over a digital wireless network
using Time Division Multiple Access (TDMA) technology. The Company believes
that TDMA technology is sufficiently robust to meet the existing needs of its
customers and to enable it to introduce new products and services as part of
its business plan. As previously mentioned, this segment is reliant on AT&T
PCS' national network for calls outside of its Greater Cincinnati and Dayton,
Ohio operating areas. The Company believes that AT&T PCS will maintain its
national digital wireless network in a form and manner that will allow
Cincinnati Bell Wireless to attract and retain customers.
Rates and prices for this segment are determined as a function of
marketplace conditions. As such, rates can and will be influenced by the
pricing plans of as many as six active wireless service competitors. As
evidenced by its record of attracting and retaining customers since its entry
into the wireless business in 1998, the Company believes that its combination
of technology, pricing and customer service enable it to succeed in its
current operating environment. The Wireless segment has both consumer and
business customers and does not believe that the loss of any one customer or
small group of customers would have a material impact on its operations.
4
Given that this venture is jointly owned with AT&T PCS, net income or
losses generated by this segment are shared between Cincinnati Bell Wireless
and AT&T PCS in accordance with respective ownership percentages. As a
result, 19.9% of the adjusted net income or loss for this segment is
reflected as minority interest income or loss in the Company's Consolidated
Statements of Income and Comprehensive Income (Loss).
DIRECTORY
The Directory segment is comprised of the operations of Cincinnati Bell
Directory, which publishes Yellow Pages directories and sells directory
advertising and informational services in Cincinnati Bell Telephone's
franchise area. These services are available to more than 1.2 million
residential and business customers in the form of traditional printed
directories, an Internet-based service known as "Cincinnati Exchange," and on
CD-Rom.
The majority of the revenues for this segment come from publishing, and
it is the Company's practice to recognize revenues, and associated direct
expenses over the lifespan of the respective publications (generally twelve
months). Revenues for this segment constituted 7%, 8% and 9%, respectively,
of consolidated Company revenues for 1999, 1998 and 1997. Primary expenses of
this segment are sales commissions paid to sales agents and printing costs
associated with its directory publications.
OTHER COMMUNICATIONS
Other Communications combines the operations of the Cincinnati Bell Long
Distance, Cincinnati Bell Supply, and Broadwing IT Consulting segments.
Revenues for this segment constituted 12% of consolidated Company revenues
for 1999 and each of the preceding two years.
Cincinnati Bell Long Distance Inc. (CBLD)
CBLD is an integrated communications provider that resells long distance
telecommunications services and products as well as voice mail and paging
services mainly in Ohio, Indiana, Michigan, Kentucky and Pennsylvania. CBLD
is licensed, however, as a long distance provider in every state except
Alaska. Its principal market focus is small-and medium-sized business and
residential customers. CBLD augments its high-quality long-distance services
with calling plans, network features and enhanced calling services to create
customized packages of communications services for its clients. CBLD has
added new data communications services for business customers, including
high-speed dedicated and dial-up Internet access services and other
high-speed data transport using frame relay technology. The operations of
CBLD were integrated into Broadwing Communications in January 2000. Also in
January 2000 CBLD started doing business as Cincinnati Bell Any Distance.
Cincinnati Bell Supply Company (CBS)
CBS markets telecommunications and computer equipment. Its principal
market is the secondary market for refurbished telecommunications systems,
including AT&T and Lucent branded systems. CBS's competitors include vendors
of new and used computer and communications equipment operating regionally
and across the nation. The Company is finalizing plans to sell or exit this
business in 2000 as it does not fit the Company's long-term strategic plan.
Broadwing IT Consulting
Broadwing IT Consulting provides network integration and consulting
services as well as the sale of related equipment. Its principal market is
small- to medium-sized businesses. Competitors include Intranet hardware
vendors, wiring vendors and other network integration and consulting
businesses. The operations of Broadwing IT Consulting were integrated into
Broadwing Communications in January 2000.
5
RISK FACTORS
INCREASED COMPETITION COULD COMPROMISE CBT'S PROFITABILITY AND CASH FLOW
LOCAL
With regard to local markets, CBT continues to be the predominate
provider of voice and data communications in the Greater Cincinnati and
Northern Kentucky areas. This business is becoming increasingly
competitive. CBT offers modern telecommunications services (such as its
ZoomTown-SM- high-speed Asynchronous Digital Subscriber Line (ADSL) service
and its FUSE-Registered Trademark- Internet access services) to its local
customers, but faces competition from cable modem and Internet access
providers. The Company believes CBT will face greater competition as more
competitors surface and focus additional resources on the Greater Cincinnati
and Northern Kentucky metropolitan areas.
With the exception of Broadwing Communications (discussed below under
"National"), the Company's other subsidiaries operate in a largely local
or regional area, and each of these subsidiaries face significant
competition. CBD's competitors are directory services companies,
newspapers and other media advertising services providers in the
Cincinnati metropolitan market area. CBD now competes with its former
sales representative for Yellow Pages directory customers; such
competition may affect CBD's ability to grow or maintain profits and
revenues. CBLD's competitors include interexchange carriers and certain
local telecommunications services companies. CBS's competitors include
vendors of new and used communications and computer equipment, operating
regionally and across the nation. Cincinnati Bell Wireless, LLC is one of
six active wireless service providers in the Cincinnati and Dayton
metropolitan market areas, most of which are nationally known and well
financed. Broadwing IT Consulting provides network integration and
consulting services and competes with a variety of Intranet hardware
vendors, wiring vendors and other integration and consulting businesses.
The Company's inability to succeed against these competitors would
compromise its profitability and cash flow. This would result in increased
reliance on borrowed funds and could affect its ability to continue
expansion of its national fiber-optic and regional wireless networks.
NATIONAL
The addition of the Broadwing Communications subsidiary presents the
Company with significant opportunities to reach a nationwide customer base
and provide new services to local customers. However, the Company's success
in this regard will depend on its ability to meet customers' price, quality
and customer service expectations. With entry into this national market, the
Company now faces competition from well-managed and well-financed companies
such as Level 3 Communications, Qwest Communications International, Global
Crossings, and Williams Communications. As with competition in the local
arena, the Company's failure against these competitors could compromise its
ability to continue construction of its network, which could have a material
adverse effect on its business, financial condition and results of
operations.
Competition from other national providers could also have another
effect on the Company. The current and planned fiber network capacity of
these and other competitors could result in decreasing prices even as the
demand for high-bandwidth services increases. Most of these competitors have
announced plans to expand, or are currently in the process of expanding,
their networks. Increased network capacity and traffic optimization could
place downward pressure on prices, thereby making it difficult for the
Company to maintain profit margins.
INSUFFICIENCY OF CASH FLOW FOR PLANNED INVESTING AND FINANCING ACTIVITIES
WILL RESULT IN A SUBSTANTIAL AMOUNT OF INDEBTEDNESS
The Company's recent history of generating sufficient cash flow in
order to provide for investing and financing needs has changed. Prior to
1998, the Company consisted largely of mature businesses that benefited from
a local telephone franchise, an embedded customer base and relative freedom
from competition.
The growth in demand for wireless, data and Internet-based
communications, however, has made it necessary and prudent for the Company
to diversify into these new businesses. Entering these businesses requires
the Company to explore new markets in an attempt to reach new customers, and
has resulted in substantial start-up costs, net operating losses and a drain
on cash flow. The need to continue construction of the Company's fiber-optic
network in support of these services will require a significant amount of
additional funding, aggregating to approximately $1.8 billion over the next
three years.
6
In order to provide for these cash requirements, the Company has
obtained a $2.1 billion credit facility from a group of 24 banking and
non-banking institutions. The Company anticipates that it will
substantially increase its indebtedness in 2000 under this credit facility
in order to provide for net operating losses, to fund its capital
investment program, and to refinance existing debt.
The Company will not be able to provide for its anticipated growth
without borrowing from this credit facility. The ability to borrow from
this credit facility is predicated on the Company's ability to satisfy
certain debt covenants that have been negotiated with lenders. Failure to
satisfy these debt covenants could severely constrain the Company's
ability to borrow from the credit facility without receiving a waiver from
these lenders. If the Company were unable to continue the construction of
its fiber-optic network, current and potential customers could be lost to
competitors, which could have a material adverse effect on its business,
financial condition and results of operations.
NETWORK EXPANSION IS DEPENDENT ON ACQUIRING AND MAINTAINING RIGHTS-OF-WAY
AND PERMITS
The expansion of the Company's network also depends on acquiring
rights-of-way and required permits from railroads, utilities and
governmental authorities on satisfactory terms and conditions and on
financing such expansion. In addition, after the network is completed and
required rights and permits are obtained, the Company cannot guarantee
that it will be able to maintain all of the existing rights and permits.
If the Company were to fail to obtain rights and permits or were to lose a
substantial number of rights and permits, it could have a material adverse
effect on its business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF CAPITAL EXPENDITURES WILL BE REQUIRED TO FUND
EXPANSION OF THE NETWORK
The Company is committed to the expansion of its nationwide
fiber-optic network, the widespread deployment of high-speed data
transport services in its local telephone franchise area and continued
infrastructure development for its wireless business. These initiatives
will require a considerable amount of funding.
The Company's annual capital expenditures for its local
Telecommunications business ranged between $100 million and $160 million
over the last four years. In 1999, growth of the wireless business and
capital spending in the post-merger period more than doubled these amounts
(to nearly $400 million in the current year). The Company's current plans
call for more than $800 million in capital spending in 2000 in order to
continue expansion of the fiber optic network. Heavy capital spending is
also planned in subsequent years, with the Company planning to spend
nearly $1 billion over the succeeding two-year period.
The Company believes that it is imperative to invest heavily in its
network in order to offer leading-edge products and services to its
customers. Failure to construct and maintain such a network would leave
the Company vulnerable to customer loss to other fiber-optic network
providers, and would cause slower than anticipated growth. This would have
a material adverse effect on our business, financial condition and results
of operations.
REGULATORY INITIATIVES MAY IMPACT THE COMPANY'S PROFITABILITY
The Company's most profitable subsidiary, CBT, is subject to
regulatory oversight of varying degrees at both the state and federal
level. Regulatory initiatives that would put CBT at a competitive
disadvantage or mandate lower rates for its services could result in lower
profitability and cash flow for the Company, thereby increasing its
reliance on borrowed funds. This could potentially compromise the
expansion of its national fiber-optic network and development of its
wireless business.
A further discussion of specific regulatory matters pertaining to the
Company and its operations is contained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
7
CAPITAL ADDITIONS
The capital additions of the Company are primarily for its fiber-optic
transmission facilities, telephone plant in its local service area, and for
development of the infrastructure for its wireless business. As a result of
these expenditures, the Company expects to be able to introduce new products
and services, respond to competitive challenges and increase its operating
efficiency and productivity.
The following is a summary of capital additions for the years 1995
through 1999:
Dollars in Millions
------------------------------------------------------------------------------------------------
Local Telephone Fiber-Optic Wireless Total Capital
Operations Transmission Facilities Infrastructure Other Additions
---------- ----------------------- -------------- ----- ---------
1999 $152.2 $165.0 $ 55.9 $ 8.3 $381.4
1998 $134.9 -- $2.2 $ 6.5 $143.6
1997 $140.0 -- -- $18.4 $158.4
1996 $101.4 -- -- $ 4.9 $106.3
1995 $ 90.3 -- -- $ 2.5 $ 92.8
The total investment in local telephone operations plant increased from
approximately $1,447 million at December 31, 1994, to approximately $1,856
million at December 31, 1999, after giving effect to retirements but before
deducting accumulated depreciation at either date.
Capital additions for 2000 are estimated to be approximately $800
million, excluding any acquisitions that may occur in 2000.
EMPLOYEES
At December 31, 1999, the Company and its subsidiaries had approximately
6,000 employees. CBT had approximately 2,000 employees covered under a
collective bargaining agreement with the Communications Workers of America,
which is affiliated with the AFL-CIO. The collective bargaining agreement
expires in May 2002.
BUSINESS SEGMENT INFORMATION
The amounts of revenues, intersegment revenues, EBITDA, assets, capital
additions, depreciation and amortization attributable to each of the business
segments of the Company for the year ended December 31, 1999, are set forth
in Note 15 of the Notes to Financial Statements contained in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
ITEM 2. PROPERTIES
The property of the Company is principally composed of its nationwide
fiber-optic transmission system, telephone plant in its local telephone
franchise area, and the infrastructure associated with its wireless business
in the Greater Cincinnati and Dayton, Ohio operating areas. As this
investment is extensive and geographically dispersed, it does not lend itself
to description by character and location of principal units. Each of the
Company's subsidiaries maintains some investment in furniture and office
equipment, computer equipment and associated operating system software,
leasehold improvements and other assets. Facilities leased as part of an
operating lease arrangement are expensed as incurred and are not included in
the totals below.
With regard to its local telephone operations, substantially all of the
central office switching stations are owned and situated on land owned by the
Company. Some business and administrative offices are located in rented
facilities, some of which are treated as capitalized leases and included in
the "Furniture, fixtures, vehicles and other" caption below. Fiber-optic
transmission facilities consist largely of fiber-optic cable, associated
optronics and the land and rights-of-way necessary to place these facilities.
The wireless infrastructure consists primarily of transmitters, receivers,
towers, antennae and associated land and rights-of-way.
The gross investment in fiber-optic transmission facilities, telephone
plant, wireless infrastructure and other property, in millions of dollars, at
December 31, 1999 and 1998 was as follows:
1999 1998
---- ----
Land and rights of way $ 155.9 $ 5.0
Buildings and leasehold improvements 428.3 164.0
Telephone plant 1,697.2 1,438.5
Transmission system 1,074.4 65.9
Furniture, fixtures, vehicles and other 225.7 187.4
Construction in process 232.0 12.4
----- ----
Total $3,813.5 $1,873.2
======== ========
Properties of the Company are divided between operating segments as follows:
1999 1998
---- ----
Local Communications 48.7% 92.9%
Broadband 46.0% --
Wireless 4.5% 5.8%
Other Communications 0.8% 1.3%
---- ----
Total 100.0% 100.0%
====== ======
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is included in Note 19 of the Notes
to Financial Statements that are contained in Item 8, "Financial Statements
and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
On October 29, 1999, the Company conducted a special meeting of its
security holders in order to vote on the issuance of the Company's common
stock to stockholders of IXC in the merger of IXC and a subsidiary of the
Company. This was the only item submitted for a vote of security holders
during this special meeting. The Company's shareholders approved the merger,
with 82,156,679 common shares (87.04%) voting in favor of the merger,
12,238,220 common shares (12.04%) voting against the merger, and 1,417,918
common shares abstaining from the vote.
9
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (DURING 1999)
The names, ages and positions of the executive officers of the Company as of
12/31/99 are as follows:
Name Age Title
---- --- -----
James D. Kiggen (a) 67 Chairman of the Board
Richard G. Ellenberger (a)(b)(d) 46 President and Chief Executive Officer
John T. LaMacchia (a)(b)(c) 57 President and Chief Executive Officer
Kevin W. Mooney 41 Executive Vice President and Chief
Financial Officer
Thomas E. Taylor 53 General Counsel and Secretary
Richard S. Pontin 46 President and Chief Operating Officer of
Broadwing Communications Inc.
John F. Cassidy 45 President, Cincinnati Bell Enterprises
Jack J. Mueller 43 President, Cincinnati Bell Telephone
- ------------------------------
(a) Member of the Board of Directors
(b) Member of the Executive Committee
(c) Effective February 28, 1999, Mr. LaMacchia resigned as President and
Chief Executive Officer of the Company but continues to serve as a
Director of the Company.
(d) Effective March 1, 1999, upon Mr. LaMacchia's resignation, Mr.
Ellenberger became President and Chief Executive Officer of the
Company.
Officers are elected annually but are removable at the discretion of the
Board of Directors.
JAMES D. KIGGEN, Chairman of the Board of the Company since January 1, 1999;
Chairman of the Board of Xtek, Inc., 1985-1999; Chief Executive Officer of
Xtek, Inc., 1985-1998; President of Xtek, Inc., 1985-1995. Director of Fifth
Third Bancorp and its subsidiary, Fifth Third Bank, and The United States
Playing Card Company.
RICHARD G. ELLENBERGER, President and Chief Executive Officer of the Company
since March 1, 1999; Chief Operating Officer of the Company since September
1, 1998; President and Chief Executive Officer of CBT since June, 1997; Chief
Executive Officer of XLConnect, 1996-1997; President, Business Services of
MCI Telecommunications, 1995-1996; Senior Vice President, Worldwide Sales of
MCI Telecommunications, 1994-1995; Senior Vice President, Branch Operations
of MCI Telecommunications, 1993-1994; Vice President, Southeast Region of MCI
Telecommunications, 1992-1993.
JOHN T. LAMACCHIA, President and Chief Executive Officer of CellNet Data
Systems, Inc. since May 1999, President and Chief Executive Officer of the
Company, 1993 - February 28, 1999; President and Chief Operating Officer of
the Company, 1988-1993; Chairman of Cincinnati Bell Telephone, 1993 - 1999.
Director of The Kroger Company, Burlington Resources Inc. and CellNet Data
Systems, Inc.
KEVIN W. MOONEY, Executive Vice President and Chief Financial Officer of the
Company since September 1, 1998; Senior Vice President and Chief Financial
Officer of CBT since January 1998; Vice President and Controller of the
Company, September 1996 to January 1998; Vice President of Financial Planning
and Analysis of the Company, January 1994 to September 1996; Director of
Financial Planning and Analysis of the Company, 1990-1994.
THOMAS E. TAYLOR, General Counsel and Secretary of the Company since
September 1998; Senior Vice President and General Counsel of Cincinnati Bell
Telephone from August 1996 to present; Partner at law firm of Frost & Jacobs
from July 1987 to August 1996.
10
RICHARD S. PONTIN, President and Chief Operating Officer of Broadwing
Communications since November 1999; President and Chief Operating Officer of
Cincinnati Bell Telephone, April 1999 to November 1999; Vice President,
Engineering & Operations of Nextel Communications, 1997 to 1999; Vice
President, National Accounts, MCI Communications, 1996; Vice President Data
Services, MCI Communications, 1994-1996; Vice President, Global Alliances,
MCI Communications, 1992-1994.
JOHN F. CASSIDY, President, Cincinnati Bell Enterprises since August, 1999;
President of Cincinnati Bell Wireless since 1996; Senior Vice President,
National Sales & Distribution of Rogers Cantel in Canada from 1992-1996.
JACK J. MUELLER, President of Cincinnati Bell Telephone since November 1999;
General Manager of Cincinnati Bell Telephone's Residential and Business
Markets February 1999-November 1999; President and CEO of Cincinnati Bell
Directory 1996-1999; Vice President of Cincinnati Bell Directory 1990-1996.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
MARKET INFORMATION
The Company's common shares (symbol: BRW) are listed on the New York
Stock Exchange and on the Cincinnati Stock Exchange. As of February 25, 2000,
there were approximately 127,000 holders of record of the 202,550,808
outstanding common shares of the Company. The high and low sales prices* and
dividends declared per common share** each quarter for the last two fiscal
years are listed below:
Quarter 1st 2nd 3rd 4th
1999 HIGH $ 23 7/16 $ 26 1/2 $ 26 1/2 $ 37 7/8
LOW $ 16 1/16 $ 19 5/8 $ 16 5/16 $ 18 3/4
DIVIDEND DECLARED $ .10 $ .10 $ -- $ --
1998 High $ 14 11/16 $ 15 5/8 $ 13 9/16 $ 15 7/16
Low $ 12 9/16 $ 11 11/16 $ 9 7/16 $ 8 13/16
Dividend Declared $ .10 $ .10 $ .10 $ .10
- ------------------------------
Effective November 15, 1999, the ticker symbol for the Company's common
shares changed to BRW from CSN.
* Prices adjusted to reflect distribution of shares of Convergys
Corporation on December 31, 1998.
** Dividends discontinued after quarterly dividend declared on June 21,
1999.
DIVIDENDS
The Company discontinued its dividend payment on its common shares
effective after the second quarter 1999 dividend payment in August 1999. The
Company does not intend to pay dividends on its common shares in the
foreseeable future. Furthermore, the Company's future ability to pay
dividends is restricted by certain covenants and agreements pertaining to
outstanding indebtedness. The Company is required to pay dividends on its 6
3/4% and 7 1/4% preferred shares, and is paying dividends in cash rather than
shares of Broadwing Communications 12 1/2% preferred shares on February 15,
2000.
12
ITEM 6. SELECTED FINANCIAL DATA
Millions of dollars except per share amounts 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
RESULTS OF OPERATIONS
Revenues $1,131.1 $ 885.1 $834.5 $779.8 $736.0
Costs and expenses, less depreciation and amortization 795.4 595.1 539.8 507.9 478.7
----- ----- ----- ----- -----
EBITDA (a) 335.7 290.0 294.7 271.9 257.3
Depreciation and amortization 181.0 111.1 124.3 121.0 116.3
Restructuring and other charges (credits) (b) 10.9 (1.1) (21.0) (29.7) 131.6
----- ----- ----- ----- -----
Operating income 143.8 180.0 191.4 180.6 9.4
Equity loss in unconsolidated entities 15.3 27.3 -- -- --
Minority interest and other income (expense) 4.5 (2.4) (2.7) 0.5 (9.1)
Interest expense 61.7 24.2 30.1 27.9 45.4
----- ----- ----- ----- -----
Income (loss) before income taxes, extraordinary items
and cumulative effect of change in accounting principle 71.3 126.1 158.6 153.2 (45.1)
Income taxes 33.3 44.3 56.3 53.7 (16.0)
----- ----- ----- ----- -----
Income (loss) from continuing operations 38.0 81.8 102.3 99.5 (29.1)
Income from discontinued operations, net of taxes (c) -- 69.1 91.3 85.5 3.8
----- ----- ----- ----- -----
Income (loss) before extraordinary items 38.0 150.9 193.6 185.0 (25.3)
Extraordinary items and cumulative effect of
change in accounting principle (d) (6.6) (1.0) (210.0) -- (7.0)
----- ----- ----- ----- -----
Net income (loss) 31.4 149.9 (16.4) 185.0 (32.3)
Dividends and accretion applicable to preferred stock 2.1 -- -- -- --
----- ----- ----- ----- -----
Net income (loss) applicable to common shareholders $29.3 $149.9 $(16.4) $185.0 $(32.3)
----- ----- ----- ----- -----
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ .25 $ .60 $ .76 $ .74 $ (.22)
Income from discontinued operations, net of taxes -- .51 .67 .64 .03
Extraordinary items, net of taxes (.05) (.01) (1.55) -- (.05)
Income (loss) $ .20 $ 1.10 $ (.12) $ 1.38 $ (.24)
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ .24 $ .59 $ .74 $ .73 $ (.22)
Income from discontinued operations, net of taxes -- .50 .67 .62 .03
Extraordinary items, net of taxes (.04) (.01) (1.53) -- (.05)
Income (loss) $ .20 $ 1.08 $ (.12) $ 1.35 $ (.24)
Dividends declared per common share $ .20 $ .40 $ .40 $ .40 $ .40
Weighted average common shares (millions)
Basic 144.3 136.0 135.2 133.9 132.0
Diluted 150.7 138.2 137.7 137.2 133.5
FINANCIAL POSITION
Total assets (c) (d) $ 6,508.6 $ 1,041.0 $ 1,275.1 $ 1,415.9 $ 1,363.8
Long-term debt $ 2,136.0 $ 366.8 $ 268.0 $ 271.2 $ 370.0
Redeemable Preferred stock $ 228.6 -- -- -- --
Total debt $ 2,145.2 $ 553.0 $ 399.5 $ 409.0 $ 423.7
Common shareowners' equity (c) (d) $ 2,132.8 $ 142.1 $ 579.7 $ 634.4 $ 478.1
Cash flow from continuing operations $ 313.9 $ 212.3 $ 197.4 $ 132.0 $ 151.5
(a) EBITDA represents operating income before depreciation, amortization, and
restructuring and related charges or credits. EBITDA does not represent cash
flow for the periods presented and should not be considered as an alternative
to net earnings (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.
(b) See Note 3 of Notes to Financial Statements.
(c) See Note 12 of Notes to Financial Statements.
(d) See Notes 13 and 5 of Notes to Financial Statements.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND RESULTS AND OPERATIONS
Broadwing Inc. (the Company) is a full-service provider of wireline and
wireless telecommunications services that conducts its operations through the
following reportable segments:
LOCAL COMMUNICATIONS -- The Company provides local service, network access,
long distance, data and Internet, ADSL, transport, and payphone services, as
well as sales of communications equipment to customers in southwestern Ohio,
northern Kentucky and southeastern Indiana. Services are marketed and
delivered via the Company's Cincinnati Bell Telephone (CBT) and ZoomTown.com
(ZT) subsidiaries.
BROADBAND -- The Company utilizes its advanced fiber-optic network to provide
data transport, Internet services, private line, switched access, and other
services nationwide. This segment also leases network capacity in the form of
indefeasable right-to-use agreements ("IRUs"). These services are offered
through the Company's new subsidiary, Broadwing Communications, Inc.
(formerly IXC Communications, Inc.).
WIRELESS -- The Wireless segment includes the Company's Cincinnati Bell
Wireless subsidiary (an 80%-owned venture with AT&T Wireless PCS, Inc.) which
provides advanced digital personal communications to customers in its Greater
Cincinnati and Dayton, Ohio operating areas.
DIRECTORY -- The Company sells directory advertising and information services
through printed directories and the Internet, primarily to business customers
in its Local Communications segment service area. This segment's most
identifiable product is the Yellow Pages directory produced by the Company's
Cincinnati Bell Directory (CBD) subsidiary.
OTHER COMMUNICATIONS -- Other Communications combines several of the
Company's other segments: Cincinnati Bell Long Distance (CBLD) , Cincinnati
Bell Supply (CBS), and Broadwing IT Consulting. CBLD resells long distance,
voice, data, frame relay, and Internet access services to small- and
medium-sized business and residential customers throughout a six-state region
of the midwest. CBS sells new computers and resells telecommunications
equipment in the secondary market, and Broadwing IT Consulting provides
network integration and consulting services.
This report and the related consolidated financial statements and
accompanying notes contain certain forward-looking statements that involve
potential risks and uncertainties. The Company'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.
- -------------------------------------------------------------------------------
CONSOLIDATED OVERVIEW
The Company is now a full-service, local and national provider of data and
voice telecommunications services, and a regional provider of wireless
communications services. Upon its November 9, 1999 merger with IXC
Communications, Inc. (hereinafter referred to as "the Merger"), the Company
acquired a high-speed fiber-optic network capable of providing private line,
switched access, data, Internet-based, and other advanced communications
services. This complements the strong service offerings that were provided on a
local or regional basis (local service, long distance, data transport, Internet
access and related communications equipment) primarily in the Cincinnati area.
The national network has also contributed an important new source of revenue and
cash flow to the Company: the sale of IRUs.
The Company seeks to provide world-class service on a national level by
combining two sets of strengths: its well-regarded brand name and reputation for
service in its regional franchise area and its newly acquired, nationwide
fiber-optic network and Internet backbone. The Company further enhances these
capabilities by partnering with targeted industry leaders such as Cisco Systems,
PSINet, ZeroPlus.com, Lucent Technologies and AT&T.
14
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
In 1999, the Company transformed itself from a provider of local
communications services into a national provider of voice and data
communications. The transition began in 1998 with the spin-off of Convergys
Corporation, a former subsidiary that held the Company's information and
customer management businesses, and was solidified with the acquisition of
IXC and its high-speed, fiber optic network and national presence. The
acquisition of an 80% interest in the wireless business from AT&T-PCS on
December 31, 1998 also added significant growth to our local and regional
service offerings.
The Merger and the acquisition of the wireless business from AT&T-PCS had
a significant impact on 1999 operating results. Of the $246 million in
additional revenues in 1999, more than 77% (or $190 million) came from these
new businesses. While the Company continues to expand its product and service
offerings, as well as its geographic footprint, all previously existing
segments reported strong results. Revenues from Local Communications
increased 4%, or $31.7 million, Directory grew 2%, or $1.3 million, and Other
Communications grew 24%, or $25.2 million. The growth in the Other
Communications segments was due to the expansion of the sale of
communications equipment and the addition of the network integration and
consulting business through an acquisition in November 1998.
Costs and expenses, excluding depreciation, amortization and special
charges, were $795.4 million, up $200.3 million, or 34%. Of this increase,
$98.7 million was due to the Merger and $116.2 million was due to Cincinnati
Bell Wireless, which became a consolidated entity upon completion of the
acquisition of the wireless business from AT&T-PCS on December 31, 1998.
Excluding these two additions, operating expenses were down $14.6 million
from the prior year. EBITDA margins excluding Broadwing Communications and
Cincinnati Bell Wireless increased 5.5 percentage points. Depreciation and
amortization expense increased $69 million over 1998, with $47 million as a
result of the Merger and $14 million attributable to the wireless business.
In December 1999, the Company's management approved restructuring plans
which included initiatives to integrate operations of the Company and
Broadwing Communications improve service delivery, and reduce the Company's
expense structure. Total restructuring costs and impairments of $18.6 million
were recorded in the fourth quarter related to these initiatives. The $18.6
million consisted of $7.7 million relating to Broadwing Communications
(recorded as a component of the preliminary purchase price allocation) and
$10.9 million relating to the Company (recorded as a cost of operations). The
$10.9 million relating to the Company consisted of restructuring and other
liabilities in the amount of $9.5 million and related asset impairments in
the amount of $1.4 million.
The Company's estimated restructuring costs were based on management's
best estimate of those costs based on available information. The
restructuring costs accrued in 1999 included the costs of involuntary
employee separation benefits related to 347 employees (263 Broadwing
Communication employees and 84 other employees). As of December 31, 1999,
approximately 1% of the employee separations had been completed for a total
cash expenditure of $0.4 million. Employee separation benefits include
severance, medical and other benefits, and primarily affect customer support,
infrastructure, and the Company's long distance operations. 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.
In connection with the restructuring plan, the Company performed a review
of its long-lived assets to identify any potential impairments in accordance
with SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of." Accordingly, the Company recorded a $1.4 million charge as an
expense of operations, resulting from the abandonment and write-off of
certain assets including duplicate network equipment. In total, we expect
these restructuring related activities to result in cash outlays of $14.8
million and non-cash items of $3.8 million. The Company expects that most of
the restructuring actions will be completed by December 31, 2000.
Operating income decreased by $36.2 million from the prior year
reflecting the losses of the Broadband and Wireless segments which were $46.5
million and $40.3 million, respectively. Also included in operating income
was the $10.9 million charge for business restructuring mentioned above.
Excluding these items, operating income increased by $57.4 million due
primarily to the operations of the Local Communications segment.
The Company recorded equity losses in unconsolidated entities in both
years. In 1999, the Company recorded a 13% share of the operating losses of
IXC due to its ownership of IXC common stock from August 16, 1999 to the
November 9, 1999 closing date of the Merger. In 1998, the Company recorded a
$27.3 million loss on its wireless venture with AT&T-PCS because
15
it agreed to fund its proposed share of the wireless business losses from
inception to the close of the acquisition on December 31, 1998. The Company
managed the operations of the venture while awaiting regulatory approval of
the acquisition. As mentioned above, the results for this business are
consolidated in Company operations in 1999.
Minority interest and other income (expense) resulted in income of $4.5
million for the year, a $6.0 million increase over 1998. Of this amount, $9.3
million of minority interest income was recorded as AT&T PCS' 19.9% share in
the losses of our wireless subsidiary. This was partially offset by $6.9
million in preferred stock dividends accreted to the 12.5% preferred
stockholders of Broadwing Communications and treated as minority interest.
Remaining amounts in this category are largely attributable to interest
income.
Interest expense increased significantly in 1999, owing to higher average
debt levels associated with the Merger, the issuance of $400 million in 6 3/4%
Convertible Subordinated Notes in July 1999, and the amortization of debt
issuance costs and bank commitment fees associated with the Company's new
$2.1 billion credit facility and these convertible subordinated notes. Of the
$37.5 million increase in interest expense, $13.4 million is attributable to
the operations of the Wireless business and approximately $24.0 million is
related to the Merger.
Income taxes decreased $11 million, or 25%, in comparison to the prior
year, as a function of lower pre-tax income and the offsetting impact of
nondeductible expenses such as goodwill amortization and preferred stock
dividends.
Extraordinary items related to the early extinguishment of debt affected
results for each year. In 1999, costs related to the early extinguishment of
Broadwing Communications' debt as a result of the Merger resulted in a $6.6
million charge, net of taxes. The spin-off of Convergys Corporation in 1998
reduced the borrowing capacity that was needed from the Company's
then-existing credit facility and some debt and a portion of that credit
facility were retired, resulting in a $1.0 million extraordinary charge, net
of tax.
As a result of the above, income from continuing operations decreased
from $81.8 million to $38.0 million and earnings per common share (EPS) from
continuing operations decreased from $.60 in 1998 to $.25 in 1999. Excluding
the Merger, EPS from continuing operations would have been $.82, a 37%
increase over 1998.
Discontinued Operations for 1995 through 1998 includes the results of the
Convergys Corporation (Convergys), the billing and customer management
operations that were divested on December 31, 1998 through a tax free
spin-off.
1998 COMPARED TO 1997
Revenues were $885.1 million, up 6% from $834.5 million in 1997,
primarily as a result of increased activities in Local Communications
segment. Increases in the Company's suite of custom calling services, through
bundling of services as well a pay-per-use option, and increased data
transport services accounted for a majority of the increase.
Costs and expenses, less depreciation, amortization and special charges,
were $595.1 million, up 10% from $539.8 million in 1998. Of this increase $10
million, or 20%, was due to an increase Y2K and regulator mandated costs.
Other increases were primarily due to increased headcount and higher wages.
As a result, the EBITDA margin decreased two percentage points to 33%.
Income from continuing operations in 1998 was $81.8 million, or $.59 per
common share, compared with $102.3 million, or $.74 per common share in 1997.
In 1998, the Company recognized $1.1 million in special credits resulting
from the 1995 business restructuring, compared with $21.0 million in 1997
(see Note 3 of Notes to Financial Statements). The Company also recorded a
$27.3 million loss on its wireless venture in 1998, while no such loss was
recorded in 1997. Excluding special credits and the wireless dilution, income
from continuing operations on a per common share basis was $.72 in 1998
compared with $.64 in 1997.
Extraordinary items affected both years. In 1998, retirement of long-term
debt and a portion of a credit facility resulted in an extraordinary charge
of $1.0 million, net of taxes. In 1997, the discontinuation of Statement of
Financial Accounting Standard No. 71,"Accounting for the Effects of Certain
Types of Regulation," at CBT resulted in a non-cash charge of $210.0 million
after-tax.
16
- -------------------------------------------------------------------------------
LOCAL COMMUNICATIONS
The Local Communications segment provides local service, network access,
(including high-speed data transport), long distance, data and Internet, ADSL
transport, sales of communications equipment, and other ancillary
telecommunications services through its Cincinnati Bell Telephone (CBT) and
ZoomTown.com (ZT) subsidiaries. These two subsidiaries function as a fully
integrated, wireline communications provider.
% Change % Change
($ in millions) 1999 1998 99 vs. 98 1997 98 vs. 97
- ----------------------------------------------------------------------------------------------------------------------
Revenues:
Local service $426.4 $407.9 5 $386.2 6
Network access 185.3 180.9 2 170.0 6
Other services 138.4 129.6 7 113.9 14
----- ----- -----
Total 750.1 718.4 4 670.1 7
Costs and expenses:
Cost of providing service 282.0 296.6 (5) 267.6 11
Selling, general and
administrative expense 142.7 152.4 (6) 145.6 5
Y2K and regulator-mandated 4.6 21.5 (79) 10.6 103
--- ------ -------
Total 429.3 470.5 (9) 423.8 11
EBITDA $320.8 $247.9 29 $246.3 1
EBITDA margin 42.8% 34.5% 24 36.8% (6)
Access lines (thousands) 1,055 1,033 2 1,005 3
VGEs (thousands) 518 387 34 276 40
1999 COMPARED TO 1998
The Local Communications segment posted another strong performance in
1999, with revenues and EBITDA increasing by 4% and 29% respectively. The
combination of revenue growth and a focus on cost control efforts resulted in
an 8.3 percentage point increase in EBITDA margin.
REVENUES
Revenues of $750.1 million were 4% higher than the $718.4 million
recorded in the prior year, owing to growth in all categories. The local
service category provided most of the revenue growth for the segment, growing
5% for the year, or nearly $19 million. Within this category, growth came
primarily from new product bundling offers (e.g. Complete
Connections-Registered Trademark- added 110,000 subscribers within the year),
new products (e.g. the Zoomtown-SM- ADSL product launched late in 1998 grew to
18,000 subscribers by December 31, 1999), and data transport. These services,
in the aggregate, contributed more than 80% of the increase for this
category, or $15 million. Access line growth was responsible for the
remainder of the increase, with a 2% increase in lines contributing
approximately $4 million in additional revenue for the year.
Network access revenues were 2% higher, or $4.4 million. The sale of high
capacity digital services (expressed in voice grade equivalents, or VGEs)
increased 34%, resulting in approximately $13 million in new revenues for the
category. The Company also realized approximately $5 million in additional
revenues due to the recovery of mandated telecommunications costs. In spite
of a 7% increase in access minutes of use, switched access revenues were
approximately $14 million lower due to decreased per-minute rates initiated
as part of the Company's Commitment 2000 program in Ohio and the optional
incentive rate regulation at the Federal level.
Other services revenue increased approximately $9 million, or 7%, for the
year, with the Company's FUSE-Registered Trademark- Internet access service
contributing more than $2 million of the increase (a 44% revenue growth for
this service). Other increases in the category are attributable to higher
rent and facilities collocation revenue ($6 million). A lower provision for
loss on receivables in the current year also contributed to the revenue
increase in the current year.
17
COSTS AND EXPENSES
Excluding depreciation, amortization and special charges, costs and
expenses of $429.3 million were $41.2 million less than the prior year,
representing a 9% decrease.
Costs of providing services decreased by nearly $15 million for the year,
$8 million of which is attributable to lower expenditures for payroll and
temporary labor sources resulting from CBT's continuing efforts at increasing
productivity. These efforts have resulted in a 4% increase in access lines
per employee since the beginning of 1999.
Selling, general and administrative expenses decreased by nearly $10
million versus the prior year. Advertising expense increased approximately $1
million for the year in support of new calling services bundles and the
Company's ZoomTown ADSL service. Consulting and contract services were
approximately $7 million less, due to lower usage of external labor sources.
Computer programming expenses and right-to-use fees decreased approximately
$14 million for the year, due to a reduction in projects initiated and the
capitalization of approximately $10 million in internal use software as
required by AICPA Statement of Position 98-1. These expense decreases were
somewhat offset by approximately $14 million in increases related to
materials and supplies, rent, and reciprocal compensation to Internet service
providers.
Year-2000 programming expenses were approximately $6 million lower than
in the prior year, reflecting the progress previously made on critical
systems and the conclusion of remediation efforts by year-end. No mandated
telecommunications costs were incurred in 1999 since the local portability
and interconnection requirements were met in the prior year (when the Company
incurred nearly $11 million of such costs).
As a result of the revenue increase and expense decrease detailed above,
EBITDA grew from $247.9 million in 1998 to $320.8 million in 1999, a 29%
increase.
1998 COMPARED TO 1997
The Local Communications segment showed strong performance in 1998,
enjoying the benefits of continued growth in access lines, voice grade
equivalents and value-added services, such as Caller ID and other custom
calling features. This, in combination with increased usage of the Company's
network on a minutes-of-use basis, contributed significantly to the increase
in revenue over 1997.
REVENUES
Revenues increased $48.3 million, or 7%. Local service revenues increased
$21.7 million, primarily due to access line growth of 3% and increased usage
of the Company's suite of custom calling services.
Network access revenues increased $10.9 million, or 6%. This was
primarily due to growth in high-capacity digital service and an associated
40% increase in voice grade equivalents. Minutes of use increased 7% along
with an increase in end-user access charges, but these were offset by a
reduction of interstate per-minute rates instituted by the Federal
Communications Commission (FCC) and by a reduction in intrastate rates
instituted as part of the Company's "Commitment 2000" plan as approved by the
Public Utilities Commission of Ohio.
Revenues from other services increased $15.7 million, or 14%. Revenues
from the Company's National Payphone Clearinghouse business and commissions
associated with the deregulation of the public payphone business increased
$6.9 million in 1998. The Company's FUSE-Registered Trademark- Internet
access service increased $2.6 million in 1998. The remainder of the increase
in this category is attributable to equipment and wiring sales and network
integration and consulting revenues, partially offset by increased
uncollectible expense of $4.3 million.
COSTS AND EXPENSES
Excluding depreciation and amortization, costs and expenses increased
$35.7 million, or 9%. Approximately $12 million of the increase was
attributable to higher headcount and associated wages. Right-to-use fees for
network switching systems decreased by more than $2 million but were offset
by increased expenditures for contract and consulting services. Expenses also
increased approximately $5 million due to mandated charges to fund universal
service initiatives and $2 million for increased advertising.
Year-2000 programming expenses totaled $10.9 million, representing nearly
a $7 million increase. Regulator-mandated interconnection and local number
portability expenses totaled $10.6 million in 1998, over $4 million more than
the prior year.
18
- -------------------------------------------------------------------------------
BROADBAND
IXC became a subsidiary of the Company on November 9, 1999 as a result
of the Merger. Subsequent to the acquisition date, the Company changed the
name of IXC to Broadwing Communications, Inc. (Broadwing Communications).
Operations of the Broadwing Communications subsidiary comprise the Broadband
segment and are included in the Company's financial results prospectively
from November 9, 1999. For purposes of comparability, portions of the
following discussion assume the Broadband segment existed from January 1,
1998. These references will generally include a reference to Pro Forma
results.
The Broadband segment utilizes an advanced, expansive, fiber-optic
network to provide data transport, Internet services, private line, switched
access, and other services. Broadwing Communication's network-based delivery
solutions are designed to address the speed and capacity requirements of the
global telecommunications market. Excess network capacity is also leased (in
the form of IRUs) to other telecommunications and Internet service providers.
Post-merger Pro Forma % Change
----------- --------- --------
($ in millions) 1999 1999 1998 1999 vs 1998
- -------------------------------------------------------------------------------------------------
Revenues:
Private Line $45.8 $304.3 $225.4 35
Switched Services 48.4 312.1 414.4 (25)
Data and Internet 4.8 23.5 9.0 161
Other -- 27.3 19.8 38
----- ---- ----
Total 99.0 667.2 668.6 n/m
Cost and expenses:
Cost of providing service 60.7 427.1 433.3 (1)
Selling, general and
administrative expense 38.1 248.7 144.5 72
---- ----- -----
Total 98.8 675.8 577.8 17
EBITDA $ 0.2 $(8.6) $90.8 (109)
EBITDA margin n/m (1) 14 (107)
1999 COMPARED TO 1998
REVENUES
Broadband revenues totaled $99 million in the post-merger period. On a
Pro Forma 1999 basis, revenues were $667.2 million compared to $668.6 million
in 1998. The reduction in switched services revenues of $102 million resulted
from the strategic decision to de-emphasize the wholesale switched services
business, and was offset by increases in all of Broadwing Communications'
other service offerings. Private line revenues increased $78.9 million, or
35%, on a Pro Forma basis as a result of an increase in other carriers
utilizing Broadwing Communication's next-generation broadband network . Data
and Internet revenues increased $14.5 million, or 161%, as these services
became a primary focus in 1999.
COSTS AND EXPENSES
Broadband costs and expenses, excluding depreciation and amortization
expenses of $46.7 million, were $98.8 million in 1999. Of this amount, $60.7
million was for cost of providing services and $38.1 million was for selling,
general and administrative expenses. Broadband's gross margin was 39% and
EBITDA was $0.2 million.
On a Pro Forma basis, costs and expenses, excluding depreciation,
amortization and special charges, were $98 million, or 17% greater than the
prior year. Costs of providing services decreased by over $6 million, or 1%,
due mainly to a $22.5 million decrease in access costs. This reduction was a
direct result of Broadwing Communications making greater utilization of its
fiber optic network as well as the reduction in minutes of use caused by the
decision to de-emphasize the switched wholesale business. The decrease in
access costs was offset somewhat by an increase in transmission and Internet
expenses of $16.4 million. Gross margin increased to 36% in 1999 due mainly
to Broadwing's greater focus on higher margin products such as private line
and data and Internet.
19
Selling, general and administrative expenses increased by $104.0 million,
or 72%, versus the prior year. This increase is due in part to increased
staffing required to support, sell and market the expanded fiber optic
network. Broadwing Communications is migrating from focusing on network
construction to sales and marketing as the network increased from
approximately 9,300 to 15,700 fiber route miles during 1999. Headcount
increased by approximately 600 in 1999 versus 1998, 60% of which were in
sales positions and the remaining 40% was for network operations.
- -------------------------------------------------------------------------------
WIRELESS
The Wireless segment comprises the operations of Cincinnati Bell Wireless
LLC (an 80%-owned venture with AT&T Wireless PCS, Inc.), which provides
advanced digital personal communications services and sales of related
communications equipment to customers in its Greater Cincinnati and Dayton,
Ohio operating areas.
On December 31, 1998, the Company acquired an 80% ownership interest in
this business. Accordingly, current year results for the wireless business
are reflected in the operating results of the Company beginning January 1,
1999. The agreement between Cincinnati Bell Wireless and AT&T PCS specified
that, prior to the acquisition, the Company and AT&T PCS would operate under
an interim agreement whereby losses would be funded in the same percentages
as the proposed venture. In 1998, this resulted in a loss of $27.3 million,
which was recorded as an equity loss in unconsolidated entities.
($ in millions) 1999
- ---------------------------------------------
Revenues $91.4
Costs and expenses:
Cost of providing service 58.6
Selling, general and
administrative expense 58.4
----
Total 117.0
EBITDA $(25.6)
EBITDA margin (28.0)%
Net Income $(28.5)
REVENUES
Revenues for this segment have been increasing steadily over the course
of 1999, with a year-end total of $91.4 million. The vast majority of
revenues for this segment, or $80 million, were service revenues. An
additional $13 million in revenues were derived from the sale of handsets and
associated accessories. Service revenues are growing on the basis of
increasing subscribership (95,000 and 56,000 postpaid customers were added in
1999 and 1998, respectively) generating an average monthly revenue per user
(ARPU) of $65 and low customer churn of 1.43% per month. Although it did not
drive significant growth in service revenues, the launch of CBW's new
i-wireless-SM- prepaid service added 11,000 new subscribers in the fourth
quarter of 1999.
COSTS AND EXPENSES
The costs of providing service is primarily comprised of incollect
expense (whereby CBW incurs costs associated with its subscribers using their
handset while in the territory of another wireless service provider), network
operations costs, interconnection expenses and cost of equipment sales. These
costs were 64% of revenue in 1999.
Selling, general and administrative expenses include the high cost of
customer acquisition, including the subsidy of customer handsets,
advertising, distribution and promotional expenses. With the significant
growth of the wireless business, these costs totaled $46 million, or a cost
per gross addition (CPGA) of $376 for postpaid subscribers, and contributed
heavily to our EBITDA loss of $25.6 million.
The $28.5 million net loss for the current year (which includes interest
and income tax expense, offset by the minority share of the net loss) was
dilutive to the Company's earnings in the amount of $.19 per common share.
20
- -------------------------------------------------------------------------------
DIRECTORY SERVICES
The Directory segment is comprised of the operations of the Company's
Cincinnati Bell Directory subsidiary, which publishes Yellow Pages
directories and sells directory advertising and informational services in
Cincinnati Bell Telephone's franchise area. These services are available to
the customer in the form of traditional printed directory, an Internet-based
service known as "Cincinnati Exchange," and on CD-Rom.
The majority of the revenues for this segment come from publishing, and
it is the Company's practice to recognize revenues, and associated direct
expenses, over the lifespan of the respective publications (generally twelve
months). Primary expenses of this segment are sales commissions paid to sales
agents and printing costs associated with its directory publications.
% Change % Change
($ in millions) 1999 1998 99 vs. 98 1997 98 vs. 97
- ---------------------------------------------------------------------------------------------------------------------
Revenues $74.2 $72.9 2 $72.9 --
Costs and expenses:
Cost of providing service 27.5 27.8 (1) 29.8 (7)
Selling, general and
administrative expense 19.5 19.7 (1) 18.2 8
------- ------- -------
Total 47.0 47.5 48.0
EBITDA $27.2 $25.4 7 $24.9 2
EBITDA margin 36.7% 34.8% 5 34.1% 2
1999 COMPARED TO 1998
REVENUES
Revenues of $74.2 million exceeded results of the prior year by
approximately $1 million, or 2%, as the positive outcome of the 1999 sales
campaign began to materialize. The majority of the growth for this segment
($0.6 million) came from local advertisers, with an additional $0.3 million
coming from the national advertisers.
COSTS AND EXPENSES
Costs and expenses of $47.0 million were virtually unchanged for the
year, decreasing by $0.5 million, or 1%, due primarily to lower sales
commissions. Printing costs and other SG&A expenses were held constant the
prior year.
EBITDA of $27.2 million was $1.8 million higher, or 7%, than in the prior
year. EBITDA margin of 36.7% represents a five percent improvement over the
34.8% margin recorded in the prior year.
1998 COMPARED TO 1997
REVENUES
Despite the arrival of full-scale competition in our market area during
1998, the Directory segment managed to preserve its revenue stream versus
1997. While some degree of competitive loss was felt from two new
competitors, one of which was previously a sales agent for the Company,
revenues were maintained as a result of the introduction of new listing
options that resulted in additional revenues.
COSTS AND EXPENSES
Costs and expenses in 1998 were virtually unchanged in comparison to the
prior year. Sales commissions decreased as a result of slightly lower sales
volume and a renegotiated commission rate. Advertising spending increased as
new campaigns were designed to preserve market share and stimulate demand for
value-added listings.
21
- -------------------------------------------------------------------------------
OTHER COMMUNICATIONS SERVICES
Other Communications combines the Cincinnati Bell Long Distance (CBLD),
Cincinnati Bell Supply (CBS), and Broadwing IT Consulting (formerly
EnterpriseWise) segments. CBLD resells long distance, voice, data, frame
relay, and Internet access services to small- and medium-sized business and
residential customers in a regional area consisting mainly of six states. CBS
sells new computers and resells telecommunications equipment in the secondary
market, and Broadwing IT Consulting provides network integration and
consulting services as well as the sale of related equipment.
% Change % Change
($ in millions) 1999 1998 99 vs. 98 1997 98 vs. 97
- ---------------------------------------------------------------------------------------------------------------------
Revenues $131.3 $106.1 24 $ 101.7 4
Cost and expenses:
Cost of providing service 93.1 66.3 40 63.9 4
Selling, general and
administrative expense 35.2 24.8 42 20.3 22
--------- ------- --------
Total 128.3 91.1 41 84.2 8
EBITDA $3.0 $15.0 (80) 17.5 (14)
EBITDA margin 2.3% 14.1% (84) 17.2% (18)
1999 COMPARED TO 1998
REVENUES
Revenues were up $25.2 million, or 24%, in 1999. CBS accounted for $9.8
million of the revenue increase as a result of sales of communication
equipment through its existing sales force and its new call center. Broadwing
IT Consulting provided additional revenue of $14.3 million, of which slightly
more than half was derived from the sale of hardware. CBLD contributed $1.7
million increase in revenues as decreases in its existing voice products were
offset by sales of new data and Internet services.
COSTS AND EXPENSES
Costs and expenses increased 41% or $37.2 million. Costs of providing
services accounted for approximately $27 million of this increase. Of this,
$13 million was attributable to costs of materials and hardware associated
with sales, $5 million was for employee-related expenses associated with the
network integration consulting business added in November 1998, and the
remainder was for increased cost of service in the new and existing CBLD
services.
SG&A expenses were approximately $10 million higher than in the prior
year, the majority of which can be attributed to employee costs associated
with entry into new businesses. These were incurred by all subsidiaries
within this segment, with CBLD incurring the largest increase ($5 million)
due to its introduction of data transport, high-speed Internet, and local
exchange services. An additional $4.2 million in SG&A expense is attributable
to Broadwing IT Consulting, a business that had minimal effect on 1998
operations due to its acquisition by the Company late in that year. CBS
incurred approximately $1 million in additional SG&A costs this year in order
to establish a new call center in support of a sales agency arrangement it
has with Lucent Technologies.
For these operations combined, EBITDA of $3 million was $12 million less
than the prior year for the reasons noted above.
Coincident with the merger, the Company performed a strategic
reassessment of its business unit structure. As a result, the Company is
finalizing plans to sell, or exit, the CBS business in 2000 as it does not
fit with the Company's long-term strategic plan. Also, the operations of CBLD
and Broadwing IT Consulting were integrated into Broadwing Communications in
January 2000.
22
1998 COMPARED TO 1997
REVENUES
Revenues increased $4.4 million, or 4%. CBLD contributed a substantial
gain in revenues over the prior year, adding $10 million of revenue as a
result of increased subscribership and usage. CBS reported a $5.6 million
decline in its revenues, due to the reduction in sales volume with a major
customer and lower salvage prices on reclaimed materials for resale.
COSTS AND EXPENSES
Costs and expenses increased $6.9 million, or 8%. CBLD experienced
increased selling and administrative expenses to acquire new subscribers and
enter the data market with the introduction of frame relay service and
Internet access. CBS reported lower product costs due to the decreased sales
volume previously discussed.
- -------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $69 million over 1998, of
which $47 million was a result of the Merger and $14 million was attributable
to the wireless business. The Company anticipates depreciation and
amortization expense to be approximately $470 million in 2000 due to a full
year of the merged company results.
- -------------------------------------------------------------------------------
INTEREST EXPENSE
% Change % Change
($ in millions) 1999 1998 99 vs. 98 1997 98 vs. 97
- ---------------------------------------------------------------------------------------------------------------------
$61.7 $24.2 155 $30.1 (20)
1999 COMPARED TO 1998
Interest expense increased significantly in 1999, owing to higher average
debt levels associated with the Merger, the issuance of $400 million in 6 3/4%
convertible subordinated notes in July 1999, and the amortization of debt
issuance costs and bank commitment fees associated with the Company's new
$2.1 billion credit facility and these convertible subordinated notes.
Of the $37.5 million increase in interest expense, $13.4 million is
attributable to the operations of the Wireless business and approximately
$24.0 million is related to the Merger.
1998 COMPARED TO 1997
Interest expense declined in 1998 due to lower weighted average interest
rates and an increase in interest during construction in 1998.
- -------------------------------------------------------------------------------
INCOME TAXES
% Change % Change
($ in millions) 1999 1998 99 vs. 98 1997 98 vs. 97
- ---------------------------------------------------------------------------------------------------------------------
Income taxes $33.3 $44.3 (25) $56.3 (21)
Effective tax rate 46.7% 35.1% 33 35.5% (1)
1999 COMPARED TO 1998 AND 1998 COMPARED TO 1997
Income tax expense decreased in 1999 primarily due to lower overall
pretax income resulting from higher pre-tax losses generated by the Wireless
segment and pre-tax losses generated by the new Broadband segment. The
Company's previous effective tax rate of approximately 35% will not be
sustainable for future periods due to significant levels of non-deductible
expense such as goodwill amortization and minority interest dividends.
The 1998 decrease (versus 1997) was the result of lower pre-tax income,
primarily due to the wireless venture loss. The effective tax rates between
these two years were comparable.
23
- -------------------------------------------------------------------------------
EXTRAORDINARY ITEMS, NET OF TAXES
% Change % Change
($ in millions) 1999 1998 99 vs. 98 1997 98 vs. 97
- ---------------------------------------------------------------------------------------------------------------------
$6.6 $1.0 n/m $210.0 --
1999 COMPARED TO 1998 AND 1998 COMPARED TO 1997
Extraordinary items affected both years. In 1999, costs related to the
early extinguishment of debt as a result of the Merger resulted in a $6.6
million charge, net of taxes. In 1998, the spin-off of Convergys resulted in
the retirement of debt and a portion of a then-existing credit facility,
resulting in a $1.0 million charge, net of tax.
In 1997, the Company discontinued the application of SFAS 71 which
resulted in an extraordinary, non-cash charge of $210.0 million, net of
income taxes.
- -------------------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
The Company continued its transformation from a wireline voice
communications provider focused on its local franchise to a nationwide
provider of data and voice communications and a regional provider of wireless
services. As a result, the financing needs of the Company have changed
significantly. Although the Company generated positive cash flow from
operations in 1999, and expects to again in 2000, capital expenditures and
other investing needs will increase the Company's borrowings.
In anticipation of these funding needs, the Company eliminated the
dividend payment on common stock and issued $400 million in 6 3/4%
convertible subordinated notes. The proceeds of these notes were used to
affect the Merger, namely to purchase shares of IXC for cash and to purchase
treasury shares of the Company's common stock.
In order to provide for these cash requirements and other general
corporate purposes, the Company also obtained a $2.1 billion credit facility
from a group of 24 lending institutions. The credit facility consists of $900
million in revolving credit and $750 million in term loans from banking
institutions and $450 million in term loans from non-banking institutions. At
December 31, 1999, the Company had drawn approximately $755 million from the
credit facility in order to refinance its existing debt and debt assumed as
part of the Merger. In January 2000, the Company borrowed approximately $400
million in order to redeem the majority of the outstanding 9% senior
subordinated notes assumed during the Merger as part of a tender offer. This
tender offer was required under the terms of the note indenture due to the
change in control provision and resulted in an extraordinary loss of $4
million, net of tax. Accordingly, the Company has approximately $900 million
in additional borrowing capacity under this facility as of the date of this
report. Separately, the Company also has ownership position in four publicly
traded companies. The value of these holdings was $928.4 million as of
December 31, 1999. The sale of these securities are subject to limitations
including registration rights.
The interest rates to be charged on borrowings from this credit facility
can range from 100 to 225 basis points above the London Interbank Offering
Rate (LIBOR), depending on the Company's credit rating. The current borrowing
rate is approximately 200 basis points. The Company will incur banking fees
in association with this credit facility ranging from 37.5 basis points to 75
basis points, applied to the unused amount of borrowings of the facility.
The Company is also subject to financial covenants in association with
the credit facility. These financial covenants require that the Company
maintain certain debt to EBITDA ratios, debt to total capitalization ratios,
fixed and floating rate debt ratios and interest coverage ratios. This
facility also contains certain covenants which, among other things, restrict
the Company's ability to incur additional debt, pay dividends, repurchase
Company common stock, and sell assets or merge with another company.
24
As a result of the Merger the Company's corporate credit ratings were
downgraded in 1999. As of the date of this filing, the Company maintains the
following credit ratings:
Duff & Phelps Moody's
Entity Description Standard and Poor's Credit Rating Service Investor Service
- ------ ----------- ------------------- --------------------- ----------------
BRW Corporate Credit Rating BB+ BB+ Ba2
CBT Corporate Credit Rating BB+ BBB+ Baa3
Capital expenditures to maintain and grow the nationwide fiber network,
complete the wireless network expansion, and maintain the local Cincinnati
network are expected to be approximately $805 million in 2000, consistent
with $816 million on a Pro Forma basis in 1999.
BALANCE SHEET
Nearly all balance sheet categories have increased significantly from the
prior year due to the Merger. Cash and cash equivalents increased by $70
million over the prior year largely from the receipt of approximately $76
million in cash on December 30, 1999 related to an IRU agreement with PSINet.
The increase in accounts receivable and related allowances are primarily a
result of the Merger. The increase in the reserve percentage reflects
accruals for disputes and bad debts arising as a result of provisioning
issues and the de-emphasis of the switched wholesale business at Broadwing
Communications. In addition to the Merger, property, plant and equipment
increased due to the Company's investment in its wireless and local
communications business. Goodwill and other intangibles increased by nearly
$2.2 billion and $0.4 billion, respectively, nearly all of which was related
to the Merger. Investments in unconsolidated entities represents equity
investments in PSINet, Applied Theory, PurchasePro.com, and ZeroPlus.com
(which have been adjusted to market value in accordance with SFAS 115). The
increases to short-term and long-term debt are attributable to the issuance
of $400 million in 6 3/4% convertible subordinated notes and the refinancing
of long-term debt upon the Merger. The current and long-term amounts
associated with unearned revenues relate to the sale of IRU agreements.
In 1999, the $405 million dollar increase in the Minority Interest
caption is attributable to 12 1/2% preferred shares previously issued by IXC.
Effective with the Merger, the Company replaced the previously existing 6 3/4%
and 7 1/4% preferred stock issues at IXC with its own preferred stock. These
preferred stock issues were reflected at fair value upon the Merger date, and
have resulted in the addition of approximately $229 million and $129 million,
respectively, in additional redeemable and non-redeemable preferred stock.
Additional paid in capital increased during 1999 primarily from the issuance
of approximately 68 million new shares of common stock in the Merger. The
increase in accumulated other comprehensive income is largely attributable to
unrealized holding gains (net of tax) on the equity investments previously
discussed. Also, the Company engaged in a share repurchase program that
reduced shareholders' equity by $145 million.
CASH FLOW
The cash provided by operating activities of $314 million was $102
million higher than in the prior year. The increase was largely attributable
to a $75 million increase in unearned revenues related to IRU agreements.
The Company engaged in several investment activities of significance in
1999, several of which were related to the Merger. Capital expenditures of
approximately $381 million represented a $238 million increase over the prior
year, with Broadwing Communications spending $165 million in the post-merger
period and a $53 million increase related to infrastructure development for
the wireless business. The Company also capitalized $10 million in software
development costs in 1999 pursuant to its adoption of AICPA Statement of
Position 98-1.
In the current year, net cash paid for acquisitions totaled $247 million,
$233 million of which was attributable to the Merger. Remaining expenditures
for acquisitions represented additional investment in the wireless business
and the purchase of a long distance reseller. The purchase of the marketable
securities of two unaffiliated e-commerce vendors required an additional $13
million in cash.
The Company incurred net debt of $429 million more than in the prior
year, of which $400 million was issued to Oak Hill Capital Partners in July
1999 in the form of 6.75% convertible subordinated debentures (see Note 5 of
Notes to Financial Statements). Dividends paid to shareholders of $46 million
in 1999 were $9 million less than in the prior year. The Company received an
additional $37 million versus the prior year from the exercise of employee
stock options. The Company also used $145 million in 1999 in order to
purchase shares of its own common stock as part of a share repurchase program.
25
REGULATORY MATTERS AND COMPETITIVE TRENDS
FEDERAL - In February 1996, Congress enacted the Telecommunications Act of
1996 (the 1996 Act), the primary purpose of which was to introduce greater
competition into the market for telecommunications services. Since February
1996, the Federal Communications Commission (FCC) has initiated numerous
rulemaking proceedings to adopt regulations pursuant to the 1996 Act. The
1996 Act and the FCC's rulemaking proceedings can be expected to impact CBT's
in-territory local exchange operations in the form of greater competition.
However, these statutes and regulations also create opportunities for the
Company to expand the scope of its operations, both geographically and in
terms of products and services offered.
OHIO - CBT's alternative regulation case dealing with the rates CBT can
charge to competitive local exchange carriers for unbundled network elements
is pending. The PUCO issued its decision on the methodology CBT must use to
calculate these rates on November 4, 1999. On January 20, 2000, the PUCO
denied all parties' requests for rehearing except for one issue regarding
nonrecurring charges. CBT was required to submit new cost studies by February
28, 2000. After a period for review of the studies and resolution of any
disputes, CBT is to file a tariff implementing the resulting rates.
KENTUCKY - On June 29, 1998, CBT filed an application with the Public Service
Commission of Kentucky (PSCK) seeking approval of an alternative regulation
plan similar to the Commitment 2000 plan approved by the PUCO in Ohio. On
January 25, 1999, the PSCK issued an order approving the Kentucky alternative
regulation plan with certain modifications. One of the modifications was the
adoption of an earnings-sharing provision whereby customers would receive
one-half of earnings on equity in excess of 13.5%. The PSCK also ordered that
residential rates be frozen for three years and required rate reductions of
approximately $3 million per year versus current rates. On February 12, 1999,
CBT filed a petition seeking rehearing of the PSCK's January 25, 1999 order.
On July 26, 1999, the PSCK issued an order which eliminated the automatic
earnings-sharing provision and revised the required rate reductions to $2.3
million per year, instead of the $3 million per year previously ordered.
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other
industries with the telecommunications industry are causes for increasing
competition. The range of communications services, the equipment available to
provide and access such services, and the number of competitors offering such
services continue to increase. These initiatives and developments could make
it difficult for the Company to maintain current revenue and profit levels.
CBT's current and potential competitors include other incumbent local
exchange carriers, wireless services providers, interexchange carriers,
competitive local exchange carriers and others. To date, CBT has signed
various interconnection agreements with competitors and approximately 7,200
net access lines have been transferred to competitors.
Broadwing Communications faces significant competition from other
fiber-based telecommunications companies such as Level 3 Communications,
Qwest Communications International, Global Crossings and Williams
Communications. These companies have, in the past, enjoyed a competitive
advantage over Broadwing Communications due to better business execution. The
Company feels that Broadwing Communications is well equipped to match these
competitors on the basis of technology and has been working to improve on
critical processes, systems and the execution of its business strategy.
The Company's other subsidiaries face intense competition in their
markets, principally from larger companies. These subsidiaries primarily seek
to differentiate themselves by leveraging the strength and recognition of the
Company's brand equity, by providing customers with superior service and by
focusing on niche markets and opportunities to develop and market customized
packages of services. CBD's competitors are directory services companies,
newspapers and other media advertising services providers in the Cincinnati
metropolitan market area. CBD now competes with its former sales
representative for Yellow Pages directory customers. This competition may
affect CBD's ability to grow or maintain profits and revenues. CBW is one of
six active wireless service providers in the Cincinnati and Dayton, Ohio
metropolitan market areas. CBS's competitors include vendors of new and used
computer and communications equipment operating regionally and across the
nation. Broadwing IT Consulting competes with Intranet hardware vendors,
wiring vendors, and other network integration and consulting businesses.
26
The Merger is a response to these competitive pressures and represents a
belief that the Company's reputation for quality service and innovative
products can be successfully exported outside of its local franchise area.
The Company plans to blend its provisioning and marketing expertise with
Broadwing Communications' next-generation fiber-optic network in order to
introduce advanced calling and data transport services throughout the U.S.
The Company intends to retain market share with respect to its current
service offerings and pursue rapid growth in data transport services. The
Company also expects that each of its current subsidiaries will benefit from
this business combination through the addition of new potential customers,
sales channels and markets.
CONTINGENCIES
In the normal course 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 not predictable with
assurance. However, the Company believes that the resolution of such matters
for amounts in excess of those reflected in the consolidated financial
statements would not likely have a materially adverse effect on the Company's
financial condition.
YEAR-2000 READINESS
In order to ready its network and customer support systems for the Year
2000 (Y2K), the Company incurred expenses of $4.6 million and $10.9 million
in 1999 and 1998 respectively. Year 2000 preparations were completed as
planned, and as a result of this preparedness, major impacts to the Company
and its customers were avoided. Some degree of minor difficulty was
experienced with regard to customer payment issues, but these are considered
insignificant and have been resolved or are currently being resolved.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1999, the Company adopted AICPA Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires the capitalization of certain
expenditures for software that is purchased or internally developed for use
in the business. As compared to prior years when these types of expenditures
were expensed as incurred, the 1999 adoption of SOP 98-1 resulted in the
capitalization of $10 million of internal use software development costs,
which are being amortized over a three-year period.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that a derivative instrument be recorded in the
balance sheet as either an asset or liability, measured at its fair value.
SFAS 133 has been subsequently amended through the release of SFAS 137, which
provides for a deferral of the effective date of SFAS 133 to all fiscal years
beginning after June 15, 2000. As a result, implementation of SFAS 133 is not
mandatory for the Company until January 1, 2001. Management is currently
assessing the impact of SFAS 133 on the Company's results of operations, cash
flows and financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements. In SAB 101, the SEC Staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company is
currently evaluating SAB 101 to determine its impact on the financial
statements.
BUSINESS DEVELOPMENT
In order to enhance shareowner value, the Company actively reviews
opportunities for acquisitions, divestitures and strategic partnerships.
27
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes. To manage
its exposure to interest rate changes, the Company uses a combination of
variable rate short-term and fixed rate long-term financial instruments. The
Company may, from time to time, employ a small number of financial
instruments to manage its exposure to fluctuations in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes or enter into interest rate transactions for speculative purposes.
Management is reviewing steps necessary to mitigate this exposure.
Interest Rate Risk Management - The Company's objective in managing its
exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs.
The following table describes the financial instruments that were held by
the Company at December 31, 1999, excluding the PSINet forward sale and
capital leases:
($ in millions) 2000-2002 2003 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt $20.0 $20.0 $1,917.0 $1,957.0 $1,805.0
Average interest rate 4.4% 6.2% 7.7% 7.5% --
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Consolidated Financial Statements:
Report of Management .................................................................29
Report of Independent Accountants ....................................................29
Consolidated Statements of Income and Comprehensive Income (Loss) ....................30
Consolidated Balance Sheets ..........................................................31
Consolidated Statements of Cash Flows ................................................32
Consolidated Statements of Shareowners' Equity .......................................33
Notes to Consolidated Financial Statements ...........................................34
Financial Statement Schedule:
For each of the three years in the period ended December 31, 1999:
II - Valuation and Qualifying Accounts .................................... 62
Financial statements and financial statement schedules other than that
listed above have been omitted because the required information is contained
in the financial statements and notes thereto, or because such schedules are
not required or applicable.
28
- -------------------------------------------------------------------------------
REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS BROADWING INC.
REPORT OF MANAGEMENT
The management of Cincinnati Bell Inc. dba Broadwing Inc. is responsible
for the information and representations contained in this report. Management
believes that the financial statements have been prepared in accordance with
generally accepted accounting principles and that the other information in
this report is consistent with those statements. In preparing the financial
statements, management is required to include amounts based on estimates and
judgments that it believes are reasonable under the circumstances.
In meeting its responsibility for the reliability of the financial
statements, management maintains a system of internal accounting controls,
which is continually reviewed and evaluated. Our internal auditors monitor
compliance with the system of internal controls in connection with their
program of internal audits. However, there are inherent limitations that
should be recognized in considering the assurances provided by any system of
internal accounting controls. Management believes that its system provides
reasonable assurance that assets are safeguarded and that transactions are
properly recorded and executed in accordance with management's authorization,
that the recorded accountability for assets is compared with the existing
assets at reasonable intervals, and that appropriate action is taken with
respect to any differences. Management also seeks to assure the objectivity
and integrity of its financial data by the careful selection of its managers,
by organization arrangements that provide an appropriate division of
responsibility, and by communications programs aimed at assuring that its
policies, standards and managerial authorities are understood throughout the
organization.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants. Their audit was conducted in accordance with
auditing standards generally accepted in the United States.
The Audit and Finance Committee of the Board of Directors, which is
composed of five directors who are not employees, meets periodically with
management, the internal auditors and PricewaterhouseCoopers LLP to review
their performance and responsibilities and to discuss auditing, internal
accounting controls and financial reporting matters. Both the internal
auditors and the independent accountants periodically meet alone with the
Audit and Finance Committee and have access to the Audit and Finance
Committee at any time.
KEVIN W. MOONEY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND THE
SHAREOWNERS OF CINCINNATI BELL INC. DBA BROADWING INC.
In our opinion, the accompanying consolidated financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of Cincinnati Bell Inc. dba Broadwing Inc. (the Company)
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, in 1999
the Company adopted AICPA Statement of Position 98-1 and changed its method
of accounting for internal use software development costs.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Cincinnati, Ohio
March 8, 2000
29
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(LOSS) BROADWING INC.
Millions of dollars except per share amounts Year ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES $1,131.1 $885.1 $834.5
- -----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Costs of providing services and products sold 508.7 369.6 344.6
Selling, general and administrative 286.7 225.5 195.2
Depreciation and amortization 181.0 111.1 124.3
Restructuring and other charges (credits) 10.9 (1.1) (21.0)
------ --------- --------
OPERATING INCOME 143.8 180.0 191.4
------ --------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Loss in Unconsolidated Entities 15.3 27.3 --
Minority Interest and Other Income (Expense), Net 4.5 (2.4) (2.7)
Interest Expense 61.7 24.2 30.1
----- ------- -------
Income from Continuing Operations Before Income Taxes 71.3 126.1 158.6
Income Taxes 33.3 44.3 56.3
------ ------- -------
Income from Continuing Operations 38.0 81.8 102.3
Income from Discontinued Operations, Net of Taxes -- 69.1 91.3
----- ------- ------
Income Before Extraordinary Items 38.0 150.9 193.6
Extraordinary Items, Net of Taxes (6.6) (1.0) (210.0)
------- -------- -------
NET INCOME (LOSS) 31.4 149.9 (16.4)
Dividends and Accretion Applicable to Preferred Stock 2.1 -- --
------ -------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $29.3 $ 149.9 $(16.4)
------ -------- -------
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $31.4 $ 149.9 $(16.4)
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain on investments 170.0 -- --
Currency translation adjustments -- (4.8) (1.6)
Additional minimum pension liability adjustment 3.6 (2.5) 0.8
------- --------- --------
Total other comprehensive income (loss) 173.6 (7.3) (0.8)
------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $205.0 $ 142.6 $(17.2)
------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income from Continuing Operations $ .25 $ .60 $ .76
Income from Discontinued Operations, Net of Taxes -- .51 .67
Extraordinary Items, Net of Taxes (.05) (.01) (1.55)
-------- --------- ---------
Net Income (Loss) $ .20 $ 1.10 $ (.12)
-------- --------- ---------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income from Continuing Operations $ .24 $ .59 $ .74
Income from Discontinued Operations, Net of Taxes -- .50 .67
Extraordinary Items, Net of Taxes (.04) (.01) (1.53)
-------- --------- ---------
Net Income (Loss) $ .20 $ 1.08 $ (.12)
-------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (MILLIONS)
Basic 144.3 136.0 135.2
Diluted 150.7 138.2 137.7
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
30
CONSOLIDATED BALANCE SHEETS BROADWING INC.
Millions of dollars at December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 80.0 $ 10.1
Receivables, less allowances of $53.6 and $12.0 231.0 138.0
Material and supplies 30.3 16.9
Deferred income tax benefits 35.9 13.8
Prepaid expenses and other current assets 36.2 18.6
------- --------
Total current assets 413.4 197.4
Property, Plant and Equipment, Net 2,500.9 698.2
Goodwill and Other Intangibles, Net 2,679.9 103.3
Investments in Other Entities 843.3 2.5
Deferred Charges and Other Assets 71.1 39.6
------- -------
Total Assets $6,508.6 $1,041.0
-------- --------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities, Redeemable Preferred Stock, and Shareowners' Equity
Current Liabilities
Short-term debt $ 9.2 $ 186.2
Accounts payable 230.5 57.9
Current portion of unearned revenue and customer deposits 82.6 26.8
Accrued taxes 88.3 40.6
Other current liabilities 157.5 93.8
----- ----
Total current liabilities 568.1 405.3
Long-Term Debt, less current portion 2,136.0 366.8
Unearned Revenue, less current portion 633.5 --
Deferred Income Taxes 221.8 6.3
Other Long-Term Liabilities 153.8 91.5
----- ----
Total liabilities 3,713.2 869.9
Minority Interest 434.0 29.0
7 1/4% Convertible Preferred Stock, redeemable, $.01 par value; authorized -
5,000,000 shares of all classes of Preferred Stock; 1,058,380 shares issued
and outstanding at December 31, 1999 (aggregate liquidation preference
of $105.8 at December 31, 1999) 228.6 --
Commitments and Contingencies
Shareowners' Equity
6 3/4% Cumulative Convertible Preferred Stock, $.01 par value; authorized -
5,000,000 shares of all classes of Preferred Stock; 155,250 shares issued
and outstanding at December 31, 1999 129.4 --
Common shares, $.01 par value; 480,000,000 shares authorized;
208,678,058 and 136,381,509 shares issued 2.1 1.4
Additional paid-in capital 1,979.5 147.4
Retained earnings -- --
Accumulated other comprehensive income (loss) 166.9 (6.7)
Common stock in treasury, at cost
1999 - 7,805,800 shares, 1998 - no shares (145.1) --
------ -------
Total shareowners' equity 2,132.8 142.1
------- -------
Total Liabilities, Redeemable Preferred Stock and Shareowners' Equity $6,508.6 $1,041.0
-------- --------
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS BROADWING INC.
Millions of dollars Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $31.4 $ 149.9 $(16.4)
Less: income from discontinued operations, net of taxes -- (69.1) (91.3)
----- ------- ------
Income (loss) from continuing operations 31.4 80.8 (107.7)
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used in) operating activities:
Depreciation 159.9 110.5 123.9
Amortization 21.1 0.6 0.4
Restructuring and related charges (credits) 10.6 (1.1) (21.0)
Provision for loss on receivables 28.5 15.8 7.3
Extraordinary items, net of taxes 6.6 1.0 210.0
Non-cash interest expense 15.8 1.9 (6.4)
Minority interest (3.0) -- --
Equity loss in unconsolidated entities 15.3 27.3 --
Change in operating assets and liabilities net of effects from
acquisitions:
Decrease (increase) in receivables (3.4) (24.9) (26.3)
Decrease (increase) in prepaid expenses and other current assets (16.7) 2.1 (7.4)
Increase (decrease) in accounts payable (17.1) 40.9 45.1
Increase (decrease) in other current liabilities 46.3 (7.5) (43.2)
Increase in unearned revenues 75.0 -- --
Increase (decrease) in deferred income taxes (24.7) (12.8) (4.1)
Decrease (increase) in other assets and liabilities, net (31.7) (22.3) 26.8
------ ----- ----
Net cash provided by operating activities of continuing operations 313.9 212.3 197.4
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (381.4) (143.6) (158.4)
Payments for acquisitions, net of cash acquired (247.0) (165.6) --
Purchase of marketable securities (12.8) -- --
Other investing activities, net -- -- 4.6
------ ----- -----
Net cash used in investing activities of continuing operations (641.2) (309.2) (153.8)
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,175.0 150.0 --
Repayment of long-term debt (221.2) (51.2) (99.6)
Short-term borrowings, net (371.4) 54.7 109.5
Debt issuance costs (31.5) -- --
Issuance of common shares-exercise of stock options 37.0 0.3 9.1
Purchase of treasury shares (145.1) -- --
Dividends paid (45.6) (54.4) (54.3)
------ ----- -----
Net cash provided by (used in) financing activities of continuing operations 397.2 99.4 (35.3)
----- ------
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations -- (0.2) (0.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 69.9 $ 2.3 $ 8.1
Cash and cash equivalents at beginning of year 10.1 7.8 (0.3)
---- -------- --------
Cash and cash equivalents at end of year $ 80.0 $ 10.1 $ 7.8
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
32
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY BROADWING INC.
6 3/4% Cumulative
Convertible Preferred Accumulated
Stock Common Stock Treasury Stock Additional Other
---------------- ---------------- ---------------- Paid-In Retained Comprehensive
Dollars and shares in millions Shares Amount Shares Amount Shares Amount Capital Earnings Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1997 -- -- 135.1 $1.4 -- -- $346.8 $293.5 $(7.3) $634.4
Shares issued under shareowner
and employee plans -- -- 1.0 -- -- -- 17.7 (0.8) -- 16.9
Net loss -- -- -- -- -- -- -- (16.4) -- (16.4)
Additional minimum pension
liability adjustment -- -- -- -- -- -- -- -- 0.8 0.8
Currency translation
adjustments -- -- -- -- -- -- -- -- (1.6) (1.6)
Dividends on common shares,
$.40 per share -- -- -- -- -- -- -- (54.4) -- (54.4)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 -- -- 136.1 1.4 -- -- 364.5 221.9 (8.1) 579.7
Shares issued under shareowner
and employee plans -- -- 0.3 -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- 149.9 -- 149.9
Additional minimum pension
liability adjustment -- -- -- -- -- -- -- -- (2.5) (2.5)
Currency translation
adjustments -- -- -- -- -- -- -- -- (4.8) (4.8)
Restricted stock issuance -- -- -- -- -- -- (4.9) -- -- (4.9)
Dividends on common shares,
$.40 per share -- -- -- -- -- -- -- (54.6) -- (54.6)
Spin-off of Convergys -- -- -- -- -- -- (212.2) (317.2) 8.7 (520.7)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 -- -- 136.4 1.4 -- -- 147.4 -- (6.7) 142.1
Shares issued under shareowner
and employee plans -- -- 3.2 -- -- -- 46.3 -- -- 46.3
Net income -- -- -- -- -- -- -- 31.4 -- 31.4
Additional minimum pension
liability adjustment -- -- -- -- -- -- -- -- 3.6 3.6
Unrealized gain on investments -- -- -- -- -- -- -- -- 170.0 170.0
Restricted stock amortization -- -- 0.7 -- -- -- 5.1 -- -- 5.1
Dividends:
Common Shares, at
$.20 per share -- -- -- -- -- -- -- (27.5) -- (27.5)
Preferred Shares -- -- -- -- -- -- 1.8 (3.9) -- (2.1)
Equity issued in connection
with Merger 0.2 129.4 68.4 0.7 -- -- 1,778.9 -- -- 1,909.0
Treasury shares repurchased -- -- -- -- (7.8) (145.1) -- -- -- (145.1)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 0.2 $129.4 208.7 $ 2.1 (7.8) $(145.1) $1,979.5 $ -- $166.9 $2,132.8
===== ====== ===== ===== ===== ======== ======== ====== ====== ========
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
33
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company provides diversified communications services through
businesses in four material segments: Local Communications, Broadband,
Wireless, and Directory. On November 9, 1999 the Company merged with IXC
Communications in a transaction accounted for as a purchase. Accordingly,
IXC's operations (renamed Broadwing Communications) have been included in the
consolidated financial statements for all periods subsequent to November 9,
1999 (See Note 2).
BASIS OF CONSOLIDATION -- The consolidated financial statements include the
consolidated accounts of Cincinnati Bell Inc. dba Broadwing Inc. (the
Company), and its majority owned subsidiaries in which the Company exercises
control. Less-than-majority-owned subsidiaries are accounted for using the
equity method. For equity method investments, the Company's share of income
is calculated according to the Company's equity ownership. Any differences
between the carrying amount of an investment and the amount of the underlying
equity in the net assets of the investee are amortized over the expected life
of the asset. Investments over which we do not exercise significant influence
are reported at fair value. Significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
USE OF ESTIMATES -- Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
CASH EQUIVALENTS -- Cash equivalents consist of short-term, highly liquid
investments with original maturities of three months or less.
MATERIALS AND SUPPLIES -- Materials and supplies are carried at the lower of
average cost or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
cost. The Company's provision for depreciation of telephone plant is
determined on a straight-line basis using the whole life and remaining life
methods. As a result of the discontinuation of SFAS 71 in the fourth quarter
of 1997, CBT recognized shorter, more economically realistic lives than those
prescribed by regulators and increased its accumulated depreciation balance
by $309.0 million (see Note 13). Provision for depreciation of other property
is based on the straight-line method over the estimated useful life. Repairs
and maintenance expense items are generally charged to expense as incurred.
Telephone plant is retired at its original cost, net of cost of removal and
salvage, and is charged to accumulated depreciation. For other property,
plant and equipment, retired or sold, the gain or loss is recognized in other
income.
LONG-LIVED ASSETS, OTHER ASSETS AND GOODWILL -- Deferred financing costs are
costs incurred in connection with obtaining long-term financing; such costs
are amortized as interest expense over the terms of the related debt
agreements. Certain costs incurred with the connection of customers to the
switched long distance network (deferred network costs) are amortized on a
straight-line basis over two years. Goodwill resulting from the purchase of
businesses and other intangibles are recorded at cost and amortized on a
straight-line basis from 5 to 40 years. Broadwing reviews the carrying value
of long-lived assets and goodwill for impairment 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.
REVENUE RECOGNITION -- Local service revenues are billed monthly, in advance,
with revenues being recognized when earned. Remaining revenues (with the
exception of those described below) are billed and recognized as services are
provided. Directory segment revenues and related directory costs are
generally deferred and recognized over the life of the associated directory,
normally twelve months. Indefeasible right-to-use agreements, or IRUs,
represent the lease of excess network capacity 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. Associated IRU revenue is
then recognized over the life of the agreement as services are provided,
beginning on the date of customer acceptance. IRU and related maintenance
revenue are included in the private line category for the Broadband segment.
34
ADVERTISING -- Costs related to advertising are expensed as incurred and
amounted to $22.3 million, $11.1 million, and $8.1 million in 1999, 1998, and
1997, respectively.
FIBER EXCHANGE AGREEMENTS -- In connection with the fiber optic network
expansion, the Company entered into various agreements to exchange fiber
usage rights. Non-monetary exchanges of fiber usage are recorded at the cost
of the asset transferred or, if applicable, the fair value of the asset
received. The Company accounts for agreements with other carriers to exchange
fiber for capacity by recognizing the fair value of the revenue earned and
expense incurred under the respective agreements. Exchange agreements
accounted for non-cash revenue and expense (in equal amounts) of $2.7 million
in 1999.
INCOME TAXES -- The provision for income taxes consists of an amount for
taxes currently payable and a provision for tax consequences deferred to
future periods using the liability method. For financial statement purposes,
deferred investment tax credits are being amortized as a reduction of the
provision for income taxes over the estimated useful lives of the related
property, plant and equipment.
STOCK-BASED COMPENSATION -- Compensation cost is measured under the intrinsic
value method. Pro forma disclosures of net income and earnings per share are
presented as if the fair value method had been applied.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company may,
from time to time, employ a small number of financial instruments to manage
its exposure to fluctuations in interest rates. The Company does not hold or
issue derivative financial instruments for trading purposes.
REGULATORY ACCOUNTING -- In the fourth quarter of 1997, the Company
discontinued accounting under Statement of Financial Accounting Standards
(SFAS) 71, "Accounting for the Effects of Certain Types of Regulation," at
Cincinnati Bell Telephone (see Note 13).
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current classifications with no effect on financial results.
RECENTLY ISSUED ACCOUNTING STANDARDS -- On January 1, 1999, the Company
adopted AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
the capitalization of certain expenditures for software that is purchased or
internally developed for use in the business. As compared to prior years when
these types of expenditures were expensed as incurred, the 1999 adoption of
SOP 98-1 resulted in the capitalization of $10 million of internal use
software development costs, which are being amortized over a three-year
period.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that a derivative instrument be recorded in the
balance sheet as either an asset or liability, measured at its fair value.
SFAS 133 has been subsequently amended through the release of SFAS 137, which
provides for a deferral of the effective date of SFAS 133 to all fiscal years
beginning after June 15, 2000. As a result, implementation of SFAS 133 is not
mandatory for the Company until January 1, 2001. Management is currently
assessing the impact of SFAS 133 on the Company's results of operations, cash
flows and financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." In SAB 101, the SEC Staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company is
currently evaluating SAB 101 to determine its impact on the financial
statements.
2. ACQUISITIONS
IXC COMMUNICATIONS INC.:
On November 9, 1999, the Company merged with IXC Communications, Inc.
(the Merger). Under the terms of the Merger, each share of IXC common stock
was exchanged for 2.0976 shares of the Company's common stock. The aggregate
purchase price of $2.2 billion consisted of (all numbers approximate): $0.3
billion in cash for the purchase of five million shares of IXC stock from GE
Capital Pension Trust; the issuance of 68 million shares of the Company's
common stock valued at $1.6 billion, 155,000 shares of 6 3/4% convertible
preferred stock valued at $0.1 billion; and the issuance of 14 million
options to purchase Broadwing common stock valued at $0.2 billion. These
options were issued coincident with the merger to replace the then
outstanding and unexercised options exercisable for shares of IXC common
stock. These options were granted on the same
35
terms and conditions as the IXC options, except that the exercise price and
the number of shares issuable upon exercise were divided and multiplied,
respectively, by 2.0976. The Merger was accounted for as a purchase and,
accordingly, the operating results of IXC (Broadwing Communications) have
been included in the Company's consolidated financial statements since the
Merger date of November 9, 1999.
The cost of the Merger has been preliminarily allocated to the assets
acquired and liabilities assumed according to their estimated fair values at
the acquisition date and is subject to adjustment when the assumptions
relating to the asset and liability valuations are finalized. In addition,
the allocation may be impacted by changes in pre-acquisition contingencies
identified during the allocation period by the Company relating to certain
environmental, litigation, and other matters. The results of a preliminary
allocation of the purchase price are as follows:
Fair market value adjustments:
Property, Plant & Equipment $ 207.0
Other intangibles 397.0
Debt (168.0)
Deferred tax Liabilities (113.0)
Other 7.0
- -------------------------------------------------------------------------------
Subtotal $330.0
- -------------------------------------------------------------------------------
Goodwill $2,187.5
- -------------------------------------------------------------------------------
Total $2,517.5
- -------------------------------------------------------------------------------
The amount allocated to goodwill represents the excess of price paid over
the fair value of assets realized and liabilities assumed in the Merger. These
amounts will be amortized to expense over a 30-year period.
CINCINNATI BELL WIRELESS:
On December 31, 1998 the Company paid approximately $162 million in cash
to AT&T PCS in exchange for an 80% interest in the Wireless business,
including a PCS license and other assets and liabilities. The goodwill,
licenses, and other intangibles related to this purchase were approximately
$96 million and are being amortized to expense on a straight-line basis over
a 20- to 40-year period.
The following summarized unaudited Pro forma financial information
assumes both the Merger and the acquisition of the wireless business occurred
at the beginning of each year:
Millions of dollars (except per share amounts) Year ended December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $1,699.4 $1,572.0
EBITDA 326.8 341.8
Loss from continuing operations (349.5) (202.7)
Net Loss $(356.1) $(140.2)
- --------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations per common share $(1.76) $(1.02)
Loss per common share $(1.79) $(.72)
- --------------------------------------------------------------------------------------------------------------------------------
These unaudited Pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Merger and the acquisition
of the wireless business had occurred on January 1, 1998.
36
3. RESTRUCTURING AND OTHER CHARGES (CREDITS)
1999 RESTRUCTURING PLAN
In December 1999, the Company's management approved restructuring plans
which included initiatives to integrate operations of the Company and Broadwing
Communications, improve service delivery, and reduce the Company's expense
structure. Total restructuring costs and impairments of $18.6 million were
recorded in the fourth quarter related to these initiatives. The $18.6 million
consisted of $7.7 million relating to Broadwing Communications (recorded as a
component of the preliminary purchase price allocation) and $10.9 million
relating to the Company (recorded as a cost of operations). The $10.9 million
relating to the Company consisted of restructuring and other liabilities in the
amount of $9.5 million and related asset impairments in the amount of $1.4
million. The restructuring related liabilities recorded in the fourth quarter of
1999 were comprised of the following:
Broadwing,excluding
Millions of dollars Broadwing Communications Broadwing Communications Total
- --------------------------------------------------------------------------------------------------------------------------------
Employee separations $6.0 $2.2 $8.2
Facility closure costs 2.3 2.1 4.4
Relocation --- 0.2 0.2
Other exit costs 1.2 3.2 4.4
------ ------ ------
Total accrued restructuring costs $ 9.5 $ 7.7 $ 17.2
------ ------ ------
- --------------------------------------------------------------------------------------------------------------------------------
The Company's estimated restructuring costs were based on management's best
estimate of those costs based on available information. The restructuring costs
accrued in 1999 included the costs of involuntary employee separation benefits
related to 347 employees (263 Broadwing Communication employees and 84 other
employees). As of December 31, 1999, approximately 1% of the employee
separations had been completed for a total cash expenditure of $0.4 million.
Employee separation benefits include severance, medical and other benefits, and
primarily affect customer support, infrastructure, and the Company's long
distance operations. 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.
In connection with the restructuring plan, the Company performed a review of
our long-lived assets to identify any potential impairments in accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
of." Accordingly, the Company recorded a $1.4 million charge as an expense of
operations, resulting from the abandonment of certain assets including duplicate
network equipment.
In total, the Company expects these restructuring related activities to
result in cash outlays of $14.8 million and non-cash items of $3.8 million, and
that most of the restructuring actions will be completed by December 31, 2000.
1995 RESTRUCTURING PLAN
In 1995, the Company implemented a restructuring plan to provide for the
voluntary and involuntary separation of more than 1,300 employees. The Company
recorded charges of $131.6 million to reflect the cost of this plan. The Company
recorded $21 million of non-cash pension settlement gains in 1997 and reversed
$1.1 million in restructuring liabilities in 1998 upon substantial completion of
the 1995 restructuring plan.
37
- -------------------------------------------------------------------------------
4. INVESTMENTS IN OTHER ENTITIES
Investments in Equity Method Securities - The Company holds a 27% ownership
investment in Applied Theory. The book value and market value of this investment
at December 31, 1999 were $61.0 million and $157.1 million, respectively.
Investments in Marketable Securities - Investments held in PSINet, Purchase
Pro and ZeroPlus.com are classified as an "available-for-sale" securities under
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
Accordingly, the Company recorded these investments at fair value and recorded
the unrealized holding gains net of tax in comprehensive income, and adjusted
the carrying value of these investments. The book value and related market value
of these securities were $524.3 million and $771.3 million, respectively, as of
December 31, 1999.
- -------------------------------------------------------------------------------
5. DEBT
Debt Consists of the Following:
Millions of dollars at December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Short-Term Debt:
Commercial paper -- $185.5
Current maturities of long-term debt $9.2 0.7
---- ------
Total short-term debt $9.2 $186.2
- --------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt
Bank Notes $755.0 --
9.0% Senior subordinated notes 450.0 --
6.75% Convertible notes 412.0 --
Various CBT Notes 290.0 $290.0
7.25% Senior subordinated notes 50.0 50.0
PSINet forward sale 133.9 --
Capital lease obligations 37.0 26.8
Other 8.1 --
- --------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $2,136.0 $366.8
- --------------------------------------------------------------------------------------------------------------------------------
Average balances of short-term debt and related interest rates for the last
three years are as follows:
Millions of dollars 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Average amounts of short-term debt
outstanding during the year* $190.0 $87.5 $64.2
Maximum amounts of short-term debt
at any month-end during the year $230.0 $185.5 $129.5
Weighted average interest rate
during the year** 4.9% 5.6% 5.7%
* Amounts represent the average daily face amount of notes.
** Weighted average interest rates are computed by dividing the daily average
face amount of notes into the aggregate related interest expense.
38
9% SENIOR SUBORDINATED NOTES
In 1998 IXC issued $450.0 million of 9% senior subordinated notes due 2008
("the 9% notes"). The 9% notes are general unsecured obligations and are
subordinate in right of payment to all existing and future senior indebtedness
and other liabilities of our subsidiaries. The indenture related to the 9% notes
requires us to comply with various financial and other covenants and restricts
the Company from incurring certain additional indebtedness.
In January 2000, $404 million of these 9% notes were redeemed through a
tender offer as a result of the change of control terms of the bond indenture.
As a result, the Company recorded an extraordinary charge for the debt
extinguishment of approximately $4.4 million, net of taxes.
6.75% CONVERTIBLE NOTES
In July 1999, the Company issued $400 million of 10-year, convertible
subordinated debentures to Oak Hill Capital Partners, L.P. These notes are
convertible into common stock of the Company at a price of $29.89 per common
share at the option of the holder. For as long as this debt is outstanding,
these notes bear a coupon rate of 6.75% per annum, with the associated interest
expense being added to the debt principal amount. Through December 31, 1999, the
Company has recorded $12.0 million in interest expense and has adjusted the
carrying amount of the debt accordingly.
PSINET FORWARD SALE
The Company's investment in PSINet consists of 21.6 million shares after
adjusting for their February 2000 two-for-one stock split. In June and July
1999, Broadwing Communications received approximately $111.8 million
representing amounts from a financial institution in connection with two prepaid
forward sale contracts on six million shares of the PSINet common stock. This
amount is accounted for as notes payable and is collateralized by these six
million shares of PSINet common stock owned by the Company. Each forward-sale
obligation for three million shares of PSINet stock may be settled at specified
dates in the first and second quarter of 2002 for a maximum amount of three
million shares of PSINet stock, or at the Company's option, the equivalent value
in cash. Since it is the Company's current intention to settle these obligations
in PSINet stock, the carrying amount of the liability is marked-to-market each
period with an offsetting adjustment to the "unrealized gain on investments"
caption within other comprehensive income.
BANK NOTES
In November 1999, the Company obtained a $2.1 billion credit facility from a
group of 24 lending institutions. The credit facility consists of $900 million
in revolving credit and $750 million in term loans from banking institutions and
$450 million in term loans from non-banking institutions. At December 31, 1999,
the Company had drawn approximately $755 million from the credit facility in
order to refinance its existing debt and debt assumed as part of the Merger. In
January 2000, the Company borrowed approximately $400 million in order to redeem
the outstanding 9% Senior Subordinated Notes assumed during the Merger as part
of a tender offer. This tender offer was required under the terms of the bond
indenture due to the change in control provision. Accordingly, the Company has
approximately $900 million in additional borrowing capacity under this facility
as of the date of this report. This facility's financial covenants require that
the Company maintain certain debt to EBITDA ratios, debt to capitalization
ratios, fixed to floating rate debt ratios and interest coverage ratios. This
facility also contains covenants which, among other things, restrict the
Company's ability to incur additional debt, pay dividends, repurchase Company
common stock, sell assets or merge with another company.
The interest rates to be charged on borrowings from this credit facility can
range from 100 to 225 basis points above the London Interbank Offering Rate
(LIBOR), depending on the Company's credit rating. The current borrowing rate is
approximately 200 basis points. The Company will incur banking fees in
association with this credit facility ranging from 37.5 basis points to 75 basis
points, applied to the unused amount of borrowings of the facility.
39
Annual maturities of long-term debt and minimum payments under capital leases
for the five years subsequent to December 31, 1999 are as follows:
Millions of dollars at December 31 1999
- -----------------------------------------------------------------------
Debentures/Notes
Year of Maturity
2000 $ --
2001 --
2002 20.0
2003 20.0
2004 --
2005 325.0
Thereafter 1,592.0
- -----------------------------------------------------------------------
Subtotal 1,957.0
PSINet Forward Sale 133.9
Capital leases and other 45.1
- -----------------------------------------------------------------------
Total $2,136.0
- -----------------------------------------------------------------------
Interest expense recognized on the Company's debt is as follows:
Millions of dollars Year ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Interest expense:
Long-term debt $55.8 $ 20.8 $ 23.2
Short-term debt 5.5 4.9 6.1
Other 0.4 (1.5) 0.8
- ---------------------------------------------------------------------------------------------
Total $61.7 $ 24.2 $ 30.1
- ---------------------------------------------------------------------------------------------
Interest capitalized during 1999, 1998 and 1997 was $3.8 million, $1.9
million and $1.3 million, respectively.
Extraordinary items related to the early extinguishment of debt affected
both years. In 1999, costs related to the early extinguishment of Broadwing
Communications' debt as a result of to the Merger resulted in a $6.6 million
charge, net of taxes. The spin-off of Convergys Corporation in 1998 reduced
the borrowing capacity that was needed from the Company's then-existing
credit facility and some debt and a portion of that credit facility were
retired, resulting in a $1.0 million extraordinary charge, net of tax.
- ------------------------------------------------------------------------------
6. MINORITY INTEREST
Millions of dollars Year ended December 31 1999 1998
- ---------------------------------------------------------------------------------
Minority interest consists of:
12.5% Exchangeable Preferred Stock $418.2 $ --
Minority Interest in Cincinnati Bell
Wireless held by AT&T PCS 13.1 29.0
Other 2.7
- ---------------------------------------------------------------------------------
Total $434.0 $29.0
- ---------------------------------------------------------------------------------
40
Broadwing Communications has outstanding approximately $400 million, or
400,000 shares of 12 1/2% Junior Exchangeable Preferred Stock (12 1/2%
Preferreds). The 12 1/2% Preferreds are mandatorily redeemable on August 15,
2009 at a price equal to their liquidation preference ($1,000 a share), plus
accrued and unpaid dividends. Dividends on the 12 1/2% Preferreds are
currently being effected through additional shares of the 12 1/2% Preferreds.
This option is available to the Company until February 15, 2001, at which
time all dividends are required to be paid in cash. The Company converted to
a cash pay option for these dividends on February 15, 2000. Dividends on the
12 1/2% Preferreds are classified as minority interest expense in the
Consolidated Statements of Income and Comprehensive Income. At the Merger
date, and as part of purchase accounting, the 12 1/2% Preferreds were
adjusted to fair market value which exceeds the redemption value. As such,
the accretion of the difference between the new carrying value and the
mandatory redemption value is treated as an offsetting reduction to minority
interest expense.
AT&T PCS maintains a 19.9% ownership in the Company's Cincinnati Bell
Wireless (CBW) subsidiary. The balance is adjusted as a function of AT&T PCS'
19.9% share of the adjusted net income (or loss) of CBW, with an offsetting
amount being reflected in the Consolidated Statements of Income and
Comprehensive Income under the caption "Minority Interest and Other Income
(Expense), Net."
- ------------------------------------------------------------------------------
7. COMMON AND PREFERRED SHARES
COMMON SHARES
Par value of the common shares is $.01 per share. At December 31, 1999
and 1998, common shares outstanding were 200.9 million and 136.4 million,
respectively. Common shares outstanding at December 31, 1999 include the
issuance of 68.4 million shares in association with the Merger. In July 1999,
the Company's Board of Directors approved a share repurchase program
authorizing the repurchase of as much as $200 million in common shares of the
Company. As of December 31, 1999, the Company had repurchased approximately
7.8 million shares of Company common stock at a cost of $145 million.
COMMON SHARE PURCHASE RIGHTS PLAN
In the first quarter of 1997, the Company's Board of Directors adopted a
Share Purchase Rights Plan by granting a dividend of one preferred share
purchase right for each outstanding common share to shareowners of record at
the close of business on May 2, 1997. Under certain conditions, each right
entitles the holder to purchase one-thousandth of a Series A Preferred Share.
The rights cannot be exercised or transferred apart from common shares,
unless a person or group acquires 15% or more of the Company's outstanding
common shares. The rights will expire May 2, 2007, if they have not been
redeemed.
PREFERRED SHARES
The Company is authorized to issue up to four million voting preferred
shares and one million nonvoting preferred shares.
In connection with the Merger, the Company issued 155,250 shares of 6 3/4%
cumulative convertible preferred stock. The 6 3/4% convertible preferred
stock can be converted at any time at the option of the holder into common
stock of the Company. The conversion rate is 28.84 shares of Company common
stock per share of 6 3/4% convertible preferred stock. Dividends on the 6 3/4%
convertible preferred stock are payable quarterly in arrears in cash or
common stock.
Also in connection with the Merger, the Company issued approximately $100
million (1,074,000 shares) of 7 1/4% junior convertible preferred stock due
2007. As of the date of this report 1,058,380 shares remain outstanding. The
7 1/4% convertible preferred stock is convertible at the option of the Holder
into shares of common stock at a conversion rate of 8.94 shares of common
stock for each share of 7 1/4% convertible preferred stock. The shares are
redeemable at a price of 104.83% on April 3, 2000. On March 31, 2007, the
7 1/4% convertible preferred stock must be redeemed at a price equal to the
liquidation preference ($100 per share) plus accrued and unpaid dividends. If
paid in kind, dividends accrue at 8 3/4%. The difference between the carrying
value of the 7 1/4% convertible preferred stock and its redemption value is
being accreted to additional paid-in-capital through the mandatory redemption
date, and this accretion is included in dividends and accretion applicable to
preferred stock. Since this preferred stock is mandatorily redeemable, it is
not classified within shareowners' equity.
41
- ------------------------------------------------------------------------------
8. EARNINGS PER COMMON SHARE
Basic earnings per common share are based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share reflects the potential dilution that would occur if common stock
equivalents were exercised. The following table is a reconciliation of the
numerators and denominators of the basic and diluted earnings per common
share computations for income from continuing operations, before
extraordinary items, for the following periods:
Shares and dollars
in millions (except
per share amounts) Year ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Numerator:
Income from continuing operations $38.0 $81.8 $102.3
Preferred Stock dividends 2.1 -- --
Numerator for basic earnings per common
share and earnings per common share
assuming dilution - income
applicable to common shareowners $35.9 $81.8 $102.3
- ------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings
per common share - weighted average
common shares 144.3 136.0 135.2
Potential dilution:
Stock options 5.6 1.7 1.9
Stock-based compensation .8 .5 .6
arrangements
- ------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per common share 150.7 138.2 137.7
- ------------------------------------------------------------------------------------------------------------------
Basic earnings from continuing
operations per common share $.25 $.60 $.76
- ------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations per common share
assuming dilution $.24 $.59 $.74
- ------------------------------------------------------------------------------------------------------------------
Options to purchase 4,107,471 weighted average shares of common stock at
an average of $20.75 per share were outstanding during the year ended
December 31, 1999, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price
of the common shares. The 6 3/4% convertible debentures and 7 1/4%
convertible preferred stocks are also excluded from the diluted EPS
calculation because they are anti-dilutive. The inclusion of the convertible
debentures and preferred stocks would have added 13.8 million and 9.5 million
shares, respectively, to the denominator of the EPS calculation.
42
- ------------------------------------------------------------------------------
9. INCOME TAXES
Income tax expense consists of the following:
Millions of dollars Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Current:
Federal $52.3 $51.1 $57.3
State and local 6.9 7.6 4.3
----- ----- -----
Total current 59.2 58.7 61.6
Deferred:
Federal (21.2) (12.1) (5.0)
State and local (3.5) (0.7) 0.9
----- ----- -----
Total deferred (24.7) (12.8) (4.1)
Investment tax credits (1.2) (1.6) (1.2)
----- ----- -----
Total $33.3 $44.3 $56.3
- --------------------------------------------------------------------------------------------------------------
Income taxes decreased $11 million in comparison to the prior year as a
function of lower pre-tax income and the offsetting impact of nondeductible
expenses such as goodwill amortization and preferred stock dividends.
The following is a reconciliation of the statutory Federal income tax rate
with the effective tax rate for each year:
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 3.4 3.3 0.9
Amortization of non-deductible
intangible assets 4.6 -- --
Dividends on preferred stock 3.2 -- --
Investment and research tax credits (0.9) (1.6) (1.5)
Other differences 1.4 (1.6) 1.1
---- ---- ----
Effective rate 46.7% 35.1% 35.5%
- --------------------------------------------------------------------------------------------------------------
The income tax effects relating to other comprehensive income components
were $104.0 million in 1999. These tax impacts were not significant in 1998
and 1997.
The components of the Company's deferred tax assets and liabilities are as
follows:
Millions of dollars at December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loss carryforwards $ 126.2 ---
Unearned revenues 193.9 ---
Investment in subsidiaries 46.5 9.6
Other 80.0 39.3
------- -----
Total deferred tax asset $ 446.6 $48.9
- --------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization $ 400.8 $22.3
Unrealized gain on investments 227.1 --
Other 4.6 --
------- -----
Total deferred tax liabilities $ 632.5 $22.3
------- -----
Net deferred tax (liability) asset $(185.9) $26.6
- --------------------------------------------------------------------------------------------------------------
43
The Company recorded gross deferred tax assets of approximately $346.3
million and gross deferred tax liabilities of approximately $484.3 million
upon the Merger. Tax loss carryforwards will generally expire between 2001
and 2018. 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.
- ------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS
PENSIONS AND POST-RETIREMENT PLANS
The Company sponsors three noncontributory defined benefit pension plans:
one for eligible management employees, one for non-management employees and
one supplementary, nonqualified, unfunded plan for certain senior managers.
The pension benefit formula for the management plan is a cash balance
plan; the pension benefit is determined by a combination of
compensation-based credits and annual guaranteed interest credits. The
non-management pension is also a cash balance plan; the pension benefit is
determined by a combination of service and job-classification-based credits
and annual interest credits. Benefits for the supplementary plan are based on
years of service and eligible pay. Funding of the management and
non-management plans is achieved through contributions to an irrevocable
trust fund. The contributions are determined using the aggregate cost method.
The Company uses the projected unit credit cost method for determining
pension cost for financial reporting purposes. It accounts for certain
benefits provided under early retirement packages, discussed in Note 3 as a
special termination benefit.
The Company also provides health care and group life insurance benefits
for retirees with a service pension. The Company funds its group life
insurance benefits through Retirement Funding Accounts and funds health care
benefits using Voluntary Employee Benefit Association (VEBA) trusts. It is
the Company's practice to fund amounts as deemed appropriate from time to
time. Contributions are subject to IRS limitations developed using the
aggregate cost method. The associated plan assets are primarily equity
securities and fixed income investments. The Company recorded an accrued
post-retirement benefit liability of $44.9 million at December 31, 1999.
The following information relates to all Company non-contributory
defined-benefit pension plans, post-retirement healthcare, and life insurance
benefit plans.
Effective January 1, 1999, after the spin-off of Convergys, pension
assets were divided between the pension trusts of the Company and Convergys
so that each company's plans had the required assets to meet the minimum
requirements set forth in applicable benefit and tax regulations. The
remaining assets in excess of the minimum requirements were divided between
the pension trusts of the Company and Convergys in accordance with the
Employee Benefits Agreement between the two companies.
44
Pension and post-retirement benefit cost are as follows:
Pension Benefits Postretirement and Other Benefits
----------------------- ---------------------------------
Millions of dollars Year ended December 31 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Service cost (benefits earned
during the period) $6.0 $4.8 $ 3.7 $1.8 $1.5 $1.3
Interest cost on projected
benefit obligation 30.3 18.1 20.0 14.4 15.3 15.2
Expected return on plan assets (37.8) (23.3) (23.0) (10.3) (9.4) (7.3)
- --------------------------------------------------------------------------------------------------------------------------------
Settlement gains -- -- (21.0) -- -- --
Curtailment loss -- 1.4 0.2 -- -- --
Amortization of:
Transition (asset)/obligation (2.4) (1.3) (1.5) 4.9 4.9 4.9
Prior service cost 1.5 0.7 0.7 0.3 0.2 0.2
Net (gain)/loss 0.3 0.3 0.3 (0.3) (0.2) (0.1)
- --------------------------------------------------------------------------------------------------------------------------------
Actuarial net pension cost (income) $ (2.1) $ 0.7 $ (20.6) $ 10.8 $ 12.3 $ 14.2
-------- ------- ------- ------- ------- -------
Reconciliation of the beginning and ending balance of the plans' funded
status were:
Pension Benefits Postretirement and Other Benefits
Millions of dollars Year ended December 31 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $476.5 $457.5 $234.8 $222.3
Service cost 6.0 4.8 1.8 1.5
Interest cost 30.2 18.1 14.4 15.2
Amendments 8.9 1.4 (0.4) --
Actuarial (gain) loss (44.1) 34.3 (34.1) 12.3
Curtailment -- 0.9 -- --
Benefits paid (42.8) (40.5) (15.3) (16.5)
------ ------ ------ ------
Benefit obligation at December 31 $434.7 $476.5 $201.2 $234.8
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets at January 1 $579.3 $543.2 $127.9 $112.1
Actual return on plan assets 125.0 71.8 9.3 17.5
Employer contribution 4.7 4.8 13.4 14.8
Benefits paid (42.8) (40.5) (15.3) (16.5)
------ ------ ------ ------
Fair value of plan assets at December 31 $666.2 $579.3 $135.3 $127.9
------ ------ ------ ------
Reconciliation to Balance Sheet:
Funded status $231.5 $102.8 $(65.9) $(106.9)
Unrecognized transition asset (12.0) (14.4) 62.9 68.6
Unrecognized prior service cost 26.6 19.2 2.7 2.6
Unrecognized net gain (237.1) (105.5) (44.6) (11.8)
- --------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $9.0 $2.1 $(44.9) $(47.5)
----------------------------------------------------------------------------------------------------------------------------
45
The combined net prepaid benefit expense consists of:
Pension Benefits
---------------------
Millions of dollars Year ended December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $42.0 $38.2
Accrued benefit liability (39.1) (44.2)
Intangible asset 1.3 1.2
Accumulated other comprehensive income 4.8 6.9
------- -------
Net amount recognized $ 9.0 $ 2.1
------- -------
- --------------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998, Pension plan assets include $51.4 million
in Company common stock and $52.8 million in Company and Convergys common
stocks, respectively.
The following are the weighted average assumptions as of December 31:
Pension Benefits Other Benefits
-------------------------- ------------------------
At December 31 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Discount rate - projected
benefit obligation 7.75 % 6.50% 7.00% 7.75% 6.50% 7.00%
Expected long-term rate of return
on Pension and VEBA plan assets 8.25 % 8.25% 8.25% 8.25% 8.25% 8.25%
Expected long-term rate of return
on retirement fund account assets -- -- -- 8.00% 8.00% 8.00%
Future compensation growth rate 4.50 % 4.00% 4.00% 4.50% 4.00% 4.00%
- --------------------------------------------------------------------------------------------------------------------------------
The assumed health care cost trend rate used to measure the
post-retirement health benefit obligation at December 31, 1999, was 7.43% and
is assumed to decrease gradually to 4.5% by the year 2004. In addition, a one
percentage point change in assumed health care cost trend rates would have
the following effect on the post-retirement benefit costs and obligation:
Millions of dollars 1% Increase 1% Decrease
- ---------------------------------------------------------------------------------
1999 service and interest costs $ 0.5 $ (0.4)
Post-retirement benefit obligation
at December 31, 1999 $ 6.6 $ (5.8)
- ---------------------------------------------------------------------------------
SAVINGS PLANS
The Company sponsors several defined contribution plans covering
substantially all employees. The Company's contributions to the plans are
based on matching a portion of the employee contributions or on a percentage
of employee earnings or net income for the year. Total Company contributions
to the defined contribution plans were $4.5 million, $4.0 million and $3.4
million for 1999, 1998, and 1997, respectively. These amounts exclude $6.8
million and $5.8 million in 1998 and 1997 respectively, related to the
spin-off of Convergys.
- ------------------------------------------------------------------------------
11. STOCK-BASED COMPENSATION PLANS
During 1999 and in prior years, certain employees of the Company were
granted stock options and other stock-based awards under the Company's
Long-Term Incentive Plan (Company LTIP). Under the Company LTIP, options are
granted with exercise prices that are no less than market value of the stock
at the grant date. Generally, stock options have ten-year terms and vesting
terms of three to five years. There were no Company stock appreciation rights
granted or outstanding during the three-year period ended December 31, 1999.
The number of shares authorized and available for grant (excluding those
granted in the Merger) under this plan were approximately 20 million and 8
million, respectively at December 31, 1999.
46
Effective December 31, 1998, awards outstanding under the Company LTIP
were modified such that, for each Company option or share award, the holder
also received a Convergys option or share award pursuant to Convergys'
Long-Term Incentive Plan (Convergys LTIP). These Convergys stock options or
share awards have the same vesting provisions, option periods and other terms
and conditions as the original Company options. In addition, upon completion
of the Merger, the historic IXC options were exchanged for Company options
with the same vesting provisions, option periods, and other terms and
conditions of the original IXC options.
The Company follows the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its plans. If
the Company had elected to recognize compensation cost for the issuance of
the Company or Convergys options to employees based on the fair value at the
grant dates for awards consistent with the method prescribed by SFAS 123, net
income and earnings per share would have been impacted as follows:
Millions of dollars Year ended
except per share amounts December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $31.4 $149.9 $(16.4)
- --------------------------------------------------------------------------------------------------------------
Pro forma compensation expense,
net of tax benefits (7.8) (2.1) (5.1)
Total pro forma $23.6 $147.8 $(21.5)
- --------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
As reported $ .20 $ 1.08 $ (.12)
Pro forma $ .14 $ 1.06 $ (.16)
- --------------------------------------------------------------------------------------------------------------
The pro forma effect on net income (loss) for all periods shown above is
not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995. In addition, the pro forma disclosure
for all periods shown does not take into consideration pro forma IXC option
grants prior to the Merger. Additionally, the pro forma disclosure for 1998
includes incremental compensation expense based on the difference in the fair
value of the replacement options issued at the date of the distribution to
employees who held Company options.
The weighted average fair values at the date of grant for the Company
options granted to employees during 1999 and 1998 were $8.40 and $8.73,
respectively. Such amounts were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Expected dividend yield -- 1.4% 1.8%
Expected volatility 48.0% 25.0% 29.9%
Risk-free interest rate 6.4% 5.7% 6.2%
Expected holding
period -- years 4 4 4
- --------------------------------------------------------------------------------------------------------------
47
Presented below is a summary of the status of outstanding Company stock
options issued to employees, the issuance of Convergys options to Company option
holders at the date of distribution, and related transactions:
Weighted Average
Shares Exercise Price
- ---------------------------------------------------------------------------------------------------
Company options held by
employees at January 1, 1997 2,518 $13.14
Granted 357 $30.01
Exercised (196) $10.08
Forfeited/expired (15) $23.90
- ---------------------------------------------------------------------------------------------------
Company options held by
employees at December 31, 1997 2,664 $17.16
Granted 374 $31.25
Exercised (124) $12.02
Forfeited/expired (80) $28.26
- ---------------------------------------------------------------------------------------------------
Company options held by
employees at December 31, 1998 2,834 $20.33
Effect of Convergys Split 4,450 $11.61
- ---------------------------------------------------------------------------------------------------
Company options held by
employees at January 1, 1999 7,284 $8.72
Granted in IXC acquisition 14,583 $15.78
Granted to employees 11,341 $19.38
Exercised (3,198) $11.57
Forfeited/expired (1,308) $17.55
- ---------------------------------------------------------------------------------------------------
Company options held by
employees at December 31, 1999 28,702 $15.81
- ---------------------------------------------------------------------------------------------------
The following table summarizes the status of Company stock options outstanding
and exercisable at December 31, 1999:
Shares in thousands Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted Average
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
$1.440 to $12.981 7,785 6.14 $8.02 5,802 $6.80
$12.994 to $16.781 11,150 9.11 $16.13 2,515 $15.38
$17.500 to $25.406 7,993 9.36 $20.18 2,169 $20.48
$25.450 to $31.563 1,774 6.08 28.36 520 26.80
----- ----- ------ -----
Total 28,702 $15.81 11,006 $12.40
- --------------------------------------------------------------------------------------------------------------------------------
Restricted stock awards during 1999, 1998 and 1997 were 739,250 shares,
320,000 shares, and 126,000 shares, respectively. The weighted average market
value of the shares on the grant date were $17.37 in 1999 and, on a pre-spin-off
basis, $32.59, and $29.48 in 1998 and 1997, respectively. Restricted stock
awards generally vest within one to five years. Total compensation expense for
restricted stock awards during 1999, 1998, and 1997 was $5.7 million, $.6
million and $.6 million, respectively.
48
On January 4, 1999, the Company announced stock option grants to each of its
approximately 3,500 employees. According to the terms of this program, stock
option grant recipients remaining with the Company until January 4, 2002, can
exercise their options to purchase up to 500 common shares each. The exercise
price for these options is $16.75 per share, the average of the opening and
closing prices for the Company's common stock on the date of the grant. This
plan includes a provision for option grants to future employees, in smaller
amounts and at an exercise price based on the month of hire. Grant recipients
must exercise their options prior to January 4, 2009. The Company does not
expect a significant amount of dilution as a result of this grant.
12. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the tax-free spin-off of its
Convergys subsidiary by distributing shares of Convergys common stock to Company
shareowners on a one-for-one basis, resulting in a $520.7 million reduction in
the Company's common shareowners' equity in 1998.
For 1998 and all prior periods, the consolidated financial statements have
been restated to reflect the disposition of Convergys as discontinued
operations. Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows of Convergys have been reported as discontinued
operations in the financial statements.
Summarized financial information for the discontinued operations is as follows:
Millions of dollars Year ended December 31 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues $1,387.3 $922.3
Income before income taxes 118.3 138.3
Income taxes 49.2 47.0
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 69.1 $ 91.3
FINANCIAL POSITION
Current assets $ 360.5 $265.8
Total assets 1,450.9 654.4
Current liabilities 697.9 216.7
Total liabilities 930.2 223.6
Net assets of discontinued operations $ 520.7 $430.8
Income before income taxes includes allocated interest expense of $33.7
million and $5.4 million in 1998 and 1997, respectively. Interest expense was
allocated based on the capital structure of Convergys anticipated at the date of
distribution and the Company's weighted average interest rates. The effective
tax rates for discontinued operations were 42% and 34%, respectively.
In 1998 and 1997, the Company had revenues from Convergys of $10.1 million
and $18.6 million, respectively, resulting from the provision of communications
and other services.
In 1998 and 1997, the Company incurred costs for services provided by
Convergys of $49.8 million and $49.6 million, respectively, resulting from
billing and customer management services.
The Company and Convergys entered into the Plan of Reorganization and
Distribution Agreement (the Plan) dated July 20, 1998. The Plan provided, among
other things, that the Company indemnify Convergys for all liabilities arising
from the Company's business and operations and for all contingent liabilities
related to the Company's business and operations otherwise assigned to the
Company. The Plan provided for the equal sharing of contingent liabilities not
allocated to one of the companies. In addition, the Company has a number of
other agreements with Convergys regarding federal, state and local tax
allocation and sharing, employee benefits, general services, billing and
information services provided to the Company by Convergys, and
telecommunications support services provided by the Company to Convergys.
49
13. DISCONTINUATION OF SFAS 71
In the fourth quarter of 1997, the Company determined that the application
of SFAS 71, "Accounting for the Effects of Certain Types of Regulation", was no
longer appropriate as a result of changes in CBT's competitive and regulatory
environment. Accordingly, the application of SFAS 71 was discontinued at CBT,
resulting in an extraordinary non-cash charge of $210.0 million, which is net of
a related tax benefit of $129.2 million.
The components of the charge are as follows:
Millions of dollars
- --------------------------------------------------------------------------------
Reduction in plant-related balances $327.7
Elimination of other net regulatory assets and liabilities 11.5
- --------------------------------------------------------------------------------
Total pre-tax charge $339.2
Total after-tax charge $210.0
- --------------------------------------------------------------------------------
The change in plant balances primarily represents an increase in accumulated
depreciation of $309.0 million for the removal of an embedded regulatory asset
resulting from the use of regulatory lives for depreciation of plant assets
which have typically been longer than the estimated economic lives. The
adjustment was supported by a discounted cash flow analysis which estimated
amounts of plant that may not be recoverable from future cash flows. The
adjustment also included elimination of accumulated depreciation reserve
deficiencies recognized by regulators and amortized as part of depreciation
expense and an adjustment of approximately $9.5 million to fully depreciate
analog switching equipment scheduled for replacement.
The discontinuance of SFAS 71 also required CBT to eliminate from its
balance sheet the effects of any other actions of regulators that had been
recognized as assets and liabilities pursuant to SFAS 71, but would not have
been recognized as assets and liabilities by enterprises in general. Prior to
the discontinuance of SFAS 71, CBT had recorded deferred income taxes (and a
regulatory asset) based upon the cumulative amount of income tax benefits
previously flowed through to ratepayers. The discontinuation of SFAS 71 at CBT
had no effect on the accounting for the Company's other subsidiaries.
50
14. ADDITIONAL FINANCIAL INFORMATION
BALANCE SHEET
Millions of dollars Year ended December 31 1999 1998 Depreciable Lives (Yrs.)
- --------------------------------------------------------------------------------------------------------------------------------
PROPERTY PLANT AND EQUIPMENT, NET:
Land and rights of way $ 155.9 $ 5.0 0 - 30
Buildings and Leasehold Improvements 428.3 164.0 5 - 40
Telephone Plant 1,697.2 1,438.5 6 - 29
Transmission system 1,074.4 65.9 5 - 20
Furniture, vehicles, and other 225.7 187.4 8 - 15
Construction in Process 232.0 12.4 --
- --------------------------------------------------------------------------------------------------------------------------------
3,813.5 1,873.2
Less: Accumulated depreciation 1,312.6 1,175.0
- --------------------------------------------------------------------------------------------------------------------------------
Property Plant and Equipment, Net $2,500.9 $ 698.2
- --------------------------------------------------------------------------------------------------------------------------------
Millions of dollars Year ended December 31 1999 1998 Amortization Lives (Yrs.)
- --------------------------------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLES:
Goodwill $2,247.7 $ 94.6 5 - 40
Assembled workforce 24.0 -- 2 - 4
Installed customer base 373.0 -- 2 - 20
Other Intangibles 60.6 14.3 3 - 40
- --------------------------------------------------------------------------------------------------------------------------------
2,705.3 108.9
Less: Accumulated amortization (25.4) (5.6)
- --------------------------------------------------------------------------------------------------------------------------------
Goodwill and Other Intangibles $2,679.9 $ 103.3
- --------------------------------------------------------------------------------------------------------------------------------
Millions of dollars Year ended December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
OTHER CURRENT LIABILITIES:
Accrued payroll and benefits $ 48.9 $ 33.9
Accrued interest 18.8 15.1
Accrued restructuring costs 30.2 0.5
Other current liabilities 59.6 44.3
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 157.5 $ 93.8
- --------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain on investments $ 170.0 --
Additional minimum pension liability (3.1) (6.7)
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 166.9 $ (6.7)
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
Millions of dollars Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR:
Interest (net of amount capitalized) $ 53.8 $ 26.8 $29.6
Income taxes (net of refunds) $ 40.2 $ 81.4 $82.8
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock, warrants and options
issued in purchase of business $1,909.0 -- --
Preferred stock dividends $ 12.0 -- --
Accretion of preferred stock $ 2.4 -- --
Fiber exchange agreements $ 2.7 -- --
- --------------------------------------------------------------------------------------------------------------------------------
51
15. BUSINESS SEGMENT INFORMATION
The Company is organized on the basis of products and services. The
Company's segments are strategic business units that offer distinct products and
services and are aligned with specific subsidiaries of the Company. The Company
operates in the five business segments described below.
The Local Communications segment provides local, long distance, data
networking and transport, Internet and payphone services, as well as sales of
communications equipment, in southwestern Ohio, northern Kentucky, and
southeastern Indiana. Services are marketed and sold to both residential and
business customers and delivered via the Company's Cincinnati Bell Telephone and
Zoomtown.com subsidiaries.
The Broadband segment utilizes an advanced, fiber-optic network to provide
private line, switched access, data transport, Internet-based, and other
services to end user customers. Additionally, excess network capacity is leased
(in the form of indefeasible right-to-use agreements) to other
telecommunications providers and to Internet service providers.
The Wireless segment holds the Company's Cincinnati Bell Wireless subsidiary
(an 80%-owned venture with AT&T Wireless PCS, Inc.) which provides advanced
digital personal communications and sales of related communications equipment to
customers in its Greater Cincinnati and Dayton, Ohio operating areas.
The Directory segment sells directory advertising and information services
primarily to business customers in the aforementioned area. This segment's
identifiable product is the Yellow Pages directory delivered via the Company's
Cincinnati Bell Directory subsidiary.
Other Communications combines the operations of Cincinnati Bell Long
Distance (CBLD), Cincinnati Bell Supply (CBS), and Broadwing IT Consulting
segments. CBLD resells long distance, voice, data, frame relay, and Internet
access services to small- and medium-sized business customers in a regional area
consisting mainly of six states. CBS sells new computers and resells
telecommunications equipment in the secondary market, and Broadwing IT
Consulting provides network integration and consulting services.
The Company evaluates performance of its segments and allocates resources to
them based on EBITDA (earnings before interest, taxes, depreciation,
amortization, and restructuring and other charges/credits). EBITDA is commonly
used in the communications industry to measure operating performance. EBITDA is
not intended to represent cash flows for the periods. Because EBITDA is not
calculated identically by all companies, the amounts presented for the Company
may not be comparable to similarly titled measures of other companies.
The Company generally accounts for intersegment sales and transfers as if
the sales or transfers were to third parties, i.e., at current market prices.
The accounting policies of the business segments are the same as those described
in Accounting Policies (see Note 1). Certain corporate administrative expenses
have been allocated to segments based upon the nature of the expense.
52
Millions of dollars Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES
Local Communications $ 750.1 $ 718.4 $ 670.1
Broadband 99.0 -- --
Wireless 91.4 -- --
Directory 74.2 72.9 72.9
Other Communications 131.3 106.1 101.7
Intersegment (14.9) (12.3) (10.2)
- --------------------------------------------------------------------------------------------------------------------------------
Total $1,131.1 $ 885.1 $ 834.5
- --------------------------------------------------------------------------------------------------------------------------------
INTERSEGMENT REVENUES
Local Communications $ 6.8 $ 6.8 $ 6.0
Broadband -- -- --
Wireless -- -- --
Directory 0.4 0.4 --
Other Communications 7.7 5.1 4.2
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 14.9 $ 12.3 $ 10.2
- --------------------------------------------------------------------------------------------------------------------------------
EBITDA
Local Communications $ 320.8 $ 247.9 $ 246.3
Broadband 0.2 -- --
Wireless (25.6) (0.8) (2.8)
Directory 27.2 25.5 25.0
Other Communications 3.0 14.6 17.2
Corporate and Eliminations 10.1 2.8 9.0
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 335.7 $ 290.0 $ 294.7
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Local Communications $ 781.4 $ 749.5 $ 706.4
Broadband 5,154.0 -- --
Wireless 268.4 212.1 --
Directory 26.9 28.4 30.6
Other Communications 55.7 35.2 32.6
Corporate and Eliminations 222.2 15.8 74.7
- --------------------------------------------------------------------------------------------------------------------------------
Total $6,508.6 $1,041.0 $ 844.3
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL ADDITIONS
Local Communications $ 152.2 $ 134.9 $ 140.0
Broadband 165.0 -- --
Wireless 55.9 2.2 1.5
Directory 0.2 0.1 --
Other Communications 8.1 3.9 5.6
Corporate -- 2.5 11.3
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 381.4 $ 143.6 $ 158.4
- --------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Local Communications $ 113.8 $ 106.2 $ 120.6
Broadband 46.7 -- --
Wireless 14.3 -- --
Directory 0.1 0.1 --
Other Communications 6.1 3.7 3.3
Corporate -- 1.1 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 181.0 $ 111.1 $ 124.3
- --------------------------------------------------------------------------------------------------------------------------------
53
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate, where
practicable, the fair value of each class of financial instruments:
Cash and cash equivalents, and short-term debt -- the carrying amount
approximates fair value because of the short-term maturity of these instruments.
Accounts receivable and accounts payable - the carrying amounts reported in
the balance sheets for accounts receivable and accounts payable approximate fair
value.
Notes receivable - the carrying amounts reported in the balance sheet for
notes receivable approximate fair value because of the short-term nature of the
notes and because their interest rates are comparable to current rates.
Long-term debt -- the fair value is estimated based on year-end closing
market prices of the Company's debt and of similar liabilities. The carrying
amounts at December 31, 1999, and 1998 were $1,957.0 million and $340.0 million,
respectively. The estimated fair values at December 31, 1999 and 1998 were
$1,805.0 million and $355.1 million, respectively. Long-term debt also includes
the forward sale of six million shares of PSINet common stock, as further
described in Note 5. The Company is adjusting the carrying amount of this
liability as required by the forward sale agreement. The carrying amount of this
obligation at December 31, 1999 was $133.9 million.
Convertible preferred stock - the fair values of the 7 1/4% Convertible
Preferred Stock and the 12 1/2% Exchangeable Preferred Stock were $285.8 million
and $435.5 million, respectively, and were based on the trading values of these
items at December 31, 1999.
Interest rate risk management --The Company is exposed to the impact of
interest rate changes. The Company's objective is to manage the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. The Company continuously monitors the ratio of variable to
fixed interest rate debt to maximize its total return. As of December 31, 1999,
approximately 61% of debt was long-term, fixed-rate debt and approximately 39%
was bank loans with variable interest rates.
17. CINCINNATI BELL TELEPHONE COMPANY
The following summarized financial information is for the Company's consolidated
wholly owned subsidiary, Cincinnati Bell Telephone Company:
INCOME STATEMENT
Millions of dollars Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $750.1 $ 718.4 $ 670.1
Costs and expenses $544.2 $ 576.6 $ 523.3
Net income before extraordinary item $119.3 $ 81.7 $ 85.2
Net income (loss) $119.3 $ 81.1 $ (124.8)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
Millions of dollars at December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Current assets $148.5 $ 151.6
Telephone plant - net 606.9 580.8
Other noncurrent assets 26.0 17.1
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $781.4 $ 749.5
- --------------------------------------------------------------------------------------------------------------------------------
Current liabilities $161.6 $ 144.2
Noncurrent liabilities 45.1 38.7
Long-term debt 322.0 317.1
Shareowner's equity 252.7 249.5
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareowner's equity $781.4 $ 749.5
- --------------------------------------------------------------------------------------------------------------------------------
54
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
All adjustments necessary for a fair statement of income for each period have
been included.
Millions of dollarsexcept
per common share amounts 1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------------------------------------------------------
1999
REVENUES $ 242.2 $ 253.6 $ 262.4 $ 372.9 $ 1,131.1
EBITDA $ 77.6 $ 84.4 $ 91.6 $ 82.1 $ 335.7
OPERATING INCOME $ 45.3 $ 51.8 $ 58.3 $ (11.6) $ 143.8
INCOME FROM:
CONTINUING
OPERATIONS $ 24.7 $ 28.3 $ 25.8 $ (40.8) $ 38.0
EXTRAORDINARY ITEM $ - $ - $ - $ (6.6) $ (6.6)
NET INCOME $ 24.7 $ 28.3 $ 25.8 $ (47.4) $ 31.4
BASIC EARNINGS
PER COMMON SHARE $ .18 $ .21 $ .19 $ (.29) $ .20
DILUTED EARNINGS
PER COMMON SHARE $ .18 $ .20 $ .19 $ (.29) $ .20
- --------------------------------------------------------------------------------------------------------------------------------
In the fourth quarter of 1999, the extraordinary item was for the early
extinguishment of long-term debt associated with the Merger. This reduced net
income by $6.6 million, or $.04 per common share, net of tax. The third quarter
results have been restated to reflect an equity share of IXC's losses as part of
the step acquisition that was finalized on November 9, 1999.
Millions of dollars except
per common share amounts 1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------------------------------------------------------
1998
Revenues $216.5 $219.5 $222.6 $ 226.5 $ 885.1
EBITDA $ 68.1 $ 66.5 $ 75.5 $ 79.9 $ 290.0
Operating Income $ 41.2 $ 39.5 $ 47.1 $ 52.2 $ 180.0
Income from:
Continuing
Operations $ 22.5 $ 16.1 $ 21.0 $ 22.2 $ 81.8
Discontinued
Operations,
Net of Taxes $ 0.3 $ 26.4 $ 27.4 $ 15.0 $ 69.1
Extraordinary Item $ -- $ -- $ -- $ (1.0) $ (1.0)
Net Income $ 22.8 $ 42.5 $ 48.4 $ 36.2 $ 149.9
Basic Earnings
Per Common Share $ .17 $ .31 $ .36 $ .26 $ 1.10
Diluted Earnings
Per Common Share $ .16 $ .31 $ .35 $ .26 $ 1.08
In the fourth quarter of 1998, the extraordinary items were for the early
extinguishment of long-term debt and a portion of a credit facility. Net of tax,
this reduced net income by $1.0 million or $.01 per common share.
55
19. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its
operations. Total rental expenses were approximately $23.4 million, $11.7
million and $10.5 million in 1999, 1998 and 1997, respectively.
At December 31, 1999, the total minimum annual rental commitments under
noncancelable leases are as follows:
Operating Capital
Millions of dollars Leases Leases
- --------------------------------------------------------------------------------------------------------------------------------
2000 $49.9 $ 7.5
2001 36.1 7.5
2002 27.8 7.4
2003 24.1 4.5
2004 10.6 4.7
Thereafter 20.1 36.3
- --------------------------------------------------------------------------------------------------------------------------------
Total $168.6 67.9
Amount representing interest 32.0
- --------------------------------------------------------------------------------------------------------------------------------
Present value of net minimum lease payments $35.9
- --------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS
In order to satisfy the contractual commitments that Broadwing has
entered into with respect to IRU agreements, approximately 1,700 fiber route
miles must be constructed at an approximate cost of $82 million.
CONTINGENCIES
In the normal course 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 not predictable with assurance.
The Company, as well as certain former members of IXC's board of
directors, has been named as a defendant in five stockholder class action
suits filed in the Delaware Court of Chancery (the Court). These suits were
filed in July 1999 and pertain to the Company's recently completed merger
with IXC. The complaints allege, among other things, that the defendants
breached their fiduciary duties to IXC's former stockholders by failing to
maximize stockholder value in connection with entering into the merger
agreement and sought a court order enjoining completion of the merger. In an
October 27, 1999 ruling, the Court denied plaintiffs' request for a
preliminary injunction. The Merger has since closed and management believes
that the performance of the Company's share price has rendered plaintiffs'
arguments moot. While these suits currently remain outstanding and subject to
further litigation, the Company does not believe any of plaintiffs' arguments
have merit. The Company intends to continue exploring all available options
to bring this matter to a close, including discussions toward a possible
settlement.
A total of twenty-seven Equal Employment Opportunity Commission ("EEOC")
charges were filed beginning in September 1999 by current Broadwing
Telecommunications Inc. employees located in the Houston office (formerly
Coastal Telephone, acquired by IXC in May 1999) alleging sexual harassment,
race discrimination and retaliation. The Company is continuing its
investigation of these charges and is cooperating with the EEOC. Many
employee interviews have been conducted by the EEOC and discovery is ongoing
at the present time.
In the course of closing Merger, the Company became aware of IXC's
possible non-compliance with reporting requirements under certain federal
environmental statutes. Since it was impossible to conduct a thorough
investigation of all IXC facilities within the 10-day period required to take
advantage of the EPA's self-policing policy, IXC, by letter dated November 8,
1999, elected to voluntarily disclose its possible non-compliance to the EPA.
By letter dated January 19, 2000, the EPA determined that IXC appears to have
satisfied the "prompt disclosure" requirement of the self-policing policy,
and established a deadline of May 1, 2000 for the Company to complete its
environmental audit of all IXC facilities and report any violations to the
Agency. The Company intends to complete its environmental audit of these
facilities within the time frame established by the
56
EPA and take whatever corrective actions are indicated.
The Company believes that the resolution of such matters for amounts in
excess of those reflected in the consolidated financial statements would not
likely have a materially adverse effect on the Company's financial condition.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any accounting or financial
disclosure or auditing scope or procedure occurred during the period covered
by this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors of Broadwing
can be found in the Proxy Statement for the Company's 2000 Annual Meeting of
Shareholders, dated March 17, 2000, and incorporated herein by reference.
Information regarding executive officers required by Item 401 of
Regulation S-K is furnished in a separate disclosure in Part I of this report
under the caption "Executive Officers of the Registrant" since the registrant
did not furnish such information in its definitive proxy statement prepared
in accordance with Schedule 14A.
ITEMS 11 AND 12. EXECUTIVE COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by these items can be found in the Proxy
Statement for the Company's 2000 Annual Meeting of Shareholders dated March
17, 2000, and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
57
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
Exhibits identified in parenthesis below, on file with the Securities and
Exchange Commission ("SEC"), are incorporated herein by reference as exhibits
hereto.
Exhibit
Number DESCRIPTION
(2.1)(a) Agreement and Plan of Merger, dated as of July 20,
1999, among Cincinnati Bell Inc., an Ohio
corporation, IXC Communications, Inc., a Delaware
corporation, and Ivory Merger Inc., a Delaware
corporation. (Exhibit 2.1 to Form 8-K date of report
July 23, 1999, File No. 1-8519).
(2.1)(b) Amendment No. 1 dated as of October 13, 1999, among
Cincinnati Bell Inc., an Ohio corporation, IXC
Communications, Inc. a Delaware corporation, and
Ivory Merger, Inc. a Delaware corporation, to the
Agreement and Plan of Merger dated as of July 23,
1999, among Cincinnati Bell Inc., IXC Communications,
Inc. and Ivory Merger Inc. (Exhibit 2.1 to Form 8-K,
date of report October 14, 1999 File No. 1-8519).
(3)(a) Amended Articles of Incorporation effective November
9, 1989. (Exhibit (3)(a) to Form 10-K for 1989, File
No. 1-8519).
(3)(b)+ Certificate of Amendment by the Board of Directors to
the Amended Articles of Incorporation including the
description of each of the Cincinnati Bell 7 1/4%
Junior Convertible Preferred Shares Due 2007 and the
Cincinnati Bell 6 3/4% Cumulative Convertible
Preferred Shares effective November 9, 1999.
(3)(c) Amended Regulations of the registrant. (Exhibit 3.2
to Registration Statement No. 2-96054).
(4)(a) Provisions of the Amended Articles of Incorporation
and the Amended Regulations of the registrant which
define the rights of holders of Common Shares and the
Preferred Shares are incorporated by reference to
such Amended Articles filed as Exhibits (3)(a) and
3(b) hereto and such Amended Regulations filed as
Exhibit (3)(c) hereto.
(4)(b)(i) Rights Agreement dated as of April 29, 1997, between
the Company and The Fifth Third Bank which includes
the form of Certificate of Amendment to the Amended
Articles of Incorporation of the Company as Exhibit
A, the form of Rights Certificate as Exhibit B and
the Summary of Rights to Purchase Preferred Stock as
Exhibit C (Exhibit 4.1 to the Company's Registration
Statement on Form 8-A filed on May 1, 1997).
(4)(b)(ii) Amendment No. 1 to the Rights Agreement dated as of
July 20, 1999, between the Company and The Fifth
Third Bank (Exhibit 1 to Amendment No. 1 of the
Company's Registration Statement on Form 8-A filed on
August 6, 1999).
(4)(b)(iii) Amendment No. 2 to the Rights Agreement dated as of
November 2, 1999, between the Company and The Fifth
Third Bank (Exhibit 1 to Amendment No. 2 of the
Company's Registration Statement on Form 8-A filed on
November 8, 1999).
(4)(c)(i) Indenture dated July 1, 1993, between Cincinnati Bell
Inc., Issuer, and The Bank of New York, Trustee, in
connection with $50,000,000 of Cincinnati Bell Inc.
7 1/4% Notes Due June 15, 2023. (Exhibit 4-A to Form
8-K, date of report July 12, 1993, File No. 1-8519).
(4)(c)(ii) Indenture dated August 1, 1962, between Cincinnati
Bell Telephone Company and Bank of New York, Trustee
(formerly, The Central Trust Company was trustee), in
connection with $20,000,000 of Cincinnati Bell
Telephone Company Forty Year 4 3/8% Debentures, Due
August 1, 2002. (Exhibit 4(c)(iii) to Form 10-K for
1992, File No. 1-8519).
58
(4)(c)(iii) Indenture dated as of October 27, 1993, among
Cincinnati Bell Telephone Company, as Issuer,
Cincinnati Bell Inc., as Guarantor, and The Bank of
New York, as Trustee. (Exhibit 4-A to Form 8-K, date
of report October 27, 1993, File No. 1-8519).
(4)(c)(iv) Indenture dated as of November 30, 1998 among
Cincinnati Bell Telephone Company, as Issuer,
Cincinnati Bell Inc., as Guarantor, and The Bank of
New York, as Trustee. (Exhibit 4-A to Form 8-K, date
of report November 30, 1998, File No. 1-8519).
(4)(c)(v) Investment Agreement dated as of July 21, 1999, among
Cincinnati Bell, Oak Hill Capital Partners L.P. and
certain related parties of Oak Hill (Exhibit 4.9 to
Form S-4 filed on September 13,1999, File No.
1-8519).
(4)(c)(vi) Indenture dated as of July 21, 1999 among Cincinnati
Bell Inc., and The Bank of New York, as Trustee
(Exhibit 4.10 to Form S-3 filed on November 10,
19999, File No. 1-8519).
(4)(c)(vii) No other instrument which defines the rights of
holders of long term debt of the registrant is filed
herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any
such instrument to the SEC upon request. (4)(b)(ii)
Amendment No. 1 to the Rights Agreement dated as of
July 20, 1999, between the Company and The Fifth
Third Bank (Exhibit 1 to Amendment No. 1 of the
Company's Registration Statement on Form 8-A filed on
August 6, 1999).
(10)(i)(1) Credit Agreement dated as of November 9, 1999 among
Cincinnati Bell and IXCS as the Borrowers, Cincinnati
Bell as Parent Guarantor, the Initial Lenders,
Initial Issuing Banks and Swing Line Banks named
herein, 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. (Exhibit
10.1 to Form 8-K, date of report November 12, 1999,
File No. 1-8519).
(10)(iii)(A)(1)* Short Term Incentive Plan of Cincinnati Bell Inc., as
amended January 1, 1995. (Exhibit (10)(iii)(A)(1)(i)
to Form 10-K for 1995, File No. 1-8519).
(10)(iii)(A)(2)* Cincinnati Bell Inc. Deferred Compensation Plan for
Outside Directors, as amended and restated effective
February 1, 1999. (Exhibit (10)(iii)(A)(2) to Form
10-K for 1998, File No. 1-8519).
(10)(iii)(A)(3)(i)* Cincinnati Bell Inc. Pension Program, as amended
effective November 4, 1991. (Exhibit
(10)(iii)(A)(4)(ii) to Form 10-K for 1994, File No.
1-8519).
(10)(iii)(A)(3)(ii)* Cincinnati Bell Pension Program, as amended and
restated effective March 3, 1997. (Exhibit
(10)(iii)(A)(3)(ii) to Form 10-K for 1997, File No.
1-8519).
(10)(iii)(A)(4)* Employment Agreement dated January 1, 1999 between
the Company and Richard G. Ellenberger. (Exhibit
(10)(iii)(A)(9) to Form 10-K for 1998, File No.
1-8519).
(10)(iii)(A)(5)* Employment Agreement effective January 1, 1999
between the Company and Kevin W. Mooney. (Exhibit
(10)(iii)(A)(ii) to Form 10-K for 1998, File No.
1-8519).
(10)(iii)(A)(6)* Employment Agreement dated January 1, 1999 between
the Company and Thomas E. Taylor. (Exhibit
(10)(iii)(A)(12) to Form 10-K for 1998, File No.
1-8519).
(10)(iii)(A)(7)* Employment Agreement effective April 9, 1999 between
the Company and Richard S. Pontin. (Exhibit
(10)(iii)(A)(1) to Form 10-Q for the quarter ended
June 30, 1999, File No. 1-8519).
(10)(iii)(A)(8)*+ Employment Agreement dated January 1, 1999 between
the Company and John F. Cassidy.
(10)(iii)(A)(9)* Cincinnati Bell Inc. Executive Deferred Compensation
Plan, as amended and restated effective October 25,
1998. (Exhibit (10)(iii)(A)(13) to Form 10-K for
1998, File No. 1-8519).
(10)(iii)(A)(10)* Cincinnati Bell Inc. 1997 Long Term Incentive Plan.
(Exhibit (10)(iii)(A)(14)(iii) to Form 10-K for 1997,
File No. 1-8519).
59
(10)(iii)(A)(11)* Cincinnati Bell Inc. 1997 Stock Option Plan for
Non-Employee Directors, as revised and restated
effective February 1, 1999. (Exhibit (10)(iii)(A)(15)
to Form 10-K for 1998, File No. 1-8519).
(10)(iii)(A)(12)* Cincinnati Bell Inc. 1989 Stock Option Plan. (Exhibit
(10)(iii)(A)(14) to Form 10-K for 1989, File No.
1-8519).
(12)+ Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends.
(21)+ Subsidiaries of the Registrant.
(23)+ Consent of Independent Accountants.
(24)+ Powers of Attorney.
(27.1, 27.2, 27.3) Financial Data Schedules.
+ Filed herewith.
* Management contract or compensatory plan required to be filed as
an exhibit pursuant to Item 14(c) of Form 10-K.
The Company will furnish, without charge, to a security holder upon
request, a copy of the Proxy Statement, portions of which are incorporated by
reference, and will furnish any other exhibit at cost.
60
REPORTS ON FORM 8-K.
Form 8-K, date of report October 13, 1999, reporting that certain
sections of the Company's merger agreement with IXC Communications, Inc. had
been amended in response to a decision of the Delaware Court of Chancery in
the case of Phelps Dodge Corporation vs. Cyprus Amax Minerals Company. The
Company's merger agreement with IXC Communications, Inc was previously filed
in a Form 8-K, date of report July 23, 1999.
Form 8-K, date of report October 22, 1999, reporting on the Company's
results of operations for the three months ended September 30, 1999.
Form 8-K, date of report November 8, 1999, setting forth certain
historical financial statements of the Company's merger partner, IXC
Communications, Inc.
Form 8-K, date of report November 12, 1999, reporting that the Company's
merger with IXC Communications, Inc. was successfully completed on November
9, 1999.
Form 8-K, date of report December 30, 1999, setting forth certain
historical financial statements of IXC Communications, Inc.
Form 8-K, date of report December 30, 1999, setting forth certain
proforma historical financial statements of the Company and IXC
Communications, Inc.
61
SCHEDULE II
BROADWING INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS OF DOLLARS)
Additions
--------------------------
Balance at Charged Balance
Beginning Charged to to Other At End
of Period Expenses Accounts Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year 1999 $12.0 $21.1 $51.6(a) $31.1(b) $53.6
Year 1998 $ 9.1 $18.1 $11.0(a) $26.2(b) $12.0
Year 1997 $ 6.1 $12.2 $ 5.5(a) $14.7(b) $ 9.1
RESERVES RELATED TO BUSINESS RESTRUCTURING
Year 1999 $ .5 $10.9 $33.9(c) $15.1 $30.2
Year 1998 $ 5.3 $ -- $ -- $ 4.8 $ .5
Year 1997 $ 8.7 $ -- $ -- $ 3.4 $ 5.3
- ------------------------------------------------------------------------------------------------------------------------------
(a) Primarily includes amounts previously written off which were
credited directly to this account when recovered and an allocation of the
purchase price for receivables purchased from Interexchange Carriers. In
1999, amounts include $45.3 million assumed on 11/9/99 as part of the
Company's merger with IXC Communications, Inc. (IXC).
(b) Primarily includes amounts written off as uncollectible.
(c) Includes amounts assumed as part of the Company's merger with IXC.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CINCINNATI BELL INC.
March 17, 2000 By /s/Kevin W. Mooney
Kevin W. Mooney
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Principal Executive Officer;
President, Chief Executive
RICHARD G. ELLENBERGER* Officer and Director
- ---------------------------------
Richard G. Ellenberger
Principal Accounting and
Financial Officer;
KEVIN W. MOONEY* Executive Vice President and Chief Financial Officer
- ---------------------------------
Kevin W. Mooney
PHILLIP R. COX* Director
- ---------------------------------
Phillip R. Cox
J. TAYLOR CRANDALL* Director
- ---------------------------------
J. Taylor Crandall
WILLIAM A. FRIEDLANDER* Director
- ---------------------------------
William A. Friedlander
KAREN M. HOGUET* Director
- ---------------------------------
Karen M. Hoguet
RICHARD D. IRWIN* Director
- ---------------------------------
Richard D. Irwin
JAMES D. KIGGEN* Chairman of the Board and Director
- ---------------------------------
James D. Kiggen
JOHN T. LAMACCHIA* Director
- ---------------------------------
John T. LaMacchia
DANIEL J. MEYER* Director
- ---------------------------------
Daniel J. Meyer
MARY D. NELSON* Director
- ---------------------------------
Mary D. Nelson
DAVID B. SHARROCK* Director
- ---------------------------------
David B. Sharrock
JOHN M. ZRNO* Director
- ---------------------------------
John M. Zrno
*By: /s/ Kevin W. Mooney March 17, 2000
Kevin W. Mooney
as attorney-in-fact and on his behalf
as Chief Financial Officer
63