Cincinnati Bell 2001 Annual Report Download

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2001 ANNUAL REPORT

Table of contents

  • Page 1
    2 0 0 1 A N N UA L R E P O R T

  • Page 2
    ... $2200 2050 2050 2000 1800 1600 1400 1200 1000 804 800 600 97 98 99 00 1356 1530 1670 1102 861 01 EBITDA AS REPORTED EBITDA PRO FORMA numbers in millions 626 626 $650 575 498 498 500 425 350 288 275 200 97 98 99 00 318 285 376 331 322...

  • Page 3
    ... and offers businesses nationwide a competitive advantage by providing data, voice and internet solutions that are ï¬,exible, reliable and innovative on its 18,500mile optical network and its award-winning IP backbone. Local service subsidiary Cincinnati Bell serves customers in Ohio, Kentucky and...

  • Page 4
    ...15 percent - always a painful task - and removed layers of management. We announced plans to exit the network construction business, reduce the number of data centers, merge our ZoomTown business into Cincinnati Bell and integrate finance, accounting and administrative functions. It was critical to

  • Page 5
    ... to deliver value for our customers and shareholders. With a substantial majority of our infrastructure investment completed, our capital spending is now directed at success-based opportunities that involve adding new customers to the Broadwing network. Furthermore, the decrease in capital...

  • Page 6
    HOW DO WE DEFINE SUCCESS? BY GROWTH AND DIVERSITY OF CUSTOMER BASE 2001 - $2.35 billion Consumer +17% revenue growth 25% 35% 40% Enterprise +16% revenue growth Carrier +12% revenue growth Lisa Morgan Voice Network Operations

  • Page 7
    ... our established customer base. In a few short years, from scratch, we have built thriving businesses with wireless, long distance and ADSL services. Our wireless business commands the top spot with close to 29 percent market share. Cincinnati Bell Any Distance, our long distance offering, ended its...

  • Page 8
    HOW DO WE DEFINE SUCCESS? BY REVENUE GROWTH IN EACH SEGMENT 38% 40% 30 19% 20 10 00 BROADBAND LOCAL WIRELESS OTHER 17% 5% Lindsey Mertes Network Operations Center

  • Page 9
    ... to our National Account program. C O N V E R G I N G A R O U N D T H E C U S TO M E R A new customer-centric structure has created a single Cincinnati Bell market presence. It coordinates the activities of several separate business units, including local wireline, wireless and long distance, to...

  • Page 10
    ...ed portfolio of products, customers and businesses. We offer a rich mix of broadband transport services, switched voice services, data and internet services, managed hosting, local telephony and wireless services. About 40 percent of our revenue comes from business enterprises, about 35 percent from...

  • Page 11
    BY OUR FINANCIAL STRENGTH. BY DISTRIBUTION OF REVENUE 2001 - $2.35 billion Broadband 51% 35% 3% Other, Corporate and Eliminations Carol Ervin Consumer Markets Local 11% Wireless

  • Page 12
    HOW DO WE DEFINE SUCCESS? BY CONTINUOUS CUSTOMER GROWTH numbers of customers in thousands ADSL WIRELESS LONG DISTANCE 80 61 60 40 40 20 00 18 500 400 300 200 100 99 00 01 000 99 00 162 339 462 600 457 400 534 200 0 01 000 99 00 01 Dennis Kinne Network Data Monitoring and Analysis

  • Page 13
    ... of Broadwing continues to validate our vision. From the ground up, we have grown leading businesses in wireless, ADSL and long distance in Cincinnati. We have a robust national sales distribution footprint in place for our up-market initiatives. At the end of our second full year, we reached...

  • Page 14
    ... newly created position of Chief Operating Officer. He is now responsible for all operations including sales, network operations, information technology and customer service, across both Cincinnati Bell and Broadwing Communications. The move positions Broadwing to attack the opportunities available...

  • Page 15
    ...to Growth and Profitability PENETRATION and OPTIMIZATION PRODUCTIZATION INVESTMENT Customer Focus Product Bundling Market Penetration Margin Expansion CBW Partnership ADSL Network IXC Acquisition 1999 2000 Wireless ZoomTown Frame Relay/ATM Complete Connections Nationwide Long Distance Lightwaves...

  • Page 16
    ALL-OPTICAL SWITCHED NETWORK Seattle Portland Bend Walnut San Creek Francisco Santa Clara Sacramento Salt Lake City Denver ...Harlingen Houston †18,500 route miles †30 sales offices †3 optical media centers SALES OFFICE OPTICAL MEDIA CENTER To Mexico City, Monterrey and Guadalajara

  • Page 17
    ...Jacksonville Daytona New Orleans Orlando Tampa Melbourne West Palm Beach Fort Lauderdale Miami CINCINNATI BELL †85% ADSL deployed †29% wireless market share †98% local customer retention Dayton LOCAL AND WIRELESS FOOTPRINT EXPANDED WIRELESS FOOTPRINT OHIO INDIANA Cincinnati KENTUCKY

  • Page 18
    ... of our local exchange business. The investment we made in wireless is providing increased cash contribution as that business matures. Our ADSL offering continues to grow and in 2001, accounted for one point of Cincinnati Bell's 5 percent revenue growth. Our national business provides growth...

  • Page 19
    ...fund its business plan and maintain and strategically grow its optical network; changes in the telecommunications regulatory environment; changes in the demand for the services and products of the Company; the ability of the Company to introduce new service and product offerings in a timely and cost...

  • Page 20
    ... other charges (credits)(a) Operating income (loss) Interest expense(b) Loss (gain) on investments(c) Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of change in accounting principle Net income (loss) Earnings (loss) per common share(d) Basic...

  • Page 21
    ...world-class service on a national level by combining two sets of strengths: its national optical network and internet backbone and its state-of-the-art local network with a well-regarded brand name and reputation for service. The Company operates in four business segments: Broadband, Local, Wireless...

  • Page 22
    ... the Company announced an agreement to sell 97.5% of its Cincinnati Bell Directory ("CBD") subsidiary to a group of investors for $345 million in cash. The Company will maintain a 2.5% minority interest in the new company and will account for its investment in that company as a cost-based investment...

  • Page 23
    ... and consulting expenses and network construction. The Local segment also incurred $18 million in cost increases over 2000, primarily due to cost of materials for equipment sales, resale of national broadband products and customer care expenses related to high-speed internet access service, all...

  • Page 24
    ...promotional expenses required to launch new products and services. The Local segment incurred lower costs as a decrease in salaries and wages, postretirement and computer programming expenses were partially offset by an increase in customer care and materials and supplies relating to equipment sales...

  • Page 25
    ... consists of $49 million in dividends and accretion on the 121⁄2% preferred stock of Broadwing Communications offset by approximately $5 million that is attributable to AWS's 19.9% minority interest in the operating loss of the Company's wireless business. Minority interest expense increased $47...

  • Page 26
    ... associated with Broadwing IT Consulting (now operating as Broadwing Technology Solutions) and an agreement with the former Cincinnati Bell Long Distance to service its customers outside of the Cincinnati, Ohio area. See Item 1 of the Company's annual report on Form 10-K, filed with the Securities...

  • Page 27
    ...of demand for internet-based, ATM/frame relay, data collocation and web hosting services. IT consulting revenue increased from $14 million in 1999 to nearly $66 million in 2000. The increase was attributable to additional consulting revenue and related equipment sales. Network construction and other...

  • Page 28
    ...features, internet access, wireless, and long-distance on one customer bill. Local service revenue grew 3% during the year to $465 million and contributed 32% of the total revenue growth of the segment in 2001. The Company's Complete Connections® calling service bundle added over 55,000 subscribers...

  • Page 29
    ... CBT's latest product bundling offer, Complete Connections Universal® (introduced May 1, 2000), which allows the customer to combine high-speed data transport, local service, custom-calling features, internet access, wireless and long-distance services on one customer bill. Similar success has...

  • Page 30
    ... personal communications services and sales of related communications equipment to customers in its Greater Cincinnati and Dayton, Ohio operating areas. Services are provided over CBW's regional and AWS's national wireless networks. $ Change ($ in millions) % Change $ Change % Change 2001 $232...

  • Page 31
    ...'s managed web hosting activities were merged into Broadwing Communications and will be reported in the Broadband segment subsequent to December 31, 2001. ZoomTown's DSL and internet operations will be assumed by CBT subsequent to December 31, 2001. In addition, in February 2002, the Company...

  • Page 32
    ... in the Cincinnati area representing residential and business market shares of approximately 67% and 38% of access lines, respectively. CBD continued to provide nearly half of the revenue in this segment as the directory business grew by $2 million, or 3%, during 2001. ZoomTown's web hosting and...

  • Page 33
    ... or liens; pay dividends; repurchase Company common stock; sell, transfer, lease, or dispose of assets; make investments or merge with another company. The Company obtained an amendment to its credit facility to exclude charges associated with the November 2001 Restructuring Plan from the covenant...

  • Page 34
    ... inventory of equipment to meet customer demand. Deferred income tax benefits increased by $120 million or 110% as operating loss carryforwards continue to grow. Accounts payable decreased 26% primarily as capital spending associated with construction of the optical network decreased substantially...

  • Page 35
    ... completion of the wireless network footprint and installation of ADSL-enabling equipment at CBT. The Company received proceeds of $115 million from the sale of its entire equity stake in PSINet, Applied Theory and Corvis. Consistent with 2000, no dividends were paid on common stock in 2001. However...

  • Page 36
    ... adverse effect on the Company's financial condition. A total of 26 Equal Employment Opportunity Commission ("EEOC") charges were filed beginning in September 1999 by Broadwing Telecommunications Inc. employees located in the Houston office (formerly Coastal Telephone, acquired by IXC in May...

  • Page 37
    ..., the Company adopted SAB 101 in the fourth quarter of 2000 and modified its revenue recognition policies retroactive to January 1, 2000, to recognize service activation revenue and associated direct incremental costs over their respective average customer lives. As a result, the previously reported...

  • Page 38
    ... against changes in market interest rates to be charged on the Company's borrowings under its credit facility. The increase in the notional amount from 2000 to 2001 is a result of the Company's additional borrowings under its credit facility during 2001. These swap agreements involve the exchange...

  • Page 39
    ... 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...

  • Page 40
    ...AND COMPREHENSIVE INCOME (LOSS) Year ended December 31 ($ in millions, except per share amounts) R EVE N U E COSTS AN D EXPE N S E S 2001 $2,350.5 2000 $2,050.1 1999 $1,102.0 Cost of services and products (excluding depreciation of $353.4, $258.7, and $124.8 included below) Selling, general and...

  • Page 41
    ...) 2001 2000 ASS ETS Current assets Cash and cash equivalents Short-term investments Receivables, less allowances of $38.1 and $49.0, respectively Materials and supplies Deferred income tax benefits Prepaid expenses and other current assets Total current assets Property, plant and equipment, net...

  • Page 42
    ...Repayment of long-term debt Short-term borrowings (repayments), net Debt issuance costs Issuance of common shares - exercise of stock options Purchase of treasury shares Common dividends paid Minority interest and preferred stock dividends paid Net cash provided by financing activities of continuing...

  • Page 43
    ...(377.1) - (0.1) Shares issued under employee plans Net income Additional minimum pension liability adjustment Unrealized gain on investments Restricted stock amortization Dividends: Common Shares, at $.20 per share Preferred Shares Equity issued in connection with Merger Treasury shares repurchased...

  • Page 44
    ...-line method over the estimated useful life. Repairs and maintenance expense items are 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. The DE SCR I PTION OF B US I N E SS Company reviews...

  • Page 45
    ... 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 broadband transport category of the Broadband segment. Directory publishing revenue and related directory costs are deferred and...

  • Page 46
    ... recognize service activation revenue and associated direct incremental costs over their respective average customer lives, resulting in an after tax charge of $0.8 million related to all periods prior to January 1, 2000. I XC C O M M U N I CAT I O N S I N C . The Company completed its merger with...

  • Page 47
    ... Bell Telephone ("CBT"), Cincinnati Bell Any Distance ("CBAD"), Cincinnati Bell Wireless ("CBW"), Cincinnati Bell Public Communications ("Public") and Cincinnati Bell Directory ("CBD") in order to create one centralized "Cincinnati Bell" presence for its customers. Total restructuring costs...

  • Page 48
    ..., 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...

  • Page 49
    ... created stock enterprise. In 2001, the Company received 459,223 shares of Anthem common stock and recorded a gain of $19.7 million based on the fair market value of the stock in the Consolidated Statements of Operations and Comprehensive Income (Loss) under the heading "Other expense (income), net...

  • Page 50
    ... or liens; pay dividends; repurchase Company common stock; sell, lease, transfer or dispose of assets; make investments; and merge with another company. The Company obtained an amendment to its credit facility to exclude the charges associated with the November 2001 Restructuring Plan (described in...

  • Page 51
    ... 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 63⁄4% per annum, with the associated interest expense being added to the debt principal amount through June 2004. Interest payments for the remaining five years...

  • Page 52
    ...Corvis Corporation in order to minimize its exposure to share price fluctuations on shares for which sales in the open market were restricted. In the first quarter, the Company received a $42.7 million prepayment in connection with the forward sale contract, which was accounted for as a note payable...

  • Page 53
    ...interest expense over the remaining life of the preferred stock. AT&T Wireless Services Inc. ("AWS") maintains a 19.9% ownership in the Company's Cincinnati Bell Wireless LLC ("CBW") subsidiary. The balance is adjusted as a function of AWS's 19.9% share of the operating income (or loss) of CBW, with...

  • Page 54
    ... change in accounting principle Weighted average common shares outstanding at December 31, 2001 and 2000 includes two full years of the approximately 69 million shares issued in conjunction with the Merger and the conversion of approximately 1.1 million shares of 71⁄4% convertible preferred stock...

  • Page 55
    ...effective tax rate for each year: U.S. federal statutory rate State and local income taxes, net of federal income tax benefit Change in valuation allowance Amortization of nondeductible intangible assets Dividends on 121⁄2% exchangeable preferred stock Other differences, net Effective rate 2001 35...

  • Page 56
    ... 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. The Company also provides health care and group life insurance benefits for retirees with a service...

  • Page 57
    ... service cost Unrecognized net gain Net amount recognized The combined net prepaid benefit expense consists of: Pension Benefits Year ended December 31 ($ in millions) Prepaid benefit cost Accrued benefit liability Intangible asset Accumulated other comprehensive income Net amount recognized 2001...

  • Page 58
    ... Company stock options issued to employees, options issued in the Merger and related transactions (shares in thousands): Weighted Average Exercise Price Shares 2001 2000 1999 Net income (loss) applicable to common shareowners: As reported Pro forma compensation expense, net of tax benefits...

  • Page 59
    ... common shares at an exercise price of $9.645. The options vest over a period of three years and expire ten years from the date of grant. The Company does not expect a significant amount of dilution as a result of this grant. On May 23, 2000, the Company completed the sale of its Cincinnati Bell...

  • Page 60
    ... construction business through the November 2001 restructuring. The Local segment provides local telephone service, network access, high-speed internet access, data transport services and switched long-distance, as well as other ancillary products and services to customers in southwestern Ohio...

  • Page 61
    ... and sales of related communications equipment to customers in the Greater Cincinnati and Dayton, Ohio operating areas. The Other segment combines the operations of Cincinnati Bell Any Distance ("CBAD"), Cincinnati Bell Directory ("CBD"), ZoomTown.com ("ZoomTown") and Cincinnati Bell Public...

  • Page 62
    ... approximately 68% were bank loans with variable interest rates. A further discussion of the Company's interest rate risk management policies can be found in "Qualitative and Quantitative Disclosures about Market Risk" on page 36 of this annual report. CBT, a wholly owned subsidiary of the Parent...

  • Page 63
    ... costs and expenses (5.6) Operating income 5.6 Equity in earnings (loss) of subsidiaries 55.1 Interest expense 35.8 Other expense (income), net 1.1 Income (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle 23.8 Income tax provision (benefit...

  • Page 64
    ...157.2) $(4,016.1) Eliminations $ $ 30.0 320.7 119.2 - 469.9 3,059.5 2,444.9 16.3 321.4 - - $6,312.0 Short-term debt Accounts payable Other current liabilities Intercompany payables - current Total current liabilities Long-term debt, less current portion Other noncurrent liabilities Intercompany...

  • Page 65
    ... expenditures Other investing activities Cash flows from investing activities Issuance of long-term debt/(capital contributions) Repayment of long-term debt Short-term borrowings and capital leases, net Issuance of common shares - exercise of stock options Other financing activities Cash flows from...

  • Page 66
    ... in operating income of $232 million related to restructuring activities and asset impairments. The net effect of these restructuring charges reduced earnings per share by $0.69 in the fourth quarter. LE A S E C O M M I T M E N T S The Company leases certain facilities and equipment used in its...

  • Page 67
    ... adverse effect on the Company's financial condition. A total of 26 Equal Employment Opportunity Commission ("EEOC") charges were filed beginning in September 1999 by Broadwing Telecommunications Inc. employees located in the Houston office (formerly Coastal Telephone, acquired by IXC in May...

  • Page 68
    ..., Business Markets Mark F. Canha President, Broadband Services Jack J. Chidester President, Business Enterprises Michael R. Jones Chief Technology Officer Jeffrey A. Lackey President, Broadwing Technology Solutions Maxine L. Moreau Chief Services Officer Richard E. Putt President, National Accounts...

  • Page 69
    ... Bank, our Transfer Agent and Registrar, maintains account records for registered shareholders. Broadwing employees do not have access to those records. Please contact Fifth Third with questions about your current holdings, stock transfers, lost certificates, address changes or related matters. If...

  • Page 70
    201 East Fourth Street Cincinnati, Ohio 45202 513 | 397-9900 www.broadwing.com