Cincinnati Bell 2006 Annual Report Download

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2006 Annual Report
Letters to
Shareholders
Notice of
2007 Annual Meeting
and Proxy Statement
Report on
Form 10-K

Table of contents

  • Page 1
    2006 Annual Report Letters to Shareholders Notice of 2007 Annual Meeting Report on and Proxy Statement Form 10-K

  • Page 2
    Contents Letter to Shareholders from the Chairman, the President & Chief Executive Officer and the Chief Financial Officer Financial Highlights Board of Directors and Company Officers Notice of Annual Meeting of Shareholders Proxy Statement Report on Form 10-K

  • Page 3
    ... companies, Cincinnati Bell continues to outperform its peers and create value for our shareholders, employees, and customers. Solid execution in 2006 produced revenue and earnings growth throughout our core operations. Our wireless subscribers grew to 528,000 and fueled wireless service revenue...

  • Page 4
    ... access lines. For customers who bundle, the disconnection rate for services such as wireless and high-speed internet access is substantially lower than our customers who do not bundle. This not only indicates a higher rate of customer satisfaction, but also over time saves sales and marketing...

  • Page 5
    ... access lines and actively grew relationships with key enterprise customers. In addition, 64% of revenue came from other areas besides traditional wireline voice. In other words, by achieving growth in wireless, data, and Technology Solutions products, we continue to lessen the impact of lower local...

  • Page 6
    ...to meet current customer demand. When this construction is complete, we will have one Tier 2 data center and four Tier 3 data centers for a total of 177,000 square feet. Highly scalable fiber optic networks will connect the Tier 3 data centers. This architecture allows us to bundle traditional local...

  • Page 7
    ... our plans to take Cincinnati Bell to the next level in 2007. At the same time, we acknowledge the challenges of operating in today's telecom industry, but are firm in our belief that the company must move forward and grow in order to deliver outstanding products and services for our customers and...

  • Page 8
    ... by any such forward-looking statement for a variety of reasons, including but not limited to, Cincinnati Bell's ability to maintain its market position in communications services, including wireless, wireline and internet services; general economic trends affecting the purchase or supply of...

  • Page 9
    ... Company Officers John F. Cassidy President and Chief Executive Officer Brian A. Ross Chief Financial Officer Rodney D. Dir Chief Operating Officer Jeffery D. Coleman Vice President, Internal Controls Kurt A. Freyberger Vice President and Controller Brian G. Keating Vice President, Human Resources...

  • Page 10
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 11
    ... LLP as the independent registered public accounting firm to audit the financial statements of the Company for the year 2007; To approve the Cincinnati Bell Inc. 2007 Long Term Incentive Plan; To approve the Cincinnati Bell Inc. 2007 Stock Option Plan for Non-Employee Directors; and To consider any...

  • Page 12
    ... Report ...Independent Accountants ...Approval of the Cincinnati Bell Inc. 2007 Long Term Incentive Plan - Item 3 on Proxy Card ...Approval of the Cincinnati Bell Inc. 2007 Stock Option Plan for Non-Employee Directors - Item 4 on Proxy Card ...Equity Compensation Plan Information ...Stock Ownership...

  • Page 13
    ... Time, at the METS Center, 3861 Olympic Boulevard, Erlanger, Kentucky. The combined Notice of Annual Meeting of Shareholders, Proxy Statement and the accompanying proxy card or voting instruction card, the Company's Annual Report on Form 10-K for the year ended December 31, 2006 and the Company...

  • Page 14
    ...as Independent Accountants to audit the financial statements of the Company for the year 2007, "FOR" the approval of the Cincinnati Bell Inc. 2007 Long Term Incentive Plan, and "FOR" the approval of the Cincinnati Bell Inc. 2007 Stock Option Plan for Non-Employee Directors. Q: What shares can I vote...

  • Page 15
    ... directly to Cincinnati Bell to vote your shares or you may vote your shares in person at the meeting. Cincinnati Bell has enclosed a proxy card for your use in voting by proxy. Beneficial Owner If your shares are held in a stock brokerage account or by another nominee (including a Company employee...

  • Page 16
    ... a Company employee or director plan managed by Fidelity, how will my shares be voted? A: If you are a participant in the Cincinnati Bell Inc. Executive Deferred Compensation Plan, Cincinnati Bell Inc. Retirement Savings Plan, Cincinnati Bell Inc. Savings and Security Plan, or Cincinnati Bell Inc...

  • Page 17
    ... proxy solicitation by the Board. Occasionally, shareholders provide written comments on their proxy card, which are forwarded to Cincinnati Bell's management. Q: Who will bear the cost of soliciting votes for the meeting? A: The Company is making this solicitation and will pay the entire cost of...

  • Page 18
    ... of any class of the Company's voting stock? A: As of the Record Date, Barclay Global Investors, N.A. is the only entity that indicated it held more than 5% of the issued and outstanding common shares of the Company. See page 34 for more details on number of shares owned and percentage ownership as...

  • Page 19
    ... STRUCTURE AND CORPORATE GOVERNANCE Our business, property and affairs are managed under the direction of our Board. Members of our Board are kept informed of our business through discussions with our President and Chief Executive Officer and other officers, by reviewing materials provided to them...

  • Page 20
    ... meeting of the Board. Mr. Cox presides at the meeting of the non-management directors. Committees of the Board The following table sets forth the membership of the committees of the Board for 2006: Name of Director Audit and Finance Compensation Governance and Nominating Executive Non-Employee...

  • Page 21
    ... meets at least three times each calendar year. The Compensation Committee also meets separately with the Company's Chief Executive Officer and other corporate officers, as it deems appropriate, to establish and review the performance criteria and compensation of the Company's executive officers...

  • Page 22
    ... for board members includes the following: established leadership reputation in his or her field; recognition for good business judgment; active in business; knowledge of business on a national/global basis; high ethical standards; familiarity with the field of telecommunications services...

  • Page 23
    ...to the applicable retainers and meeting fees described above, Mr. Cox, Chairman of the Board, also receives an additional director fee determined by the Board annually ($180,000 for 2006) for his service as Chairman. Non-Employee Directors Deferred Compensation Plan The Cincinnati Bell Inc. Deferred...

  • Page 24
    ... shares under the Cincinnati Bell Inc. 1997 Stock Option Plan for Non-Employee Directors (the "1997 Directors Stock Option Plan"). Pursuant to the current terms of such plan, each non-employee director of the Company, in the discretion of the Board, may have been granted on or after January 1, 2006...

  • Page 25
    ... non-employee director in office prior to such annual meeting received a stock option grant for 9,000 common shares. The Board will exercise its discretion in granting such options on and after January 1, 2006 with the intent that such grants, together with other Company equity-based compensation...

  • Page 26
    ... has one or more executive officers serving on the Company's Board or Compensation Committee. CODE OF BUSINESS CONDUCT AND CODES OF ETHICS The Company has a Code of Business Conduct applicable to all officers and employees that describes requirements related to ethical conduct, conflicts of interest...

  • Page 27
    ...of the Company, is an officer of Cisco Systems, Inc. ("Cisco"). The Company acquired certain IT equipment and products from Cisco, a market leader in such goods. The equipment and products were either used by the Company in its operations or resold to customers. All of the purchases of equipment and...

  • Page 28
    ... and Chief Executive Officer of Cox Financial Corporation (a financial planning services company) since 1972. He is a director of the Federal Reserve Bank of Cleveland, Duke Energy Corporation, The Timken Company, Touchstone Mutual Funds, Long Stanton Manufacturing Company and a member of the Board...

  • Page 29
    ... Bell Telephone Company since May 2001; and President of Cincinnati Bell Wireless Company since 1997. Director since 2002. Age 52. John F. Cassidy Mr. Mahoney is retired. He served as Chairman of the Board and Chief Executive Officer of Diebold, Inc. (a manufacturer of automated self-service...

  • Page 30
    ... of AK Steel Holding Corporation and Hubbell Incorporated. Director since 1999. Age 70. Daniel J. Meyer CLASS I DIRECTORS (Terms Expire in 2009) Mr. Sharrock has been a consultant since 1994. Prior to that time, he served as Executive Vice President and Chief Operating Officer of Marion Merrell Dow...

  • Page 31
    ... independent registered public accounting firm to audit the financial statements of the Company for the fiscal year ending December 31, 2007. One or more members of the firm of Deloitte & Touche LLP will attend the Annual Meeting, will have an opportunity to make a statement and will be available...

  • Page 32
    ... procedures and execution of an engagement letter. During the 2004 fiscal year and through March 21, 2005, the Company did not consult with Deloitte & Touche LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion...

  • Page 33
    ... independence. Based on its review and discussions referred to in the preceding paragraph, the Audit and Finance Committee recommended to the Board that the audited financial statements for the Company's fiscal year ended December 31, 2006 be included in the Company's Annual Report on Form 10-K for...

  • Page 34
    ...'s Independent Accountants. Audit Fees The audit fees for the years ended December 31, 2006 and 2005 were for services rendered in connection with the audit of the Company's annual consolidated financial statements, review of consolidated financial statements included in the Company's reports filed...

  • Page 35
    ... Section 162(m) of the Internal Revenue Code. Thus, the Chief Executive Officer generally may grant awards under the 2007 Long Term Plan to employees of the Employer who are not officers of the Company if delegated this right by the Board. If the Chief Executive Officer is delegated such right, then...

  • Page 36
    ...that the grant price of the common shares that are subject to a SAR may not be less than the fair market value of such common shares as determined on the SAR's grant date. A SAR may be granted by itself, in conjunction with new stock options granted at the same time under the plan, or in relation to...

  • Page 37
    ... set forth below apply in determining the maximum number of common shares or maximum amount of compensation that may ultimately be payable under any awards granted under the 2007 Long Term Plan to any employee during any one calendar year: (a) The maximum number of common shares on which all stock...

  • Page 38
    ...other investing activities, dividend payments and proceeds from the issuance of equity securities, and proceeds from the sale of assets); (ii) EBITDA (earnings before interest, taxes, depreciation, and amortization); (iii) earnings per share; (iv) operating income; (v) total shareholder returns; (vi...

  • Page 39
    ... make any other change in the plan that is required by applicable law to be approved by the Company's shareholders in order to be effective. Further, the purchase, grant, or other similar price applicable to any award granted under the 2007 Long Term Plan, including a stock option or a SAR granted...

  • Page 40
    ... the Committee can use or permit to ensure that such purchase price and tax withholding requirements are satisfied. Any award granted under the 2007 Long Term Plan to an employee who is, at the time of the award, an employee of a corporation that is not the Company but is part of the Employer may be...

  • Page 41
    The Board unanimously recommends a vote FOR the approval of the Cincinnati Bell Inc. 2007 Long Term Incentive Plan. Effect of Management Vote on Proposal Because the directors and officers of the Company own beneficially 9.1 million common shares, or 3.7% of the outstanding voting securities, their ...

  • Page 42
    ...to exceed ten years, a number of common shares at a fixed purchase price. The fixed purchase price of any common share acquired under any stock option shall not be less than 100% of the fair market value of a common share on the grant date of the option. No stock option granted under the plan may be...

  • Page 43
    ...shareholders of the Company other than cash dividends, the Board will make such adjustments in the aggregate number or class of common shares which may be distributed under the 2007 Directors Plan and in the number, class, and purchase or other price of shares on which the outstanding awards granted...

  • Page 44
    ...of this proposal. The Board unanimously recommends a vote FOR the approval of the Cincinnati Bell Inc. 2007 Stock Option Plan for Non-Employee Directors. Effect of Management Vote on Proposal Because the directors and officers of the Company own beneficially 9.1 million common shares, or 3.7% of the...

  • Page 45
    ... of active service as a non-employee director or if he or she dies while a member of the Board. (3) As noted above, this amount reflects the number of securities available for future issuance as of December 31, 2006. Two of the Company's equity compensation plans, the Cincinnati Bell Inc. 1997 Long...

  • Page 46
    ... ownership of less than 1% of issued and outstanding shares. (a) Includes common shares subject to outstanding options under the Cincinnati Bell Inc. 1997 Long Term Incentive Plan and the Directors Stock Option Plan that are exercisable by such individuals within 60 days. The following options...

  • Page 47
    ...numbers represent 6 3⁄ 4% Convertible Preferred Shares. In the aggregate, the 155,250 issued and outstanding 6 3⁄ 4% Convertible Preferred Shares are represented by 3,105,000 Depositary Shares and each 6 3⁄ 4% Convertible Preferred Share is represented by 20 Depositary Shares. Proxy Statement...

  • Page 48
    ... our review and discussions with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in Cincinnati Bell Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2006...

  • Page 49
    ... service offerings as well as expansion into new markets. Compensation Elements and General Principles There are three elements to the Company's executive compensation program: • Fixed compensation - Base salary • "At-risk" annual compensation - Annual incentives paid in cash • "At-risk" long...

  • Page 50
    .... Mediacom Communications Corp. Qwest Communications International Sprint Nextel Corp. Telephone & Data Systems Time Warner United States Cellular USA Mobility Inc. US LEC Corp. Verizon • The second peer group is comprised of 112 companies across many industries with annual revenues between...

  • Page 51
    ... from Company management (primarily the Chief Executive Officer and Vice President of Human Resources & Administration), the Committee allocates total target direct compensation among base salary, annual bonus and long-term incentive compensation. For 2006, the Chief Executive Officer's base salary...

  • Page 52
    ... the information obtained from the other directors concerning the Chief Executive Officer's individual performance, based on a discussion led by the Chairman of the Board, which included succession planning, overall development of the Company leadership team and community involvement/relationships...

  • Page 53
    ... grant. The Compensation Committee has a long-standing practice of making its annual grants of stock options at their December meeting. The Compensation Committee (and in the case of the Chief Executive Officer, the full Board) grants stock option awards based upon a review of peer company practices...

  • Page 54
    ... in the employee's account as they are made to the plan. Each executive participates in a broad set of benefit plans and programs, including medical, dental, vision, life, short- and long-term disability benefits and price discounts on home telephone service, on the same basis as all other salaried...

  • Page 55
    ... similar positions in the custom group of telecommunications companies at the 50th percentile of market pay after adjusting for differences in annual revenue of the company. Their compensation is based on both the Company's performance as well as each executive's personal performance and is designed...

  • Page 56
    ... value of the Company's retirement program was not considered in any of the compensation decisions made on proxy officer compensation because survey data tends to focus on those elements of pay which most directly align the interests of executives and shareholders, which the Company believes is most...

  • Page 57
    ... Company's executives with those of its shareholders. To that end, the Compensation Committee has established the following stock ownership guidelines: Chief Executive Officer - 3 times base salary Other named executive officers - 1.5 times base salary Since the personal situation of each executive...

  • Page 58
    ...and/or any profits from the sale of securities of the Company during the twelve month period following the date the financial statements, that were subject to restatement, were issued. Compensation Limitation Section 162(m) of the Internal Revenue Code generally limits the available deduction to the...

  • Page 59
    ... ...President and Chief Executive Officer Brian A. Ross ...Chief Financial Officer Rodney D. Dir ...Chief Operating Officer Michael W. Callaghan ...Senior Vice President - Corporate Development Christopher J. Wilson ...Vice President, General Counsel and Secretary Year Salary ($) Bonus ($) Stock...

  • Page 60
    ... 37. In 2006, the following program benefits were utilized by the executives: Mr. Cassidy - automobile allowance election, legal/financial planning fees and club dues; Mr. Ross - automobile allowance, club dues, life insurance, monthly home security system and legal/financial planning fees; Mr. Dir...

  • Page 61
    ... 150% of the original target unit grant. The fair market value of one unit is equivalent to one share of common stock and, as required under the Cincinnati Bell Inc. 1997 Long Term Incentive Plan, is determined by averaging the low and high traded price of the Company's stock on the NYSE on the date...

  • Page 62
    ... of Summary Compensation Table and Grant of Plan-Based Awards Employment Agreements During 2006, all of the Named Executive Officers were employed pursuant to agreements with the Company. Each employment agreement sets forth, among other things, the Named Executive Officer's base salary, bonus...

  • Page 63
    ... of the base wages and annual bonus payment that exceeds the maximum compensation that can be used in determining benefits under a qualified defined benefit pension plan. All salaried and non-union hourly employees of the Company also participate in the Management Pension Plan on the same basis and...

  • Page 64
    ... and monthly fees for home security, adoption fees, purchase of software designed to provide or assist with tax planning/preparation, and financial, estate and legal planning/documents. Executives must pay first for eligible services and submit an invoice and evidence of payment in order to...

  • Page 65
    ... table sets forth information concerning options and other equity awards held by the Named Executive Officers at December 31, 2006: Outstanding Equity Awards at 2006 Fiscal Year-End Option Awards Stock Awards Equity Incentive Plan Awards: Market Number of Value of Unearned Shares or Shares, Units...

  • Page 66
    ...Deferred Compensation Table on page 58) plus the performance unit grant made to each of the executives for the 2006 - 2008 performance period on March 27, 2006. (c) Amounts represent the value of equity incentive plan awards not yet vested based on the closing price of the Company's common shares on...

  • Page 67
    ... required, under the terms of the 1997 Cincinnati Bell Inc. Executive Deferred Compensation Plan, to be invested in common shares of the Company for a period of at least six months. Shares deferred are payable upon the termination of employment in two annual installments beginning the later of six...

  • Page 68
    ...under his employment agreement if he retires, because Mr. Cassidy has not attained 55 years of age, he would not be entitled to any benefits under the SERP described above. All of the Named Executive Officers of the Company participated during 2006 in the Cincinnati Bell Management Pension Plan (the...

  • Page 69
    ... Statement For purposes of the above charge, "excess compensation" means the portion of a plan participant's total plan compensation for 2006 that exceeds the Social Security old-age retirement taxable wage base for 2006. A participant's account under the Management Pension Plan is also generally...

  • Page 70
    ... his base salary and bonus payments for periods prior to 2006. The 1997 Cincinnati Bell Inc. Executive Deferred Compensation Plan (the "Executive Deferred Compensation Plan") permits, for any calendar year, each employee who has an annual base rate of pay and target bonus above a certain high dollar...

  • Page 71
    ... in common shares. The accounts under the Executive Deferred Compensation Plan are not funded in a manner that would give any participant a secured interest in any funds, and benefits are paid from the assets of the Company and its subsidiaries (or from a trust that the Company has established...

  • Page 72
    ... contracts, agreements, plans or arrangements, whether written or unwritten, for various scenarios involving a change-in-control or termination of employment, assuming a December 31, 2006 termination date, and where applicable, using the closing price of our common shares of $4.57 (as reported...

  • Page 73
    ... base rate of pay and target bonus; • Continued medical, dental, vision and life insurance benefits during the one-year period (or two-year period for Mr. Cassidy) following the executive's termination of employment on the same basis as any active salaried employee provided any required monthly...

  • Page 74
    ... base salary plus target bonus (2.99 times for Mr. Cassidy); • A payment equal to the present value of an additional one year (two years for Mr. Cassidy) of participation in the Company's Management Pension Plan as though the executive had remained employed at the same base rate of pay and target...

  • Page 75
    ...Cassidy - $5,512,331, Mr. Ross - $911,745, Mr. Dir - $149,115 and Mr. Wilson - $437,311. These amounts represent stock they own outright, vested in-the-money stock options, pension benefits and, in the case of Messrs. Cassidy and Ross, nonqualified deferred compensation amounts. Proxy Statement 63

  • Page 76
    ... two business days of the grant. Shareholder Proposals for Next Year's Annual Meeting Shareholder proposals intended for inclusion in next year's Proxy Statement should be sent to Christopher J. Wilson, General Counsel and Secretary, Cincinnati Bell Inc., 221 East Fourth Street, Cincinnati, Ohio...

  • Page 77
    ..., General Counsel and Secretary, Cincinnati Bell Inc., 221 East Fourth Street, Cincinnati, Ohio 45202, for a free copy: Corporate Governance Document Website Audit and Finance Committee Charter Compensation Committee Charter Governance and Nominating Committee Charter Code of Business Conduct Code...

  • Page 78
    ... such shareholder communications. Shareholders should send any communications to Christopher J. Wilson, General Counsel and Secretary, Cincinnati Bell Inc., 221 East Fourth Street, Cincinnati, Ohio 45202, and identify the intended recipient or recipients. All communications addressed to the board of...

  • Page 79
    APPENDIX A CINCINNATI BELL INC. 2007 LONG TERM INCENTIVE PLAN

  • Page 80
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  • Page 81
    ... the Company by offering competitive incentive compensation related to long term performance goals to those Employees of the Company who will be responsible for planning and directing such growth, (ii) to reinforce a commonality of interest between CBI's shareholders and the Company's Employees who...

  • Page 82
    ...other form of award that is listed in section 5 hereof, constitutes a Nonshare-Based Award. 2.13 "Participant" means any Employee who is granted an award under the Plan. 2.14 "Plan" means this document, named the "Cincinnati Bell Inc. 2007 Long Term Incentive Plan," as set forth herein and as it may...

  • Page 83
    ...the verification that all conditions applicable to the payment under or the exercise of such awards have been met shall be read to refer to CBI's Chief Executive Officer as if such person was the Committee. 4. Class of Employees Eligible for Plan. Awards may be granted under the Plan to, and only to...

  • Page 84
    ...set forth in subparagraphs (1) and (2) of this subsection 6.2 (which generally involve the maximum number of Common Shares and other compensation on which awards granted to any Participant during a calendar year may be based) shall apply to the grant of awards under the Plan. No award may be granted...

  • Page 85
    ...of Stock Option. A stock option means an option to purchase any number of Common Shares, up to a fixed maximum number of Common Shares, in the future at a fixed price (for purposes of this section 7, the "Exercise Price") that applies to the Common Shares to which the purchase relates. Stock options...

  • Page 86
    ... a fixed maximum number of Common Shares, exceeds a fixed price (for purposes of this section 8, the "Exercise Price") of the Common Shares to which the exercise relates. A SAR may be granted free-standing, in relation to a new stock option being granted at the same time as the SAR is granted, or in...

  • Page 87
    ... employee of the Company for a specified continuous period of time of at least three years (or of at least one year if the restricted stock is subject to the meeting of certain performance goals) or terminate employment with the Company in special circumstances (such as the Participant's retirement...

  • Page 88
    ... Common Shares that constitute such restricted stock. 9.3 Procedures for Payment of Taxes Upon Vesting of Restricted Stock. Any taxes required to be withheld upon the lapse of any restrictions applicable to any restricted stock granted under the Plan (and, if applicable, any minimum purchase price...

  • Page 89
    ... at least one year or terminate employment with the Company in special circumstances (such as the Participant's retirement, disability, or death); and (ii) conditions related to the meeting of certain performance goals (except that the Committee may provide in the terms of the applicable share-based...

  • Page 90
    ... activities, dividend payments and proceeds from the issuance of equity securities, and proceeds from the sale of assets); (b) earnings before interest, taxes, depreciation, and amortization; (c) earnings per share; (d) operating income; (e) total shareholder returns; (f) profit targets; (g) revenue...

  • Page 91
    ... natural catastrophes; (11) currency fluctuations; (12) an expense relating to the issuance of stock options and/or other stock-based compensation; (13) an expense relating to the early retirement of debt; and/or (14) an impact of the conversion of convertible debt securities. Proxy Statement A-11

  • Page 92
    ...cash payment shall be equal to the amount by which (i) the aggregate fair market value (on the date of the Change in Control) of the Common Shares that are subject to such stock option or stock appreciation right exceeds (ii) the aggregate exercise price of such Common Shares under such stock option...

  • Page 93
    ...Voting Securities among the holders thereof immediately prior to the Reorganization or Sale; (2) no person (other than any employee benefit plan sponsored or maintained by the Surviving Entity or the Parent Entity or the related trust of any such plan) is or becomes the beneficial owner, directly or...

  • Page 94
    ... procedures governing the exercise of, lapse of restrictions under, and/or payment of any award granted under the Plan and to compel under such procedures that, to the extent applicable under such award, any purchase price for Common Shares being obtained under such award and/or taxes required to be...

  • Page 95
    ... Shares which may be subject to or issued under ISOs granted during the existence of the Plan; (iii) change the class of persons eligible to become Participants under the Plan; or (iv) make any other change in the Plan that is required by applicable law to be approved by CBI's shareholders in order...

  • Page 96
    ... Participant's compensation for purposes of any termination or severance pay plan, or any other pension, profit sharing, or other benefit plan, of the Company unless such plan expressly or clearly indicates that the payments or other benefits provided under an award granted under the Plan shall be...

  • Page 97
    ... the Plan, any award granted under the Plan to an Employee who is, at the time of the grant of the award, an employee of a corporation (other than CBI) that is part of a controlled group of corporations (within the meaning of Section 1563(a) of the Code, but determined without regard to Code Section...

  • Page 98
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  • Page 99
    APPENDIX B CINCINNATI BELL INC. 2007 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

  • Page 100
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  • Page 101
    ... Plan is the Cincinnati Bell Inc. 2007 Stock Option Plan for Non-Employee Directors, and its sponsor is CBI. 1.2 Purposes of Plan. The purposes of this Plan are (i) to attract and retain the services of experienced and knowledgeable persons to serve as independent directors of CBI for the benefit...

  • Page 102
    2.9 "Outside Director" means any member of the Board who is not an employee (on an employee payroll) of the Company. 2.10 "Plan" means this document, named the "Cincinnati Bell Inc. 2007 Stock Option Plan for Non-Employee Directors," as set forth herein and as it may be amended. 2.11 "Regulation 1....

  • Page 103
    ..., the following limits set forth in paragraphs (a) through (c) of this subsection 6.1 (which generally involve the maximum number of Common Shares that may be issued or paid under the Plan and its various types of awards during the Plan's entire existence) shall apply to the grant of awards under...

  • Page 104
    ...signed by the Board or a representative thereof, which agreement shall contain the terms and conditions of the stock option (as set by the Board). 7.3 Exercise Price of Stock Option. Unless otherwise prescribed by the Board to be higher, the Exercise Price with respect to any number of Common Shares...

  • Page 105
    ... Common Shares that constitute such restricted stock. 8.3 Procedures for Payment of Taxes Upon Vesting of Restricted Stock. Any taxes required to be withheld upon the lapse of any restrictions applicable to any restricted stock granted under the Plan (and, if applicable, any minimum purchase price...

  • Page 106
    ... the aggregate fair market value (on the date of the Change in Control) of the Common Shares that are subject to such stock option exceeds the aggregate exercise price of such Common Shares under such stock option. In the event the Board exercises its discretion to cause such cash payment to be made...

  • Page 107
    ...Voting Securities among the holders thereof immediately prior to the Reorganization or Sale; (2) no person (other than any employee benefit plan sponsored or maintained by the Surviving Entity or the Parent Entity or the related trust of any such plan) is or becomes the beneficial owner, directly or...

  • Page 108
    .... The Board may, in its discretion, establish procedures governing the exercise of, lapse of restrictions under, and/or payment of any award granted under the Plan and to compel under such procedures that, to the extent applicable under such award, any purchase price for Common Shares being obtained...

  • Page 109
    ... (i) increase the total number of Common Shares which may be issued or paid during the existence of the Plan; (ii) change the class of persons eligible to receive awards under the Plan; or (iii) make any other change in the Plan that is required by applicable law to be approved by CBI's shareholders...

  • Page 110
    ... with an award granted under the Plan unless and until CBI determines that such issuance or delivery will not constitute a violation of the provisions of any applicable law (or regulation issued under such law) or the rules of any securities exchange on which Common Shares are listed and will not...

  • Page 111
    ... the fiscal year ended December 31, 2006 ' 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. Ohio (State of Incorporation) Telephone-513-397-9900 31-1056105 (I.R.S. Employer...

  • Page 112
    ... and Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships, Related Transactions and Director Independence ...Principal Accountant Fees and Services ...106...

  • Page 113
    ... package of services that the Company offers is the Custom ConnectionsSM "Super Bundle," comprised of a customized package of local, long distance, wireless, and digital subscriber line ("DSL") services on a single monthly bill and at a price that is discounted compared to the purchase price of each...

  • Page 114
    ... with its primary high-speed internet competitors. The Company believes that the improvement in speed and marketing of this service in combination with local voice, long distance and wireless services, have helped its DSL subscriber base to increase to 198,000 as of December 31, 2006, a 22% and 51...

  • Page 115
    ... of mobile-to-mobile (calls to and from other CBW subscribers), an unlimited number of calls to and from a CBT access line, or local minutes for a flat monthly rate. For plans with a fixed number of minutes, postpaid subscribers can purchase additional minutes at a per-minute-of-use rate. Prepaid...

  • Page 116
    ... hourly rates. In May 2006, the Company purchased Automated Telecom Inc. ("ATI") for a purchase price of $3.5 million to expand its geographical presence in order to better serve its customers located outside of the greater Cincinnati area. ATI is based in Louisville, Kentucky, with offices...

  • Page 117
    ... distance plans, which include unlimited long distance for a flat fee, purchase minutes at a per-minute-of-use rate or a fixed number of minutes for a flat fee. Business customers can choose from a variety of services, which include audio conferencing, dedicated access, and, starting in 2006, VoIP...

  • Page 118
    ... on-going operations. The Broadband segment previously provided data and voice communications services nationwide over 18,700 route miles of fiber-optic transmission facilities. Operating income in 2006 of $10.4 million consisted of a $4.7 million gain on sale of broadband fiber assets, $3.6 million...

  • Page 119
    ... Bell Inc. ("the Parent Company"), the Parent Company may not be able to make the scheduled interest and principal repayments on its $1.8 billion of debt. This would have a material adverse effect on the Company's liquidity and the trading price of the Cincinnati Bell common stock, preferred stock...

  • Page 120
    ... lose, access lines as a part of its customer base utilizes service of competitive wireline or wireless providers in lieu of the Company's local wireline service. CBT faces competition from other local exchange carriers, wireless service providers, inter-exchange carriers, and cable, broadband, and...

  • Page 121
    ... Verizon began offering VoIP and long distance service in Cincinnati and Dayton. Also, in July 2004, the local gas and electric supplier began offering high-speed Internet access over electrical lines to customers in limited neighborhoods of CBT's operating area. Insight Cable, which provides cable...

  • Page 122
    ... changes to the business conditions in the telecommunications industry. For example, in 2006, the FCC opened a proceeding to consider creating new rules for the protection of customer proprietary network information ("CPNI") and subsequently directed various providers, including the Company...

  • Page 123
    ... of current and future enterprise, carrier, and residential customers. The Company seeks to meet these needs through new product introductions, service quality, and technological superiority. The Company has implemented GSM technology for wireless communications and works with vendors to ensure the...

  • Page 124
    ...generates a substantial portion of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas. An economic downturn or natural disaster occurring in this limited operating territory could have a disproportionate effect on the Company's business, financial condition, results of...

  • Page 125
    ...run retail locations. CBTS operates five data centers - three owned and two leased - in Ohio and Kentucky through which it provides 24-hour monitoring of the customer's computer equipment in the data center, power, environmental controls, and high-speed, high bandwidth point-to-point optical network...

  • Page 126
    Item 3. Legal Proceedings The information required by this Item is included in Note 12 to the Consolidated Financial Statements that are contained in Item 8 of this Annual Report on Form 10-K. Item 4. Submission of Matters to a Vote of the Security Holders None. 16

  • Page 127
    ... the Consolidated Financial Statements that are contained in Item 8 of this Annual Report on Form 10-K. Issuer Purchases of Equity Securities The following table provides information regarding the Company's purchases of its common stock during the quarter ended December 31, 2006: Maximum Number (or...

  • Page 128
    ... the Company's common shares (ii) the S&P 500® Stock Index, and (iii) the S&P© Integrated Telecommunications Services Index. CUMULATIVE TOTAL RETURN Based upon an initial investment of $100 on December 31, 2001 with dividends reinvested $150 $125 $100 $75 $50 $25 $0 Dec-01 Dec-02 Cincinnati Bell...

  • Page 129
    ...except per share amounts) 2006 2005 2004 2003 2002 Operating Data Revenue ...Cost of services and products, selling, general, and administrative, depreciation and amortization ...Restructuring, asset impairments and other charges, shareholder claim settlement (a) ...Gain on sale of broadband assets...

  • Page 130
    ...to Consolidated Financial Statements. Executive Summary Cincinnati Bell Inc. (the "Company") is a full-service local provider of data and voice communications services and equipment and a regional provider of wireless and long distance communications services. The Company provides telecommunications...

  • Page 131
    ... revenues in the Wireless segment due to an increase in postpaid service revenue from additional subscribers and increased data revenue; and • $8.3 million lower revenues in the Local segment due to access line loss, partially offset by higher data and DSL revenues. Operating income for 2006...

  • Page 132
    ...the Technology Solutions segment primarily due to increased telecom and IT equipment sales; • $24.2 million lower revenues in the Wireless segment due to lower service revenue; • $6.1 million lower revenues in the Local segment due to access line loss, partially offset by increased data and DSL...

  • Page 133
    ... network access, Gigabit Ethernet and Asynchronous Transfer Mode based data transport, and DSL and dial-up Internet access, to customers in southwestern Ohio, northern Kentucky, and southeastern Indiana. Cincinnati Bell Telephone LLC ("CBT"), which operates as the Incumbent Local Exchange Carrier...

  • Page 134
    ... Dayton, Ohio. The Company had 50,000 total access lines outside its ILEC service territory at December 31, 2006, a 33% increase from the prior year. Data revenue consists of data transport, high-speed Internet access (including DSL), dial-up Internet access, digital trunking, and Local Area Network...

  • Page 135
    ... to state and local income tax; • $5.4 million increase in network and other costs related to the out-of-territory expansion of the Company's CLEC operations; • $1.3 million increase in right-to-use fees for webhosting services and product costs to support additional DSL subscribers; and...

  • Page 136
    ... TDMA and GSM networks. During the first quarter of 2003, CBW began to transition its subscribers to GSM technology, which provides voice communication, short message service ("SMS") or text messaging, and enhanced data communication services, such as mobile web browsing, internet access, email, and...

  • Page 137
    ...voice minutes and data services usage, and a $5.2 million increase for handset and accessory costs due to higher activations and the migration of subscribers from the TDMA network to the GSM network. The remaining cost increases resulted from higher operating taxes and customer service costs related...

  • Page 138
    ... accessory costs related to the equipment revenue increase and $2.5 million of higher operating taxes. Selling, general and administrative expenses were flat as compared to 2004. Increases in advertising and promotional expenses of $2.9 million were offset by decreased fees for outsourced services...

  • Page 139
    ... through the Company's subsidiary, Cincinnati Bell Technology Solutions, Inc. ("CBTS"). (dollars in millions) 2006 2005 $ Change 2006 vs. 2005 % Change 2006 vs. 2005 2004 $ Change 2005 vs. 2004 % Change 2005 vs. 2004 Revenue: Telecom and IT equipment distribution ...Data center and managed services...

  • Page 140
    ... accounted for the remaining increase in 2005. The newly operational data centers and increased hardware sales directly contributed to an increase of $13.7 million in data center and managed services revenue in 2005. Data center service revenue increased in 2005 as a result of the opening of its new...

  • Page 141
    ... CBAD's revenue increased $2.3 million in 2006 compared to 2005 primarily due to new dedicated access business customers and a 28% increase in minutes of use for audio conferencing. CBAD had 552,000 subscribed access lines as of December 31, 2006 in the Cincinnati and Dayton, Ohio operating areas...

  • Page 142
    ... in the Cincinnati and Dayton, Ohio operating areas, an increase of 2,000 lines over 2004. Usage increases from the growth of unlimited long distance plans within the Company's service bundles are the primary reason for this growth. The Company's market share has increased as a function of the Local...

  • Page 143
    ... local, wireless, and DSL networks will be focused on maintenance, strategic expansion, and incremental revenue-generating penetration of these services with the bundle, cost and productivity improvements and technological enhancement initiatives undertaken to add and retain customers on the Company...

  • Page 144
    ..., interest coverage and fixed charge ratios. The facilities also contain certain covenants which, among other things, may restrict the Company's ability to incur additional debt or liens, pay dividends, repurchase Company common stock, sell, transfer, lease, or dispose of assets and make investments...

  • Page 145
    ... a three-year labor agreement extending through May 10, 2008. The contract affects approximately 1,500 members of the CWA Locals 4400 and 4401. Terms of the new labor contract include: • Base pay increases for union employees of 1.75% retroactive to May 8, 2005, 2.75% effective May 14, 2006, and...

  • Page 146
    ...• Establishment of health care premium payments for active employees beginning in 2007; and • Contribution increases of 10% to the union employees' pension plan. Commitments and Contingencies Commitments In 1998, the Company entered into a ten-year contract with Convergys Corporation ("Convergys...

  • Page 147
    ... of Ohio. Fidelity Management Investment Trust Company was also named as a defendant in these actions. These cases, which purport to be brought on behalf of the Cincinnati Bell Inc. Savings and Security Plan, the Broadwing Retirement Savings Plan, and a class of participants in the Plans, generally...

  • Page 148
    ... compared to the $322.3 million provided by operating activities during 2005. The increase was generated by working capital improvements, partially offset by lower operating cash generated from the Local segment due to access line losses and shareholder claim payments of $6.3 million (See Note 12 to...

  • Page 149
    ...repayments in 2005, the Company incurred debt issuance costs and consent fees of $21.9 million. Preferred stock dividends of $10.4 million were paid during each of 2006 and 2005. 2005 Compared to 2004 Cash provided by operating activities for 2005 totaled $322.3 million, an increase of $21.6 million...

  • Page 150
    ... wireless, long distance, switched access, data center management services, reciprocal compensation, and data and Internet product services are billed monthly in arrears. The Company bills service revenue in regular monthly cycles, which are spread throughout the days of the month. As the last day...

  • Page 151
    ...The Company estimates the useful lives of plant and equipment in order to determine the amount of depreciation expense to be recorded during any reporting period. The majority of the Local segment plant and equipment is depreciated using the group method, which develops a depreciation rate (annually...

  • Page 152
    ... demand for existing voice minutes of use by customers as well as to provide enhanced data services such as streaming video, the Company intends to construct a 3G network and deploy it on the newly purchased AWS spectrum. Due to this implementation, lives of certain GSM assets were shortened...

  • Page 153
    ... current assumptions, the Company believes it will pay an estimated $110 million to fund its pension plans during the period 2007 to 2016. In October 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement...

  • Page 154
    ... pension plans: one for eligible management employees, one for non-management employees and one supplemental, nonqualified, unfunded plan for certain senior executives. The Company also provides health care and group life insurance benefits for eligible retirees. The key assumptions used to account...

  • Page 155
    ... the use of individual Health Reimbursement Accounts ("HRAs"), which provides for Company contributions of a fixed amount per retiree that the retiree can use to purchase their healthcare from among the various plans offered. The Company agreed to increase the HRA amount annually over the life of...

  • Page 156
    ... as cable modem broadband providers and VoIP providers. While Cincinnati Bell has expanded beyond its incumbent local exchange operations by offering wireless, long distance, broadband service, Internet access and out-of-territory competitive local exchange services, the majority of its revenue is...

  • Page 157
    ...plan requires the Local segment to operate as a CLEC in service areas outside of CBT's traditional ILEC franchise area. For approximately the past six years, CBT has offered local services, primarily on its own facilities-based network, to Ohio communities contiguous to its ILEC territory. In Dayton...

  • Page 158
    ... pricing flexibility. On August 7, 2006, the Company applied for authority to increase its rates for basic local exchange service in certain of its exchanges. In November 2006, the PUCO granted the Company's application. In January 2007, the PUCO denied a request, by the Ohio Consumer Counsel...

  • Page 159
    ... balance of retained earnings. The Company has not yet completed its evaluation of FIN 48. In September 2006, FASB ratified Emerging Issues Task Force Issue No. 06-1, "Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer...

  • Page 160
    ... market for telecommunication services; changes in competition in markets in which the Company operates; pressures on the pricing of the Company's products and services; advances in telecommunications technology; the ability to generate sufficient cash flow to fund the Company's business plan...

  • Page 161
    ... time. The Company does not hold or issue derivative financial instruments for trading purposes or enter into transactions for speculative purposes. Interest rate swap agreements, a particular type of derivative financial instrument, involve the exchange of fixed and variable rate interest payments...

  • Page 162
    ... each of the three years in the period ended December 31, 2006: II -Valuation and Qualifying Accounts ...112 53 54 57 58 59 60 61 Financial statement schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto...

  • Page 163
    ... accounting firm, Deloitte & Touche LLP, has issued an audit report on management's assessment of the Company's internal control over financial reporting. This report is included on page 54. March 1, 2007 /s/ John F. Cassidy John F. Cassidy President and Chief Executive Officer /s/ Brian A. Ross...

  • Page 164
    ... in Current Year Financial Statements, elected application effective January 1, 2006, FASB Statement No. 123(R) (revised 2004), Share Based Payment, effective January 1, 2006, and FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment...

  • Page 165
    ... operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the Index at Item 15 presents fairly, in all material respects, the information set...

  • Page 166
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareowners of Cincinnati Bell Inc. We have audited the accompanying consolidated balance sheets of Cincinnati Bell Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations...

  • Page 167
    Cincinnati Bell Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Millions of Dollars, Except Per Share Amounts) Year Ended December 31, 2006 2005 2004 Revenue Services ...Products ...Total revenue ...Costs and expenses Cost of services ...Cost of products sold ...Selling, general and administrative ......

  • Page 168
    Cincinnati Bell Inc. CONSOLIDATED BALANCE SHEETS (Millions of Dollars, Except Share Amounts) As of December 31, 2006 2005 Assets Current assets Cash and cash equivalents ...Receivables, less allowances of $15.2 and $14.3 ...Materials and supplies ...Deferred income tax benefits, net ...Prepaid ...

  • Page 169
    ... from sale of broadband assets ...Other, net ...Net cash used in investing activities ...Cash flows from financing activities Issuance of long-term debt ...Repayment of debt ...Debt issuance costs and consent fees ...Issuance of common shares - exercise of stock options ...Preferred stock dividends...

  • Page 170
    ... ...Comprehensive income Shares issued/(purchased) under employee plans and other ...Restricted stock grant and amortization ...Dividends on 6 3⁄ 4% preferred stock ...Adjustment to initially apply SFAS No. 158, net of taxes of $73.3 . . Other ...Balance at December 31, 2006 3.1 - $129.4 - 252...

  • Page 171
    ... of the broadband business, which is reported in the Broadband segment. The Company generates substantially all of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas. An economic downturn or natural disaster occurring in this limited operating territory could have...

  • Page 172
    ... wireless, long distance, switched access, data center management services, reciprocal compensation, and data and Internet product services are billed monthly in arrears. The Company bills service revenue in regular monthly cycles, which are spread throughout the days of the month. As the day...

  • Page 173
    .... Upon resolution of audit, any remaining liability not paid is released and increases operating income. Stock-Based Compensation - In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS 123...

  • Page 174
    ... had no impact on the Company's results of operations for 2006. The fair value of stock options is determined using the Black-Scholes option-pricing model using assumptions such as volatility, risk-free interest rate, holding period and dividends. For all share-based payments, an assumption is also...

  • Page 175
    ... fourth quarter. The Company believes it has meritorious defenses related to the payment of these operating taxes and intends to defend its position in order to limit the ultimate payment of the fees. Other Recently Issued Accounting Standards In February 2006, the FASB issued Statement of Financial...

  • Page 176
    ..., except per share amounts) 2006 2005 2004 Numerator: Net income (loss) ...Preferred stock dividends ...Numerator for basic and diluted EPS ...Denominator: Denominator for basic EPS - weighted average common shares outstanding ...Warrants ...Stock-based compensation arrangements ...Denominator for...

  • Page 177
    ...) Initial Charge Utilizations Balance December 31, 2006 Employee separation obligations ...2005 Restructuring $3.0 $(1.1) $1.9 In late 2005, the Company incurred employee separation expense of $1.6 million related to the outsourcing of its directory assistance services. Substantially all...

  • Page 178
    ...31, 2006 due to the expected migration of its TDMA customer base to its Global System for Mobile Communications ("GSM") network. As part of the process of redeploying spectrum from the Company's legacy TDMA wireless network to its GSM network to meet unexpected increasing demand for its GSM services...

  • Page 179
    ... existing voice minutes of use by customers as well as to provide enhanced data services such as streaming video, the Company intends to construct a third generation ("3G") network and deploy it on the newly purchased Advanced Wireless Services ("AWS'') spectrum. Due to this implementation, lives of...

  • Page 180
    ... assets, net" in the Consolidated Balance Sheets. To satisfy increasing demand for existing voice minutes of use by customers as well as to provide enhanced data services such as streaming video, the Company intends to construct a 3G network in its Cincinnati and Dayton regions and deploy it on the...

  • Page 181
    ... signed an agreement to purchase a local telecommunications business, which offers voice, data and cable TV services, in Lebanon, Ohio for a purchase price of $7 million, of which $4.6 million will be paid in March 2007. The Company expects to fund the purchase with its available cash. Revenues...

  • Page 182
    ...borrowing capacity; • used the proceeds from the New Bonds and borrowings from the new Corporate credit facility to repay $438.8 million outstanding at December 31, 2004 on its previous credit facility; and • executed $350 million notional interest rate swaps to change the fixed rate nature of...

  • Page 183
    ... time. The average interest rate charged on borrowings under the Corporate credit facility was 6.6% and 5.6% in 2006 and 2005, respectively. The Company recorded interest expense of $27.9 million in 2006 and $9.5 million in 2005. Under the Corporate credit facility, the Company pays commitment fees...

  • Page 184
    ... provisions, each to purchase one share of Cincinnati Bell common stock at $3.00 each, which expire in March 2013. Of the total gross proceeds received, $47.5 million was allocated to the fair value of the warrants using the Black-Scholes option-pricing model and was recorded as a discount on the 16...

  • Page 185
    ... of the net proceeds to purchase all of the Company's then outstanding Convertible Subordinated Notes due 2009, which bore interest at a rate of 9%, at a discounted price equal to 97% of their accreted value. The remaining proceeds were used to pay fees related to a credit facility amendment and...

  • Page 186
    ... of interest expense in 2006, 2005, and 2004, respectively, related to the CBT notes. Capital Lease Obligations The Company leases facilities and equipment used in its operations, some of which are required to be capitalized in accordance with Statement of Financial Accounting Standards No. 13...

  • Page 187
    ...rate fluctuations. The Company employs derivative financial instruments to manage its balance of fixed rate and variable rate indebtedness. In particular, the Company currently has outstanding interest rate swap agreements in which the Company exchanges fixed rate interest payments for variable rate...

  • Page 188
    ... group life insurance benefits through Retirement Funding Accounts and funds health care benefits and other group life insurance 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...

  • Page 189
    ... the use of individual Health Reimbursement Accounts ("HRAs"), which provides for Company contributions of a fixed amount per retiree that the retiree can use to purchase their healthcare from among the various plans offered. The Company agreed to increase the HRA amount annually over the life of...

  • Page 190
    ...for all of its employee benefit plans was the year-end balance sheet date. Effective December 31, 2006, the Company adopted SFAS 158 and its incremental effect on individual line items in the Consolidated Balance Sheet as of December 31, 2006 was as follows: Before Application of SFAS 158 Additional...

  • Page 191
    ... at December 31, 2006 2005 Plan assets: ...Fixed income ...Equity securities * ...Real estate ...Total ...* 20 - 38% 55 - 65% 8 - 12% 30.0% 59.9% 10.1% 100.0% 30.4% 60.1% 9.5% 100.0% Pension plan assets include $6.4 million and $4.9 million in Company common stock at December 31, 2006 and 2005...

  • Page 192
    ... single-employer defined benefit pension plans. The funding requirements will now largely be based on a plan's calculated funded status, with faster amortization of any shortfalls or surpluses. The Act directs the U.S. Treasury Department to develop a new yield curve to discount pension obligations...

  • Page 193
    ... used in accounting for the pension and postretirement benefit cost: Pension Benefits 2006 2005 2004 Postretirement and Other Benefits 2006 2005 2004 Discount rate ...Expected long-term rate of return on pension and health plan assets ...Expected long-term rate of return on group life plan...

  • Page 194
    ...management deferred compensation arrangements for a total cost of $146.8 million and $145.5 million at December 31, 2006 and 2005, respectively. Preferred Share Purchase Rights Plan In 1997, the Company's Board of Directors adopted a Share Purchase Rights Plan by granting a dividend of one preferred...

  • Page 195
    ..., professional and consulting and technical support services for the Company within CBT's operating territory. In return, the Company will be the exclusive provider of local telecommunications services to Convergys. The contract extension reduced the Company's annual commitment in 2004 and 2005 to...

  • Page 196
    ... of Ohio. Fidelity Management Investment Trust Company was also named as a defendant in these actions. These cases, which purport to be brought on behalf of the Cincinnati Bell Inc. Savings and Security Plan, the Broadwing Retirement Savings Plan, and a class of participants in the Plans, generally...

  • Page 197
    ...Statement of Operations. Additionally, in 2004, the Company paid $2.7 million related to indemnity obligations under a legal settlement agreement. 13. Income Taxes Income tax provision (benefit) consists of the following: (dollars in millions) Year Ended December 31, 2006 2005 2004 Current: Federal...

  • Page 198
    ... an increase in additional paid-in capital. In February 2006, the Kentucky Revenue Cabinet issued state tax regulations, which may limit the Company's ability to use its state net operating loss carryforwards against future state taxable income. The Company recorded a one-time income tax charge of...

  • Page 199
    .... 14. Stock-Based Compensation Plans The Company generally grants performance-based awards, time-based restricted shares and stock options. The numbers of shares authorized and available for grant under these plans were approximately 78.3 million and 33.8 million, respectively, at December 31, 2006...

  • Page 200
    ... management's focus on shareholder return and is in the best interest of the Company's shareholders. Presented below is a summary of the status of outstanding Company stock options issued to employees and related transactions: 2006 WeightedAverage Option Prices Per Share 2005 WeightedAverage Option...

  • Page 201
    ...of fully managed and outsourced IT and telecommunications services and offers solutions that combine data center collocation services along with the sale, installation and maintenance of major branded IT and telephony equipment. In May 2006, Technology Solutions purchased ATI for a purchase price of...

  • Page 202
    ...administrative expenses have been allocated to segments based upon the nature of the expense and the relative size of the segment. The Company's business segment information is as follows: (dollars in millions) Year Ended December 31, 2006 2005 2004 Revenue Local ...Wireless ...Technology Solutions...

  • Page 203
    ...- 0.3 $187.7 Year Ended December 31, 2006 2005 2004 Service revenue Wireline ...Wireless ...Managed and data center services ...Telephony installation and maintenance ...Other ...Total service revenue ...Product revenue Handsets and accessories ...IT and computer-related equipment ...Telephony and...

  • Page 204
    .... The following information sets forth the Condensed Consolidating Balance Sheets of the Company as of December 31, 2006 and 2005 and the Condensed Consolidating Statements of Operations and Cash Flows for the three years ended December 31, 2006, 2005, and 2004 of (1) the Parent Company, as the...

  • Page 205
    ... Revenue ...Operating costs and expenses ...Operating income (loss) ...Equity in earnings of subsidiaries, net of tax ...Interest expense ...Other income, net ...Income (loss) before income taxes ...Income tax expense (benefit) ...Net income ...Preferred stock dividends ...Net income applicable...

  • Page 206
    Condensed Consolidating Balance Sheets Parent (Guarantor) As of December 31, 2006 Other CBT (Non-guarantors) Eliminations (dollars in millions) Total Cash and cash equivalents ...Receivables, net ...Other current assets ...Total current assets ...Property, plant and equipment, net ...Goodwill and...

  • Page 207
    Condensed Consolidating Statements of Cash Flows Parent (Guarantor) Year ended December 31, 2006 Other CBT (Non-guarantors) Eliminations (dollars in millions) Total Cash flows provided by (used in) operating activities ...Capital expenditures ...Acquisition of businesses and wireless license . . ...

  • Page 208
    ...-guarantors) Eliminations Total Cash flows provided by (used in) operating activities ...Capital expenditures ...Proceeds from sale of assets ...Other investing activities ...Cash flows provided by (used in) investing activities ...Funding between Parent and subsidiaries, net ...Repayment of debt...

  • Page 209
    ... Complete Protection Inc., Cincinnati Bell Any Distance Inc., Cincinnati Bell Telecommunication Services LLC, Cincinnati Bell Wireless Company, Cincinnati Bell Wireless LLC, BCSIVA Inc., BRCOM Inc., Cincinnati Bell Technology Solutions Inc., and IXC Internet Services Inc. Effective February 14, 2006...

  • Page 210
    ... Revenue ...Operating costs and expenses ...Operating income (loss) ...Equity in earnings of subsidiaries, net of tax ...Interest expense ...Other income, net ...Income (loss) before income taxes ...Income tax expense (benefit) ...Net income ...Preferred stock dividends ...Net income applicable...

  • Page 211
    Condensed Consolidating Balance Sheets As of December 31, 2006 (dollars in millions) Parent (Issuer) Guarantors Non-guarantors Eliminations Total Cash and cash equivalents ...Receivables, net ...Other current assets ...Total current assets ...Property, plant and equipment, net ...Goodwill and other...

  • Page 212
    ... Statements of Cash Flows Year ended December 31, 2006 (dollars in millions) Parent (Issuer) Guarantors Non-guarantors Eliminations Total Cash flows provided by (used in) operating activities ...Capital expenditures ...Acquisition of businesses and wireless license ...Other investing activities...

  • Page 213
    ...Non-guarantors Eliminations Total Cash flows provided by (used in) operating activities ...Capital expenditures ...Proceeds from sale of assets ...Other investing activities ...Cash flows provided by (used in) investing activities ...Funding between Parent and subsidiaries, net ...Repayment of debt...

  • Page 214
    ...2006 Revenue ...Operating income ...Net income ...Basic earnings per common share ...Diluted earnings per common share ...(dollars in millions, except per share...and year and may not be dilutive during every period due to variations in operating results. Therefore, the sum of quarterly per share ...

  • Page 215
    ... with generally accepted accounting principles. Cincinnati Bell Inc.'s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company's internal control over financial reporting that occurred during the fourth quarter of 2006...

  • Page 216
    ...40 President and Chief Executive Officer Chief Operating Officer Chief Financial Officer Vice President, Internal Controls Vice President, General Counsel, and Secretary Vice President, Human Resources and Administration Vice President, Investor Relations and Corporate Communications Vice President...

  • Page 217
    ... August 2003; Vice President, Human Resources and Administration of the Cincinnati Operations, 2000-2003; Director of Labor Relations, Staffing and Safety of the Company, 1988-2000; ANTHONY P. SCHULTE, Vice President of Investor Relations and Corporate Communications of the Company since September...

  • Page 218
    ... to the Indenture dated October 27, 1993 by and among Cincinnati Bell Telephone Company, as Issuer, Cincinnati Bell Inc. as Guarantor, and The Bank of New York, as Trustee (Exhibit 4(c)(ii)(3) to Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-8519). Indenture dated as...

  • Page 219
    ..., 2005 to the Indenture dated 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(c)(iii)(2) to Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-8519). Second Supplemental...

  • Page 220
    ...). Cincinnati Bell Inc. 1989 Stock Option Plan (Exhibit (10)(iii)(A)(14) to Annual Report on Form 10-K for 1989, File No. 1-8519). Employment Agreement effective December 4, 2001 between the Company and Michael W. Callaghan (Exhibit (10)(iii)(A)(10) to Annual Report on Form 10-K for the year ended...

  • Page 221
    ... Form 8-K, date of Report July 29, 2005, File No. 1-8519). Employment Agreement effective July 26, 2005 between the Company and Brian A. Ross (Exhibit 10.2 to Current Report on Form 8-K, date of Report July 29, 2005, File No. 1-8519). Code of Ethics for Senior Financial Officers, as adopted pursuant...

  • Page 222
    ... CINCINNATI BELL INC. VALUATION AND QUALIFYING ACCOUNTS (dollars in millions) Beginning of Period Charge (Benefit) to Expenses To (from) Other Accounts Deductions End of Period Allowance for Doubtful Accounts Year 2006 ...Year 2005 ...Year 2004 ...Deferred Tax Valuation Allowance Year 2006 ...Year...

  • Page 223
    ..., thereunto duly authorized. CINCINNATI BELL INC. March 1, 2007 By /s/ Brian A. Ross Brian A. Ross Chief Financial Officer By /s/ Kurt A. Freyberger Kurt A. Freyberger Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by...

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    ... security analysts; retrieve stock prices; and review frequently asked questions. Phone: Individual investors may also contact us via our Shareholder Information Line at (800) 345-6301. Mail: Contact us via U.S. Mail at Cincinnati Bell Inc., Investor Relations, 221 East 4th Street, Cincinnati, Ohio...

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    221 East Fourth Street P.O. Box 2301 Cincinnati, Ohio 45202 513.397.9900 www.cincinnatibell.com