EXHIBIT 99.2
Cincinnati Bell Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in Millions, Except Per Common Share Amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUE $ 315.3 $ 570.3 $ 1,246.6 $ 1,669.3
COSTS, EXPENSES, GAINS AND LOSSES
Cost of services and products (excluding
depreciation of $31.6, $96.3, $96.3 and $278.8
included below) 124.0 254.1 605.1 793.2
Selling, general and administrative
59.2 121.6 287.6 376.4
Depreciation 39.7 120.6 120.6 351.6
Amortization 0.1 6.2 0.4 19.2
Restructuring -- 7.1 (3.4) 23.6
Asset impairments and other -- -- (0.7) --
Gain on sale of broadband assets
(37.3) -- (336.3) --
--------- --------- --------- ---------
Total operating costs, expenses, gains
and losses 185.7 509.6 673.3 1,564.0
--------- --------- --------- ---------
OPERATING INCOME
Minority interest expense 129.6 60.7 573.3 105.3
Interest expense and other financing costs 12.5 15.5 42.5 44.4
67.2 40.1 173.8 117.4
Loss on extinguishment of debt 17.4 -- 17.4 --
Other expense (income), net (0.1) 1.4 (0.8) 0.4
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes,
discontinued operations and cumulative effect of changes in
accounting principles 32.6 3.7 340.4 (56.9)
Income tax benefit
(12.1) (0.3) (12.1) (9.1)
--------- --------- --------- ---------
Income (loss) from continuing operations before discontinued
operations and cumulative effect of changes in accounting
principles 44.7 4.0 352.5 (47.8)
Income from discontinued operations, net of taxes of $119.7 -- -- -- 217.6
--------- --------- --------- ---------
Income before cumulative effect of changes in accounting principles 44.7 4.0 352.5 169.8
Cumulative effect of changes in accounting principles,
net of taxes of $47.6 and $5.8, respectively -- -- 85.9 (2,008.7)
--------- --------- --------- ---------
NET INCOME (LOSS) 44.7 4.0 438.4 (1,838.9)
Preferred stock dividends 2.6 2.6 7.8 7.8
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREOWNERS $ 42.1 $ 1.4 $ 430.6 $(1,846.7)
========= ========= ========= =========
NET INCOME (LOSS) $ 44.7 $ 4.0 $ 438.4 $(1,838.9)
Other comprehensive income (loss), net of tax:
Unrealized gain on interest rate swaps 1.1 0.2 4.3 1.2
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 45.8 $ 4.2 $ 442.7 $(1,837.7)
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations $ 0.19 $ 0.01 $ 1.56 $ (0.26)
Income from discontinued operations, net
of taxes -- -- -- 1.00
Cumulative effect of changes in accounting principles, net of
taxes -- -- 0.39 (9.20)
--------- --------- --------- ---------
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.19 $ 0.01 $ 1.95 $ (8.46)
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations $ 0.18 $ 0.01 $ 1.51 $ (0.26)
Income from discontinued operations, net
of taxes -- -- -- 1.00
Cumulative effect of changes in accounting principles, net of
taxes -- -- 0.38 (9.20)
--------- --------- --------- ---------
NET EARNINGS (LOSS) PER COMMON SHARE $ 0.18 $ 0.01 $ 1.89 $ (8.46)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (MILLIONS)
Basic 225.4 218.5 221.1 218.3
Diluted 235.2 218.9 227.5 218.3
The accompanying notes are an integral part of the financial statements.
1
Cincinnati Bell Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 32.9 $ 44.9
Restricted cash -- 7.0
Receivables, net of allowances of $70.9 and $53.0 139.0 290.6
Materials and supplies 40.5 32.2
Deferred income tax benefits 11.5 11.3
Prepaid expenses and other current assets 17.7 23.8
-------- --------
Total current assets 241.6 409.8
Property, plant and equipment, net of accumulated depreciation of
$1,605.2 and $1,659.8 923.2 867.9
Goodwill 40.9 40.9
Other intangibles, net 47.4 47.8
Deferred financing costs 49.1 19.3
Other noncurrent assets 66.0 81.9
-------- --------
Total assets $1,368.2 $1,467.6
======== ========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities
Short-term debt $ 135.7 $ 203.7
Accounts payable 59.0 129.4
Current portion of unearned revenue and customer deposits 30.4 108.9
Accrued taxes 53.9 84.4
Accrued restructuring 24.3 41.1
Dividends payable 2.6 30.9
Other current liabilities 130.8 138.7
-------- --------
Total current liabilities 436.7 737.1
Long-term debt, less current portion 2,208.0 2,354.7
Unearned revenue, less current portion 2.6 293.3
Deferred income tax liabilities 97.9 37.2
Accrued pension and postretirement benefits 85.1 77.4
Other noncurrent liabilities 30.7 72.3
-------- --------
Total liabilities 2,861.0 3,572.0
Minority interest 40.0 443.9
Commitments and contingencies
Shareowners' Deficit
6-3/4% Cumulative Convertible Preferred Stock, 2,357,299 shares of all classes
of preferred stock authorized; 155,250 shares (3,105,000 depository
shares) issued and outstanding at September 30, 2003 and December 31, 2002 129.4 129.4
Common shares, $.01 par value; 480,000,000 shares authorized; 252,062,104 and
226,598,844 shares issued; 244,194,002 and 218,690,375 outstanding at
September 30, 2003 and December 31, 2002 2.5 2.3
Additional paid-in capital 2,937.5 2,365.1
Accumulated deficit (4,447.2) (4,885.6)
Accumulated other comprehensive loss (9.5) (13.8)
Common shares in treasury, at cost:
7,868,102 and 7,908,469 shares at September 30, 2003 and December 31, 2002 (145.5) (145.7)
-------- --------
Total shareowners' deficit (1,532.8) (2,548.3)
-------- --------
Total liabilities and shareowners' deficit $1,368.2 $1,467.6
======== ========
The accompanying notes are an integral part of the financial statements.
2
Cincinnati Bell Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months
Ended September 30,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 438.4 $(1,838.9)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of changes in accounting principles, net of tax (85.9) 2,008.7
Gain on sale of broadband assets (336.3) --
Gain on sale of discontinued operations -- (211.8)
Loss on extinguishment of debt 17.4 --
Depreciation 120.6 351.6
Amortization 0.4 19.2
Asset impairments and other (0.7) --
Provision for loss on receivables 20.7 40.6
Noncash interest expense 66.8 31.4
Minority interest expense 42.5 44.4
Deferred income tax benefit (12.1) (9.1)
Tax benefits from employee stock option plans 0.2 0.7
Other, net 3.7 0.9
Changes in operating assets and liabilities:
Decrease (increase) in receivables 63.8 (33.6)
Decrease (increase) in prepaid expenses and other current assets (10.4) 5.1
Decrease in accounts payable (33.6) (35.0)
Decrease in accrued and other current liabilities (0.5) (67.2)
Decrease in unearned revenue (47.8) (168.5)
Decrease (increase) in other assets and liabilities, net (16.6) 1.1
Net cash used in discontinued operations -- (9.5)
-------- --------
Net cash provided by operating activities 230.6 130.1
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (94.8) (139.9)
Proceeds from sale of investments 3.8 23.3
Proceeds from sale of broadband assets 82.7 --
Proceeds from sale of discontinued operations -- 345.0
Other, net (2.8) --
-------- --------
Net cash provided by (used in) investing activities (11.1) 228.4
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 850.0 113.1
Repayment of long-term debt (1,008.1) (418.8)
Short-term repayments, net (4.7) (7.5)
Debt issuance costs (65.1) (8.5)
Issuance of common shares - exercise of stock options 1.6 0.5
Minority interest and preferred stock dividends paid (5.2) (32.6)
-------- --------
Net cash used in financing activities (231.5) (353.8)
-------- --------
Net increase (decrease) in cash and cash equivalents (12.0) 4.7
Cash and cash equivalents at beginning of period 44.9 30.0
-------- --------
Cash and cash equivalents at end of period $ 32.9 $ 34.7
======== ========
The accompanying notes are an integral part of the financial statements.
3
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, LIQUIDITY AND ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS -- Cincinnati Bell Inc. ("the Company"), f/k/a
Broadwing Inc., provides diversified telecommunications services
through businesses in four segments: Local, Wireless, Other and
Broadband. During the first quarter of 2002, the Company sold
substantially all of the assets of Cincinnati Bell Directory ("CBD"),
which was previously reported in the Other segment. During the second
and third quarter of 2003, the Company sold substantially all of the
assets of the Broadband business, which was previously reported in the
Broadband segment. These assets were held by the Company's wholly owned
subsidiary, BRCOM (f/k/a Broadwing Communications Inc.). Refer to Note
2 for a detailed discussion of the sale.
As of September 30, 2003, the Company's primary business consisted of
the Local and Wireless segment. The only remaining BRCOM subsidiaries
with operating assets were Cincinnati Bell Technology Solutions Inc.
("CBTS"), an information technology consulting, data collocation and
managed services subsidiary, and Cincinnati Bell Any Distance ("CBAD"),
a subsidiary whose assets service the Other segment's long distance
business. In addition to the long-distance business, the Other segment
also includes Cincinnati Bell Public Communications Inc. ("Public"), a
public payphone service provider.
BASIS OF PRESENTATION -- The Condensed Consolidated Financial
Statements of the Company have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in
the opinion of management, include all adjustments, consisting of
normal recurring adjustments and other nonrecurring adjustments as
disclosed, necessary for a fair presentation of the results of
operations, financial position and cash flows for each period presented
in accordance with generally accepted accounting principles.
Certain prior year amounts have been reclassified to conform to the
current classifications with no effect on financial results. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules and
regulations.
The December 31, 2002 Condensed Consolidated Balance Sheet was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. It is suggested
that these Condensed Consolidated Financial Statements be read in
conjunction with the notes thereto included in the Company's 2002
Annual Report on Form 10-K.
BASIS OF CONSOLIDATION -- The consolidated financial statements include
the consolidated accounts of Cincinnati Bell Inc. and its
majority-owned subsidiaries over which it exercises control.
Significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
USE OF ESTIMATES -- Preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported. Actual
results could differ from those estimates.
UNBILLED RECEIVABLES -- Unbilled receivables arise from local, wireless
and broadband services rendered but not yet billed, in addition to
network construction revenue of the Broadband segment that was
recognized under the percentage-of-completion method. As of September
30, 2003 and December 31, 2002, unbilled receivables, net of
allowances, totaled $28.8 million and $91.0 million, respectively.
Unbilled receivables at December 31, 2002, included $50.5 million in
claims and signed change orders related to a construction contract in
dispute that was terminated during the second quarter of 2002. On
4
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 30, 2003, the Company reached a tentative settlement agreement
regarding the construction contract in dispute. As a result, during the
second quarter of 2003, the Company recorded a charge of $50.5 million
to reserve against the unbilled accounts receivable related to this
contract. The Company expects to finalize the tentative settlement
during the fourth quarter of 2003. Refer to Note 14 for a detailed
discussion of this construction contract.
ALLOWANCES FOR DOUBTFUL ACCOUNTS - The Company establishes the
allowances for doubtful accounts using both percentages of aged
accounts receivable balances to reflect the historical average of
credit losses and specific provisions for certain large, potentially
uncollectible balances. The Company believes that its allowance for
doubtful accounts is adequate based on the methods described above.
However, if one or more of the Company's larger customers were to
default on its accounts receivable obligations, or general economic
conditions in the United States of America deteriorated, the Company
could be exposed to potentially significant losses in excess of the
provisions established.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is
stated at cost. The Company's provision for depreciation of telephone
plant is determined on a straight-line basis using the whole life and
remaining life methods. Provision for depreciation of other property is
based on the straight-line method over the estimated useful life.
Repairs and maintenance expense items are charged to expense as
incurred. Pursuant to the implementation of SFAS 143, discussed below,
the cost of removal for telephone plant is now included in costs of
products and services.
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS -- Goodwill represents
the excess of the purchase price consideration over the fair value of
assets acquired recorded in connection with purchase business
combinations. Indefinite-lived intangible assets consist primarily of
Federal Communications Commission ("FCC") licenses of the Wireless
segment. The Company determined its wireless licenses met the
definition of indefinite-lived intangible assets under Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") as the technology the Company uses to provide
wireless service is not expected to change significantly in the
foreseeable future, and the wireless licenses may be renewed in a
routine manner every ten years for a nominal fee, provided that the
Company continues to meet the service and geographic coverage
provisions required by the FCC. Upon the adoption of SFAS 142 on
January 1, 2002, the Company recorded a goodwill impairment charge of
$2,008.7 million, net of tax, related to the Broadband segment and
ceased amortization of remaining goodwill and indefinite-lived
intangible assets as discussed in Note 4.
Pursuant to SFAS 142, goodwill and intangible assets not subject to
amortization are tested for impairment annually, or when events or
changes in circumstances indicate that the asset might be impaired. For
goodwill, a two-step impairment test is performed. The first step
compares the fair value of a reporting unit with its carrying amount,
including goodwill. If the carrying value of a reporting unit exceeds
its fair value, then the second step of the impairment test is
performed to measure the amount of impairment loss. The second step
compares the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. The implied fair value is determined
by allocating the fair value of a reporting unit to all of the assets
and liabilities of that unit as if the reporting unit had been acquired
in a business combination. The excess of the fair value of a reporting
unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. If the carrying amount of the reporting
unit goodwill is in excess of the implied fair value of that goodwill,
then an impairment loss is recognized equal to that excess. For
indefinite-lived intangible assets, the impairment test consists of a
comparison of the fair value of the intangible asset with its carrying
value. If the carrying value of an indefinite-lived asset exceeds its
fair value, an impairment loss is recognized in an amount equal to that
excess.
IMPAIRMENT OF LONG-LIVED ASSETS, OTHER THAN GOODWILL AND
INDEFINITE-LIVED INTANGIBLES - The Company reviews the carrying value
of long-lived assets, other than goodwill and indefinite-lived assets
5
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
discussed above, when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. An impairment
loss is recognized when the estimated future undiscounted cash flows
expected to result from the use of an asset (or group of assets) and
its eventual disposition are less than its carrying amount. An
impairment loss is measured as the amount by which the asset's carrying
value exceeds its fair value.
During the fourth quarter of 2002, the Company performed an impairment
assessment of its Broadband segment long-lived assets as a result of
the restructuring plan implemented during the quarter and the strategic
alternatives being explored, including the potential sale of the
Broadband business. This assessment considered all of the contemplated
strategic alternatives for the Broadband segment, including a potential
sale of assets, using a probability-weighted approach. Based on this
assessment, the Company determined that the long-lived assets of the
Broadband segment were impaired and recorded a $2,200.0 million
non-cash impairment charge to reduce the carrying value of these
assets. Of the total charge, $1,901.7 million related to tangible fixed
assets and $298.3 million related to finite-lived intangible assets.
DEFERRED FINANCING COSTS -- Deferred financing costs are costs incurred
in connection with obtaining long-term financing; such costs are
amortized as interest expense over the terms of the related debt
agreements. The related expense, included in the Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss) under the
caption "Interest expense and other financing costs", amounted to $12.5
million and $2.7 million in the third quarter of 2003 and 2002,
respectively, and $23.7 million and $7.0 million in the nine-month
period ended September 30, 2003 and 2002, respectively.
ASSET RETIREMENT OBLIGATIONS -- The Company adopted Statement of
Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143") as of January 1, 2003. This
statement requires entities to record the fair value of a legal
liability for an asset retirement obligation in the period it is
incurred. The removal cost is initially capitalized and depreciated
over the remaining life of the underlying asset. The associated
liability is accreted over the life of the underlying asset. Once the
obligation is ultimately settled, any difference between the final cost
and the recorded liability is recognized as income or loss on
disposition. The Company determined the Local segment did not have a
liability under SFAS 143, while the Wireless segment and Other segment
did have a liability. The Company recorded a liability for removal
costs at fair value of approximately $2.6 million and an asset of
approximately $2.3 million in the first quarter of 2003 related to the
Wireless and Other segments. The assets will be depreciated straight
line over the remaining lives of the assets, while the interest
component of the liability will be accreted over the remaining lives of
the assets. Additionally, the Company recorded a non-recurring increase
to net income as a change in accounting principle as of January 1, 2003
of $85.9 million, net of tax. The Local segment recorded $86.3 million
of income related to depreciation previously recorded for asset removal
costs, offset by $0.4 million of expense recorded in the Wireless
segment
REVENUE RECOGNITION -- The Company recognizes revenue as services are
provided. Local and broadband transport service revenue is billed
monthly, in advance, with revenue being recognized when earned.
Wireless, switched voice and data and Internet product revenue are
billed monthly in arrears, while the revenue is recognized as the
services are provided. Revenue from product sales and certain services
is generally recognized upon performance of contractual obligations,
such as shipment, delivery, installation or customer acceptance.
Upfront fees for customer connection and activation are deferred and
amortized into revenue on a straight-line basis over the average
customer life. The related connection and activation costs, to the
extent of the upfront fees, are deferred and amortized on a
straight-line basis over the average customer life.
6
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prior to the sale of the broadband assets in the second and third
quarter of 2003 (refer to Note 2), the Company had previously entered
into indefeasible right-of-use agreements ("IRU"), which represent the
lease of network capacity or dark fiber and are recorded as unearned
revenue at the earlier of the acceptance of the applicable portion of
the network by the customer or the receipt of cash. The buyer of IRU
services typically pays cash upon execution of the contract, and the
associated IRU revenue is then recognized over the life of the
agreement as services are provided, beginning on the date of customer
acceptance. In the event the buyer of an IRU terminates a contract
prior to the contract expiration and releases the Company from the
obligation to provide future services, the remaining unamortized
unearned revenue is recognized in the period in which the contract is
terminated. IRU and related maintenance revenue are included in the
broadband transport category of the Broadband segment. Concurrent with
the broadband asset sale, the remaining IRU obligations were assumed by
the buyer (Refer to Note 2 for a detailed discussion of the sale).
FIBER EXCHANGE AGREEMENTS -- In connection with the development of its
optical network, the Company entered into various agreements to
exchange fiber usage rights. The Company accounts for agreements with
other carriers to either exchange fiber asset service contracts for
capacity or services based on the carrying value of the assets
exchanged. Concurrent with the broadband asset sale, the remaining
fiber exchange agreements were assumed by the buyer (Refer to Note 2
for a detailed discussion of the sale).
INCOME TAXES -- The income tax provision consists of an amount for
taxes currently payable and an expense (or benefit) for tax
consequences deferred to future periods. In evaluating the carrying
value of its deferred tax assets, the Company considers prior operating
results, future taxable income projections, expiration of tax loss
carryforwards and ongoing prudent and feasible tax planning strategies.
As of September 30, 2003, the Company had a net deferred tax liability
of $86.4 million, which included a valuation allowance of $1,118.5
million. The valuation allowance is necessary due to the uncertainties
surrounding the ability of the Company's subsidiary BRCOM to continue
as a going concern, which could limit the ultimate realization of
certain deferred tax assets. Such deferred tax assets consist
substantially of net operating loss carryforwards generated by BRCOM.
Upon elimination of these uncertainties, the Company may reverse a
substantial portion of the valuation allowance, creating a
non-recurring income tax benefit.
The Company reported an income tax benefit of $12.1 million in both the
third quarter and first nine months of 2003. This compares to a benefit
of $0.3 million and $9.1 million, respectively, reported in the prior
year periods. The income tax benefit recorded in 2003 relates
substantially to the reversal of certain income tax reserves due to the
closure of certain recent IRS audit periods. Additionally, as a result
of the valuation allowance recorded against the deferred tax assets of
BRCOM in the fourth quarter of 2002, substantially all of the Company's
current income tax expense in 2003 is offset by a corresponding
reduction in the valuation allowance.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based
compensation plans under the recognition and measurement principles of
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), and related interpretations. Compensation cost is measured under
the intrinsic value method. Stock-based employee compensation cost is
not reflected in net income (loss), as all options granted under these
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. If the Company had applied the fair
value recognition provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the expense that would have been recognized totaled $8.9 million
and $7.5 million in the third quarter of 2003 and 2002, respectively,
and $26.6 million and $22.4 million in the year-to-date periods ended
September 30, 2003 and 2002, respectively. The following table
illustrates the effect on
7
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
net income (loss) and earnings (loss) per share if the Company had
applied the fair value recognition provisions of SFAS 123, to
stock-based employee compensation in all periods presented.
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in millions except per share amounts) 2003 2002 2003 2002
- ---------------------------------------------------------------- --------- --------- --------- ---------
Net income (loss) applicable to common shareowners:
As reported $ 42.1 $ 1.4 $ 430.6 $(1,846.7)
Pro forma $ 33.2 $ (6.1) $ 404.0 $(1,869.1)
Basic earnings (loss) per common share:
As reported $ 0.19 $ 0.01 $ 1.95 $ (8.46)
Pro forma determined under fair value, net of related taxes $ 0.15 $ (0.03) $ 1.83 $ (8.56)
Diluted earnings (loss) per share:
As reported $ 0.18 $ 0.01 $ 1.89 $ (8.46)
Pro forma $ 0.14 $ (0.03) $ 1.78 $ (8.56)
The weighted average fair values at the date of grant for the Company
options granted to employees were $1.34 and $1.66 for the three months
ended September 30, 2003 and 2002, respectively, and were $1.20 and
$3.02 for the nine months ended September 30, 2003 and 2002,
respectively. Such amounts were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ----- ---- ----
Expected dividend yield -- -- -- --
Expected volatility 35.0% 105.0% 35.0% 86.5%
Risk-free interest rate 2.3% 2.5% 2.0% 3.4%
Expected holding period - years 3 3 3 3
RECENTLY ISSUED ACCOUNTING STANDARDS -- In December 2002, the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). This
interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" ("ARB 51"), addresses consolidation by business
enterprises of variable interest entities. ARB 51 requires that an
enterprise's consolidated financial statements include subsidiaries in
which the enterprise has a controlling financial interest. FIN 46
requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. FIN 46 is effective
in the first fiscal year or interim period beginning after December 15,
2003, for variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. As the
Company does not have any variable interest entities, FIN 46 is
expected to have no impact on the Company's consolidated financial
statements. In March 2003, the Emerging Issues Task Force ("EITF")
reached consensus on EITF 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables"("EITF 00-21"). This guidance addresses the
determination of whether an arrangement involving multiple deliverables
contains more than one unit of accounting. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after
June 15, 2003. EITF 00-21 did not have an impact on the Company's
financial statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"). This Statement amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives") and for
8
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
hedging activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 149 did not have
an impact on the Company's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS 150 had no impact on the Company's financial
statements as the Company did not have any financial instruments within
the scope of SFAS 150.
2. SALE OF BROADBAND ASSETS
On February 22, 2003, the Company entered into a definitive agreement
to sell substantially all of its broadband assets for approximately
$129.3 million in cash, subject to certain purchase price adjustments,
the assumption of certain liabilities and operating contractual
commitments and a 3% interest in the underlying broadband business
sold. In accordance with SFAS 144, the Company ceased depreciation of
the assets to be sold upon entering the definitive agreement. On June
6, 2003 and June 13, 2003, the purchase agreement was amended to, among
other things, reduce the purchase price to $108.7 million (an estimated
$91.5 million in cash and $17.2 million preliminary working capital
promissory note, which was ultimately reduced to zero based on the
final working capital position of the broadband business).
On June 13, 2003, the first (and most significant) stage closing was
consummated. At the first stage closing, the Company had received
regulatory approval in states where approximately 75% of 2002 broadband
revenue was generated and effectively transferred control of the
broadband business to the buyer. The buyer paid the cash purchase price
of $91.5 million, of which $29.3 million was placed into escrow to
support certain potential purchase price adjustments and the portion of
the purchase price payable upon the consummation of the second and
third stage closings.
During the third quarter ended September 30, 2003, the second and third
(final) stage closings were consummated as all remaining regulatory
approvals had been received. In connection with these closings, the
Company received $20.5 million of the $29.3 million escrowed funds. The
remaining escrowed funds of $8.8 million will be returned to the buyer
in satisfaction of the working capital and receivables post closing
purchase price adjustments pursuant to a tentative agreement between
the Company and the buyer to settle such amounts.
The Company recorded a gain on sale of broadband assets of $37.3
million during the third quarter of 2003 related to the second and
third stage closings and $336.3 million in the first nine months of
2003. The following table summarizes the components of the gain on sale
during the first nine months of 2003 (dollars in millions):
9
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GAIN ON SALE OF BROADBAND ASSETS
Cash proceeds received $ 82.7
Less: Assets sold to buyers
Accounts receivable 73.8
Property, plant and equipment 49.0
Prepaid expenses and other current assets 20.5
------
Total assets sold to buyers 143.3
------
Add: Liabilities assumed by buyers
Accounts payable and accrued cost of service 58.1
Unearned revenue 321.4
Other liabilities 10.7
------
Total liabilities assumed by buyers 390.2
------
Adjustments for income and other tax reserves 31.1
Net fees, purchase price adjustments, pension curtailment,
and indemnification liabilities (24.4)
------
Gain on sale of broadband assets $336.3
======
The adjustment to income tax reserves relates to certain liabilities
recorded in connection with the purchase of the broadband business in
1999 that, as a result of the disposition, are no longer considered
necessary. In addition, reserves for certain other taxes (other than
income tax), which relate to the broadband business and were recorded
subsequent to the acquisition, were similarly reversed as a result of
the disposition.
In connection with the purchase agreement, the Company agreed to
deliver a parent guaranty in favor of the buyers, guaranteeing (1) all
payments required to be made by the BRCOM selling subsidiaries under
the purchase agreement and (2) the performance and observance and
compliance with all covenants, agreements, obligations, liabilities,
representations and warranties of the BRCOM selling subsidiaries under
the purchase agreement.
The Company has indemnified the buyers of the broadband business
against certain potential claims. In order to determine the fair value
of the indemnification obligation, the Company performed a
probability-weighted discounted cash flow analysis, utilizing the
minimum and maximum potential claims and several scenarios within the
range of possibilities. Such analysis produced an estimated fair value
of the indemnification obligation of $7.8 million, which is included in
other liabilities and has been reflected as a reduction of the gain on
sale of broadband assets in the Condensed Consolidated Statement of
Operations and Comprehensive Income (Loss) for the nine-month period
ended September 30, 2003.
Not more than 30 days after July 1, 2004, the buyers will provide the
BRCOM selling subsidiaries with a calculation of cash EBITDA (as
defined in the Purchase Agreement) minus capital expenditures for the
broadband business for the period from July 1, 2003 to July 1, 2004. If
annual cash EBITDA minus capital expenditures for such period is
negative $48 million or less, the BRCOM selling subsidiaries will pay
to the buyers an amount equal to 35% of the difference between negative
$48 million and the amount of annual cash EBITDA minus capital
expenditures, provided that the obligation for such reimbursement will
not exceed $10 million. The Company has reflected a $10 million
liability related to this purchase price adjustment. The BRCOM selling
subsidiaries will have no obligation to make the
10
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
foregoing payment if the buyers sell 51% or more of the equity or
voting control of C III or the assets acquired in the broadband sale.
In addition, the Company entered into agreements with the buyer whereby
the Company will continue to market the buyer's broadband products to
business customers and purchase capacity on the national network in
order to sell long distance services, under the CBAD brand, to
residential and business customers in the Greater Cincinnati area
market. Due to the ongoing cash flows under these arrangements, the
sale of substantially all the broadband assets did not meet the
criteria for presentation as a discontinued operation under SFAS 144.
3. SENIOR EXECUTIVE SUCCESS-BASED BONUSES AND TERMINATION BENEFITS
During the second quarter of 2003, the Company recorded a charge of
$6.7 million related to four senior executives for certain
success-based incentives and termination benefits in accordance with
their employment contracts, including all of the benefits related to
its former Chief Executive Officer who resigned effective July 31,
2003. The charge was required as the success plan, as defined in the
senior executive employment agreements, was completed upon the first
stage closing of the sale of substantially all of the broadband assets
on June 13, 2003. The three remaining senior executives, excluding the
former Chief Executive Officer, are required to remain with the Company
for 180 days following the completion of the success plan. Therefore,
during the third quarter of 2003, the Company recorded an additional
$2.8 million in incentive and termination benefits, for a total
year-to-date charge of $9.5 million. The third quarter and year-to-date
charges included $0.9 million and $2.8 million of non-cash expenses
related to the accelerated vesting of stock options. The Company
expects to record approximately $2.3 million in incentive and
termination benefits related to such senior executive employment
agreements in the fourth quarter of 2003.
4. GOODWILL AND INTANGIBLE ASSETS
The Company adopted SFAS 142 on January 1, 2002. The Company completed
the initial impairment test for its Wireless and Broadband segments
during the first quarter of 2002, which indicated that the goodwill of
its Broadband segment was impaired as of January 1, 2002 and recorded
an impairment charge of $2,008.7 million, net of taxes, effective as of
January 1, 2002. The impairment charge is reflected as a cumulative
effect of change in accounting principle, net of taxes, in the
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss). As of September 30, 2003 and December 31, 2002, goodwill
totaled $40.9 million, of which $40.1 related to the Wireless segment
and the remaining $0.8 million related to the Other segment.
The following table details the components of the carrying amount of
other intangible assets. Indefinite-lived intangible assets consist
primarily of FCC licenses of the Wireless segment. Intangible assets
subject to amortization expense consist primarily of licensed
trademarks and wireless roaming agreements:
11
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, December 31,
(dollars in millions) 2003 2002
------------- ------------
Indefinite-lived intangible assets, excluding goodwill $35.7 $35.7
Intangible assets subject to amortization:
Gross carrying amount 14.3 14.3
Accumulated amortization (2.6) (2.2)
----- -----
Net carrying amount 11.7 12.1
----- -----
Total other intangible assets $47.4 $47.8
===== =====
The estimated intangible asset amortization expense for each of the
fiscal years 2003 through 2008 is approximately $0.5 million.
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in millions) 2003 2002 2003 2002
- ----------------------------------------------------------- ----- ----- ----- -----
Amortization expense of finite-lived other intangible assets $ 0.1 $ 6.2 $ 0.4 $19.2
5. RESTRUCTURING AND OTHER CHARGES
OCTOBER 2002 RESTRUCTURING CHARGE
In October 2002, the Company initiated a restructuring of BRCOM that
was intended to reduce annual expenses. The plan included initiatives
to reduce the workforce by approximately 500 positions; reduce line
costs by approximately 25% through network grooming, optimization, and
rate negotiations; and exit the international wholesale voice business.
In addition, Cincinnati Bell Telephone ("CBT"), a wholly owned
subsidiary of the Company, initiated a restructuring to realign sales
and marketing to focus on enterprise customers. The CBT plan included
initiatives to reduce the workforce by approximately 38 positions. The
Company recorded restructuring charges of $14.7 million, consisting of
$9.4 million related to employee separation benefits and $5.3 million
related to contractual terminations. During the second quarter of 2003,
a $2.6 million reversal was made to the restructuring reserve due to a
settlement related to a contract termination and a $0.6 million
reversal was recorded due to a change in estimate related to other
terminations of contractual obligations. As of September 30, 2003, 461
employee separations had been completed which utilized reserves of $9.2
million, of which all was cash expended. Total cash expenditures in the
first nine months of 2003 amounted to $5.5 million. The Company expects
to complete the restructuring plan for both CBT and BRCOM by December
31, 2003.
The following table illustrates the activity in this reserve since
December 31, 2002:
12
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Balance
December 31, September 30,
Type of costs (dollars in millions) 2002 Utilizations Adjustments 2003
- ----------------------------------- ------------ ------------ ----------- -------------
Employee separations $3.5 $(3.3) $(0.1) $0.1
Termination of contractual obligations 5.3 (2.2) 3.1 --
---- ----- ----- ----
Total $8.8 $(5.5) $(3.2) $0.1
==== ===== ===== ====
NOVEMBER 2001 RESTRUCTURING PLAN
In November 2001, the Company adopted a restructuring plan which
included initiatives to consolidate data centers, reduce the Company's
expense structure, exit the network construction business, eliminate
other nonstrategic operations and merge the digital subscriber line
("DSL") and certain dial-up Internet operations into the Company's
other operations. Total restructuring and impairment costs of $232.3
million were recorded in 2001 related to these initiatives. The $232.3
million consisted of restructuring liabilities in the amount of $84.2
million and related non-cash asset impairments in the amount of $148.1
million. The restructuring charge was comprised of $21.4 million
related to involuntary employee separation benefits, $62.5 million
related to lease and other contractual terminations and $0.3 million
relating to other exit costs.
During the first quarter of 2002, the Company recorded additional
restructuring charges of $16.5 million resulting from employee
separation benefits and costs to terminate contractual obligations,
which were actions contemplated in the original plan for which an
amount could not be reasonably estimated at that time. During the
fourth quarter of 2002, a $1.0 million reversal was made to the
restructuring reserve due to a change in estimate related to the
termination of contractual obligations. During the third quarter of
2003, a $1.2 million reversal was made to the restructuring reserve to
reduce contractual obligations as a result of the sale of the broadband
business. In total, the Company expects this restructuring plan to
result in cash outlays of $93.5 million and non-cash items of $153.1
million. The Company completed the plan as of December 31, 2002, except
for certain lease obligations, which are expected to continue through
December 31, 2005.
The restructuring costs include the cost of involuntary employee
separation benefits, including severance, medical and other benefits,
related to 863 employees across all areas of the Company. As of
December 31, 2002, all employee separations had been completed which
utilized reserves of $22.4 million, $17.6 million of which was cash
expended. Total cash expenditures in the first nine months of 2003
amounted to $6.8 million, which related to the termination of
contractual obligations.
In connection with the restructuring plan, the Company performed a
review of its long-lived assets to identify any potential impairments
in accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). The Company recorded a $148.1
million charge as an expense of operations in accordance with SFAS 121,
resulting from the write-off of certain assets related to the closing
of data centers, consolidation of office space and curtailment of other
Company operations.
The following table illustrates the activity in this reserve since
December 31, 2002:
13
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Balance
December 31, September 30,
Type of costs (dollars in millions) 2002 Utilizations Adjustments 2003
- --------------------------------------- ----------- ------------ ----------- -------------
Termination of contractual obligations $32.2 $(6.8) $(1.2) $24.2
----- ----- ----- -----
Total $32.2 $(6.8) $(1.2) $24.2
===== ===== ===== =====
6. DEBT
The Company's debt consists of the following:
September 30, December 31,
(dollars in millions) 2003 2002
- ----------------------------------------------------------- ------------ ------------
Short-term debt:
Credit facilities, current portion $ 106.0 $ 172.1
Current maturities of capital lease obligations 6.9 9.0
Current maturities of long-term debt 20.0 20.0
Other short-term debt 2.8 2.6
-------- --------
Total short-term debt $ 135.7 $ 203.7
======== ========
Long-term debt:
Credit facilities, net of current portion $ 533.9 $1,476.0
7-1/4% Senior notes due 2023 50.0 50.0
Capital lease obligations, net of current portion 26.7 30.0
7-1/4% Senior notes due 2013 500.0 --
Various Cincinnati Bell Telephone notes, net of current portion 250.0 250.0
16% Senior subordinated discount notes 357.1 --
Convertible subordinated notes 534.5 502.8
9% Senior subordinated notes -- 46.0
12-1/2% Senior notes -- 0.8
-------- --------
Total long-term debt 2,252.2 2,355.6
Less unamortized discount (44.2) (0.9)
-------- --------
Total long-term debt, net of unamortized discount $2,208.0 $2,354.7
======== ========
CREDIT FACILITIES
General
In November 1999, the Company obtained credit facilities totaling
$1,800 million from a group of lending institutions. The credit
facilities were increased to $2,100 million in January 2000 and again
to $2,300 million in June 2001. Total availability under the credit
facilities decreased to $1,825 million as of December 31, 2002,
following a $335 million prepayment of the outstanding term debt
facilities in the first quarter of 2002 (resulting from the sale of
substantially all of the assets of Cincinnati Bell Directory), $5
million in scheduled repayments of the term debt facilities and $135
million in scheduled commitment reduction of the revolving credit
facility. In March 2003, the Company's credit facilities were also
amended to, among other things, extend the revolving commitment, revise
the financial covenants, accelerate a portion of the term debt,
increase interest rate spreads and allow for the sale of substantially
all of the assets of the broadband business. Total availability under
the credit facilities decreased to $921.8 million as of September 30,
2003, following a $708.8 million prepayment of the borrowings under the
term and revolving credit facilities with the net cash proceeds from
the 16% notes and the 7-1/4% senior notes due 2013, and $194.4 million
in scheduled repayments of the term debt
14
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
facilities. As of September 30, 2003, the credit facilities consisted
of $594.6 million in revolving credit, $132.5 million in Term Loan A,
$134.6 million in Term Loan B and $60.1 million in Term Loan C.
Use of Credit Facilities
At September 30, 2003, Cincinnati Bell had drawn approximately $639.9
million from the credit facilities' capacity of approximately $921.8
million, and had outstanding letters of credit totaling $13.1 million,
leaving $268.8 million in additional borrowing capacity under its
revolving credit facility. Borrowings under the credit facilities have
been used to refinance debt and debt assumed as part of the merger with
BRCOM in November 1999 and to fund capital expenditures and other
working capital needs.
Interest Rates
Borrowings under the credit facilities bear interest, at the Company's
election, at either (1) LIBOR plus 425 basis points in the case of the
revolving credit facility or 375 basis points in the case of the term
facilities or (2) the base rate (as defined below) plus 325 basis
points in the case of the revolving credit facility or 275 basis points
in the case of the term facilities. The "base rate" is equal to the
higher of the base rate at Citibank, N.A. or the Federal Funds Rate
plus one-half of one percent. The weighted-average interest rate on the
revolving and term credit facilities was 5.13% and 4.66% for the three
months ended September 30, 2003 and 2002, respectively, and 4.79% and
5.49% for the nine months ended September 30, 2003 and 2002,
respectively.
Maturity and Amortization
Loans under the Term Loan A facility mature on November 9, 2004, and
require payments of $18.8 million in the fourth quarter of 2003 and
equal quarterly installments in an aggregate annual principal amount of
$113.7 million in 2004. Loans under the Term Loan B facility mature on
December 30, 2006 and require payments of $0.3 million in the fourth
quarter of 2003 and equal quarterly installments in aggregate annual
principal amounts of $1.4 million, $1.4 million and $131.5 million in
2004, 2005 and 2006, respectively. Loans under the Term Loan C facility
mature on June 29, 2007 and require payments of $0.2 million in the
fourth quarter of 2003 and quarterly installments in aggregate annual
principal amounts of $0.6 million, $0.6 million, $29.5 million and
$29.2 million in 2004, 2005, 2006 and 2007, respectively. The revolving
credit facility matures on March 1, 2006, with a commitment reduction
under a schedule providing for four equal quarterly reductions of $46.2
million each in 2005 in an aggregate amount equal to $184.8 million and
a final commitment reduction of $409.8 million in the first quarter of
2006.
Fees
The Company pays commitment fees to the lenders quarterly on the
undrawn portions of its commitments at a rate equal to 62.5 basis
points of the unused amount of borrowing of the revolving credit
facility. Additionally, the Company pays letter of credit fees on the
available amount under all outstanding letters of credit, a commission
to each bank of 0.25% per annum based on its letter of credit
commitment, and customary fees for the issuance of letters of credit.
In the first nine months of 2003, these commitment fees were
approximately $1.4 million.
In connection with the March 26, 2003 amendment of the terms of the
credit facilities, the Company agreed to pay an amendment fee in an
amount equal to 75 basis points for the revolving credit facility and
37.5 basis points for each of the Term Loan A, B and C credit
facilities, which amounted to $23.4 million. This amount was paid
during the first quarter of 2003.
Prepayments
Subject to certain limited exceptions, borrowings under the credit
facilities are required to be prepaid:
15
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) in an amount equal to 75% of excess cash flow (as defined in
the Credit Agreement) for each fiscal year commencing with the
fiscal year ended December 31, 2003;
(2) in an amount equal to 100% of net cash proceeds of certain
sales, leases, transfers or other dispositions of assets by
the Company or its subsidiaries subject to reinvestment rights
in certain cases;
(3) in an amount equal to 100% of net cash proceeds from the
issuance of certain debt obligations by the Company or any
Subsidiary Guarantor (as defined in the credit facilities);
and
(4) in an amount equal to 50% of the net cash proceeds in excess
of $50 million from issuances of Cincinnati Bell common stock
or preferred stock.
Voluntary prepayments of borrowings under the credit facilities and
voluntary reductions of the unutilized parts of the credit facilities'
commitments are, subject to proper notice, permitted at any time.
Guarantees
The Company and its subsidiaries (other than Cincinnati Bell Telephone
and certain Cincinnati Bell Wireless subsidiaries) guarantee borrowings
made by Cincinnati Bell Inc. and BCSI Inc. under the credit facilities.
BRCOM and certain subsidiaries guarantee borrowings by BCSI Inc., but
not borrowings by Cincinnati Bell Inc., under the credit facilities.
Security
Obligations under the financing documents governing the credit
facilities are collateralized by perfected first priority pledges and
security interests in the following:
(1) substantially all of the equity interests of the Company's
subsidiaries (other than Cincinnati Bell Wireless LLC and
certain BRCOM subsidiaries); provided that the pledge of
equity of BRCOM and its subsidiaries only secure borrowings by
BCSI Inc., but not borrowings by Cincinnati Bell Inc., under
the credit facilities, and
(2) substantially all of the Company's and each of the Company's
subsidiaries, (other than Cincinnati Bell Telephone, certain
Cincinnati Bell Wireless subsidiaries and certain BRCOM
subsidiaries), other tangible and intangible assets, including
accounts receivable, inventory, contract rights, equipment,
intellectual property, general intangibles, investment
property and proceeds of the foregoing; provided that the
assets of BRCOM and its subsidiaries only secure borrowings by
BCSI Inc., but not borrowings by Cincinnati Bell Inc., under
the credit facilities.
Covenants
The financing documents governing the credit facilities contain
financial covenants that require the maintenance of certain debt to
EBITDA (as defined in the Credit Agreement), senior secured debt to
EBITDA and interest coverage ratios, as well as limit its capital
expenditures. The credit facilities also contain restrictive covenants
that, among other things, limit the Company's ability to do the
following: incur additional debt or liens; pay dividends; repurchase
Cincinnati Bell common stock; sell, lease, transfer or dispose of
assets; make investments; or merge with another company. As of
September 30, 2003 the Company was in compliance with all of the
covenants of the credit facilities.
Events of Default
The credit facilities provide for events of default customary to
facilities of this type, including non-payment of principal, interest
or other amounts; incorrectness of representations and warranties in
any material respect; violation of covenants; cross-default and
cross-acceleration; certain events of bankruptcy or insolvency; certain
material judgments; invalidity of any loan or security document; change
of control; and certain ERISA events.
16
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company's credit facilities provide that a bankruptcy or insolvency
of BRCOM or any of its subsidiaries, a judgment against BRCOM or any of
its subsidiaries and breaches by BRCOM or any of its subsidiaries of
the negative covenants would not constitute an event of default with
respect to the Company. These terms continue to allow remedies to be
exercised against BRCOM and are treated as BRCOM events of default, but
not events of default of the Company.
BRCOM Arrangements
Pursuant to the amendment obtained in March 2003, future net cash
investments or other cash infusions in BRCOM and its subsidiaries after
October 1, 2002, are limited (subject to certain exceptions) to an
aggregate amount not to exceed the sum of (a) $118.0 million plus (b)
the aggregate amount of net cash dividends and distributions paid by
BRCOM and its subsidiaries to the Company after October 1, 2002 plus or
minus (c) the net position of BRCOM and its subsidiaries under the
Company's centralized cash management system. As of September 30, 2003,
the Company had the ability to invest or otherwise provide an
additional $87.9 million in funding to BRCOM. In addition, BRCOM's cash
balance as of September 30, 2003 was $0.1 million, for total BRCOM
liquidity of $88.0 million. Also, corporate separateness covenants
require the Company to maintain legal and operational separation
between BRCOM and its subsidiaries, on the one hand, and Cincinnati
Bell and its other subsidiaries, on the other hand.
7-1/4% SENIOR NOTES DUE 2023
In 1993, the Company issued $50.0 million of 7-1/4% Senior notes due
2023 (the "7-1/4% Senior notes due 2023"). The indenture related to
these 7-1/4% Senior notes due 2023 does not subject the Company to
restrictive financial covenants. However, the 7-1/4% Senior notes due
2023 do contain a covenant that provides that if the Company incurs
certain liens on its property or assets, the Company must secure the
outstanding notes equally and ratably with the indebtedness or
obligations secured by such liens. The 7-1/4% Senior notes due 2023 are
secured with assets by virtue of the lien granted under the Company's
credit facilities.
7-1/4% SENIOR NOTES DUE 2013
On July 11, 2003 the Company issued $500.0 million of 7-1/4% senior
unsecured notes due 2013 (the "7-1/4% Senior notes due 2013") by means
of a private placement. Net proceeds totaled $488.8 million and were
used to prepay term credit facilities and permanently reduce
commitments under the Company's revolving credit facility. As a result,
the Company recorded a non-cash charge of $8.4 million during the third
quarter of 2003 to "Interest expense and other financing costs" to
write-off deferred financing costs related to the Company's existing
credit facilities. Interest on the 7-1/4% Senior notes due 2013 will be
payable in cash in arrears semi-annually on January 15 and July 15 of
each year, commencing on January 15, 2004. The 7-1/4% Senior notes due
2013 are unsecured obligations and will rank equally with all of the
Company's existing and future senior debt and will rank senior to all
existing and future subordinated debt. The Company's subsidiaries,
excluding Cincinnati Bell Telephone, Cincinnati Bell Wireless, BRCOM
and its subsidiaries, unconditionally guarantee the 7-1/4% Senior notes
due 2013 on a senior unsecured basis. The 7-1/4% Senior notes due 2013
contain customary covenants for notes of this type, including the
following: limitations on dividends and other restricted payments;
dividend and other payment restrictions affecting the Company's
subsidiaries; indebtedness; asset dispositions; transactions with
affiliates; liens; investments; issuances and sales of capital stock of
subsidiaries; redemption of debt that is junior in right of payment;
issuances of senior subordinated debt, restrictions on dealing with
BRCOM and its subsidiaries; and mergers and consolidations. During the
quarter ended September 30, 2003, and since inception, the Company
recorded $8.0 million of cash interest expense related to the senior
notes.
17
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Standard No. 13, "Accounting for
Leases" ("SFAS 13"). SFAS 13 requires the capitalization of leases
meeting certain criteria, with the related asset being recorded in
property, plant and equipment and an offsetting amount recorded as a
liability. The Company had $33.6 million in total indebtedness relating
to capitalized leases as of September 30, 2003, $26.7 million of which
was considered long-term.
OTHER SHORT-TERM DEBT
The Company maintains a short-term revolving vendor financing
arrangement for its information technology consulting business, which
had an outstanding balance of $2.8 million and $2.6 million as of
September 30, 2003 and December 31, 2002, respectively. The Company has
the ability to borrow up to $3.5 million under this arrangement, which
is secured by an irrevocable $2.0 million letter of credit against its
revolving credit facility. The interest rate charged on the borrowings
is variable based on the prime rate and was 6.0% during the first nine
months of 2003.
CINCINNATI BELL TELEPHONE NOTES
CBT has $120.0 million in corporate notes outstanding that are
guaranteed by Cincinnati Bell Inc. but not the subsidiaries of
Cincinnati Bell Inc. These notes have original maturities of up to 30
years and mature at various intervals between 2003 and 2028. As of
September 30, 2003, $100.0 million was considered long-term
indebtedness and $20 million due December 30, 2003 was classified as
short-term debt. Interest rates on this indebtedness range from 6.24%
to 7.27%.
In November 1998, CBT issued $150.0 million in aggregate principal
amount of 6.30% unsecured senior notes due 2028 (the "6.30% notes"),
which are not guaranteed.
16% SENIOR SUBORDINATED DISCOUNT NOTES
On March 26, 2003, the Company received $350.0 million of gross cash
proceeds from the issuance of the 16% Senior Subordinated Discount
notes (the "16% notes"). Proceeds from the 16% notes, net of fees, were
used to pay down borrowings under the Company's credit facilities.
Interest on the 16% notes is payable semi-annually on each of June 30
and December 31 of 2003 through 2006 and then on each of June 30, 2007,
January 20, 2008 and on the maturity date of January 20, 2009, whereby
12% is paid in cash and 4% is accreted on the aggregate principal
amount. In addition, purchasers of the 16% notes received 17.5 million
common stock warrants, subject to antidilution 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% notes. During the quarter ended September 30, 2003, the Company
recorded $3.5 million of non-cash interest expense related to the 16%
notes. Through September 30, 2003 and since inception, the Company has
recorded $7.1 million in cumulative, non-cash interest expense and has
adjusted the carrying amount of the debt accordingly. The Company
incurred $10.6 million and $21.6 million of cash interest expense
related to these notes in third quarter and in the first nine months of
2003, respectively. In addition, the 16% notes were issued at a
discount of $47.5 million. In the third quarter of 2003, the Company
recognized $2.1 million of non-cash interest expense related to the
amortization of the discount and $4.2 million year-to-date through
September 30, 2003.
18
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The indenture governing the 16% notes restricts the Company's ability
to make investments or other cash infusions in BRCOM and its
subsidiaries. Specifically, the Company may not, among other things:
(1) make any restricted payments to,
(2) issue capital stock to,
(3) make any investment in (including guaranteeing obligations or
purchasing assets for BRCOM or making any payments in respect
of operating expenses or net operating losses of BRCOM), or
(4) allow any tax reimbursement for the benefit of,
BRCOM beyond an aggregate amount of $118.0 million (plus net cash
dividends or net cash distributions made by BRCOM to the Company) after
October 1, 2002. As of September 30, 2003, the Company had the ability
to invest or otherwise provide an additional $87.9 million in BRCOM. In
addition, BRCOM's cash balance as of September 30, 2003 was $0.1
million, for total BRCOM liquidity of $88.0 million. This restriction
does not apply to certain items permitted in the indenture.
The indenture governing the 16% notes contains customary covenants for
notes of this type, including the following: limitations on dividends
and other restricted payments; dividend and other payment restrictions
affecting its subsidiaries; indebtedness; asset dispositions;
transactions with affiliates; liens; issuances and sales of capital
stock of subsidiaries; issuances of senior subordinated debt;
restrictions on dealing with BRCOM and its subsidiaries; and mergers
and consolidations.
CONVERTIBLE SUBORDINATED NOTES
In July 1999, the Company issued $400.0 million of 10-year, convertible
subordinated debentures to Oak Hill Capital Partners, L.P. These notes
are convertible into common stock of the Company at an adjusted price
of $29.27 per common share at the option of the holder. In March 2003,
the Company entered into a supplemental indenture amending certain
terms governing the Convertible Subordinated Notes. The supplemental
indenture increased the paid-in-kind interest by 2-1/4% from March 2003
through redemption in July 2009, resulting in a per annum interest rate
of 9%. Interest expense will be paid in cash semi-annually on January
21 and July 21 of each year at a rate of 6-3/4% per annum, commencing
on January 21, 2005. The additional 2-1/4% will accrete, or be added to
the principal balance, through the redemption date in July 2009. The
supplemental indenture also allowed for the sale of substantially all
of the assets of the Company's Broadband segment, provided that a
bankruptcy of BRCOM would not constitute an event of default, amended
the definition of change in control by increasing the ownership
threshold deemed to be a change in control from 20% of outstanding
shares to 45% of outstanding shares and included covenants restricting
the ability of the Company to incur debt and consummate certain asset
dispositions. Since inception, Oak Hill Capital Partners, L.P. have
held in the aggregate at least two-thirds of the convertible
subordinated notes issued, which entitled them to designate one
director to the Company's board of directors. Through September 30,
2003 and since inception, the Company has recorded $134.5 million in
cumulative, non-cash interest expense and has adjusted the carrying
amount of the debt accordingly. During the three and nine months ended
September 30, 2003, the Company recorded $11.8 million and $31.7
million, respectively, of non-cash interest expense related to the
convertible subordinated notes.
9% SENIOR SUBORDINATED NOTES (BRCOM)
In 1998, BRCOM (then known as IXC Communications) issued $450.0 million
of 9% senior subordinated notes due 2008 ("the 9% notes"). In January
2000, $404.0 million of these 9% notes were redeemed through a tender
offer as a result of the change of control provision of the related
indenture. In March 2003, the Company entered into an exchange and
voting agreement with holders of the 9% notes. On September 8, 2003,
the Company exchanged the remaining $46.0 million of the 9% notes and
$1.6 million in accrued interest for approximately 11.1 million shares
of common stock of the Company,
19
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
which had a fair value of $65.0 million at the exchange date. As a result,
the Company recorded a loss on extinguishment of debt of $17.4 million
during the third quarter of 2003. Upon completion of the exchange, the
indenture related to the 9% notes was terminated.
12-1/2% SENIOR NOTES (BRCOM)
On June 16, 2003, the Company permanently retired BRCOM's remaining $0.8
million outstanding 12-1/2% senior notes due 2005.
DEBT MATURITY SCHEDULE
The following table summarizes the Company's annual maturities of debt and
minimum payments under capital leases for the five years subsequent to
September 30, 2003, and thereafter:
Capital Total
(dollars in millions) Debt Leases Debt
- --------------------- ---- ------ ----
Year of Maturity
October 1, 2003 to December 31, 2003 $ 42.0 $ 1.7 $ 43.7
2004 115.7 6.3 122.0
2005 22.0 4.3 26.3
2006 473.8 2.8 476.6
2007 29.2 2.4 31.6
Thereafter 1,671.6 16.1 1,687.7
------- ---- -------
Total debt 2,354.3 33.6 2,387.9
Less unamortized discount (44.2) -- (44.2)
------- ---- -------
Total debt, net of discount $2,310.1 $ 33.6 $2,343.7
------- ---- -------
20
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that
all derivative instruments be recognized on the balance sheet at fair
value. Fair values are determined based on quoted market prices of
comparable instruments, if available, or on pricing models using current
assumptions. On the date the financial instrument is entered into, the
Company designates it as either a fair value or cash flow hedge. As of
September 30, 2003, the Company's derivative contracts, consisting solely
of interest rate contracts, have been determined to be highly effective
cash flow hedges. In accordance with SFAS 133, unrealized gains and losses
of highly effective cash flow hedges are recorded in other comprehensive
income (loss).
INTEREST RATE CONTRACTS
From time to time the Company enters into interest rate swap agreements
with the intent of limiting its exposure to movements in interest rates.
Interest rate swap agreements are contractual agreements between two
parties for the exchange of interest payment streams on a notional
principal amount at an agreed upon fixed or floating rate, for a defined
time period. These agreements are hedges against movements in the LIBOR
rate, which determines the rate of interest paid by the Company on debt
obligations under its credit facilities (refer to Note 6). Realized gains
and losses from the interest rate swaps are recognized as an adjustment to
interest expense in each period. Such amounts included in interest expense
totaled $1.7 million and $3.6 million in the third quarter of 2003 and
2002, respectively, and $6.5 million and $10.4 million in the nine-month
periods ended September 30, 2003 and 2002, respectively. The interest rate
swap agreements in place as of September 30, 2003 expire throughout the
remainder of 2003. At September 30, 2003, the interest rate swaps on
notional amounts of $70 million were a liability with a fair value of $0.5
million, resulting in inception-to-date, after-tax net losses in other
comprehensive income (loss) ("OCI") of $1.1 million. During the nine-month
period ended September 30, 2003, the fair value of the interest rate swaps
increased, causing a decrease to the associated liability carried on the
balance sheet to $0.5 million from a liability of $7.2 million at December
31, 2002. Accordingly, a year-to-date, after-tax net gain of $4.3 million
was recognized in OCI.
8. EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS
Basic earnings (loss) per common share from continuing operations ("EPS")
is based upon the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that would
occur if common stock equivalents were exercised, but only to the extent
that they are considered dilutive to the Company's earnings. The following
table is a reconciliation of the numerators and denominators of the basic
and diluted EPS computations for income (loss) from continuing operations
for the following periods:
21
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Nine Months
(dollars and shares in millions, Ended September 30, Ended September 30,
except per common share amounts) 2003 2002 2003 2002
- -------------------------------- ---- ---- ---- ----
Numerator:
Income (loss) from continuing operations before discontinued operations $ 44.7 $ 4.0 $ 352.5 $ (47.8)
and cumulative effects of changes in accounting principles
Preferred stock dividends 2.6 2.6 7.8 7.8
------- ------- ------- -------
Numerator for basic and diluted EPS - income (loss)
from continuing operations applicable to common shareowners $ 42.1 $ 1.4 $ 344.7 $ (55.6)
======= ======= ======= =======
Denominator for basic EPS - weighted average
common shares outstanding 225.4 218.5 221.1 218.3
Dilution:
Stock options and warrants 9.7 -- 6.3 --
Stock-based compensation arrangements 0.1 0.4 0.1 --
------- ------- ------- -------
Denominator for diluted EPS per common share 235.2 218.9 227.5 218.3
======= ======= ======= =======
Basic EPS from continuing operations $ 0.19 $ 0.01 $ 1.56 $ (0.26)
======= ======= ======= =======
Diluted EPS from continuing operations $ 0.18 $ 0.01 $ 1.51 $ (0.26)
======= ======= ======= =======
The inclusion in the diluted shares calculation of 0.1 million shares
related to unvested restricted stock and 9.7 million shares related to
vested "in-the-money" stock options and warrants during the third quarter
of 2003 had a $0.01 per share impact on the diluted EPS calculation. For
the nine months ended September 30, 2003, approximately 0.1 million shares
related to unvested restricted stock and 6.3 million shares related to
vested "in-the-money" stock options and warrants are included in the
denominator of the diluted EPS calculation and had an impact of $0.05 per
share on the diluted EPS calculation. For the three and nine months ended
September 30, 2003, approximately 18.3 million shares related to the
convertible subordinated notes and 4.5 million shares related to the
convertible preferred stock are not included in the denominator of the EPS
calculation because the effect of their inclusion in the EPS calculation
would be anti-dilutive based on the "if converted" calculation. The total
number of potential additional shares outstanding related to stock
options, warrants, restricted stock, and the assumed conversion of the
Company's 6-3/4% convertible preferred stock and convertible subordinated
debentures was approximately 68 million and 53 million at September 30,
2003 and 2002, respectively, if all stock options and warrants currently
outstanding were exercised, restrictions on restricted stock were to lapse
and all convertible securities were to convert.
9. MINORITY INTEREST
September 30, December 31,
(dollars in millions) 2003 2002
- --------------------- ---- ----
Minority interest consists of:
12-1/2% Junior Exchangeable Preferred Stock $ -- $ 414.4
Minority Interest in Cincinnati Bell
Wireless held by AT&T Wireless Services Inc. ("AWS") 39.3 27.7
Other 0.7 1.8
------- -------
Total $ 40.0 $ 443.9
======= =======
In March 2003, the Company reached an agreement with holders of more than
two-thirds of BRCOM's 12-1/2% Junior Exchangeable Preferred Stock (the
"12-1/2% Preferreds") to exchange this preferred stock for common stock of
the Company. On September 8, 2003 the Company completed the exchange and
22
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
issued approximately 14.1 million shares of Cincinnati Bell Inc. common
stock. Pursuant to the exchange offer, holders of the 12-1/2% Preferreds
who tendered their shares were not paid any accumulated or unpaid
dividends. These exchanges resulted in the retirement of $412.4 million of
minority interest obligations and $64.9 million in accrued dividends of
the Company. Additional paid in capital increased $469.2 million, which is
net of fees of $8.1 million as a result of the exchange. Concurrently with
the preferred stock exchange offer, the Company solicited consents from
holders of BRCOM preferred stock to amend the certificate of the
designation under which the shares were issued to eliminate all voting
rights and restrictive covenants. Upon completion of the exchange and a
related subsidiary merger, there are no longer any shares of the 12-1/2%
Preferreds outstanding.
Through November 15, 1999, dividends on the 12-1/2% Preferreds were being
effected through additional shares of the 12-1/2% Preferreds. On November
16, 1999, the Company converted to a cash pay option for these dividends.
Dividends on the 12-1/2% Preferreds are classified as "Minority interest
expense" in the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) and are approximately $8.8 million and $11.6
million in the third quarter of 2003 and 2002, respectively, and $32.0
million and $34.7 million, respectively, for the nine months ended
September 30, 2003 and 2002.
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 an offsetting
amount being reflected in the Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) under the caption "Minority
interest expense."
10. EMPLOYEE STOCK OPTION PLAN
During 2003 and in prior years, certain employees and directors of the
Company were granted stock options and other stock-based awards under the
Company's Long-Term Incentive Plan ("Company LTIP"). Under the Company
LTIP, options are granted with exercise prices that are no less than
market value of the stock at the grant date. Generally, stock options and
stock appreciation rights have ten-year terms and vest over three to five
years. The number of shares authorized and available for grant under the
Company LTIP were approximately 50.0 million and 22.7 million,
respectively, at September 30, 2003.
The Company granted 32,800 and 202,200 options during the three months
ended September 30, 2003 and 2002, respectively, and granted 220,050 and
1,157,400 options during the nine months ended September 30, 2003 and
2002, respectively. Approximately 2,845,000 options granted to former
BRCOM employees were cancelled in the second quarter of 2003 in
conjunction with the broadband sale on June 13, 2003 (Refer to Note 2).
23
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of Company stock options
outstanding and exercisable at September 30, 2003 (shares in thousands):
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------------
Weighted Average
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- --------------- ------ ------------- -------------- ------ --------------
$1.88 to $7.27 6,031 7.88 $ 3.98 1,906 $ 4.93
$7.63 to $12.46 5,634 7.48 $ 9.86 3,681 $ 9.98
$12.98 to $16.75 5,962 5.04 $ 15.59 5,838 $ 15.58
$16.78 to $22.84 6,289 6.18 $ 19.33 5,258 $ 19.55
$23.12 to $38.19 3,415 6.47 $ 30.08 2,987 $ 30.60
------ ------
Total 27,331 6.61 $ 14.52 19,670 $ 16.84
11. BUSINESS SEGMENT INFORMATION
The Company is organized on the basis of products and services. The
Company's segments are strategic business units that offer distinct
products and services and are aligned with specific subsidiaries of the
Company. The Company operates in the four business segments; Local,
Wireless, Other and Broadband as described below.
The Local segment provides local telephone service, network access, data
transport (including ADSL), high-speed and dial-up Internet access,
inter-lata toll, as well as other ancillary products and services to
customers in southwestern Ohio, northern Kentucky and southeastern
Indiana. This market consists of approximately 2,400 square miles located
within an approximately 25-mile radius of Cincinnati, Ohio. Services are
provided through the Company's Cincinnati Bell Telephone ("CBT")
subsidiary.
The Wireless segment includes the operations of the CBW subsidiary; a
venture in which the Company owns 80.1% and AWS owns the remaining 19.9%.
This segment provides advanced digital personal communications 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") and Cincinnati Bell Public Communications Inc. ("Public"). CBAD
resells voice long-distance service and Public provides public payphone
services.
The Broadband segment previously provided data and voice communication
services nationwide through the Company's BRCOM subsidiary. These services
were provided over approximately 18,700 route miles of fiber-optic
transmission facilities. Broadband segment revenue was generated by
broadband transport through private line and IRU agreements, Internet
services utilizing technology based on Internet protocol ("IP"), and
switched voice services provided to both wholesale and retail customers.
During the second and third quarters of 2003, the Company sold
substantially all of its broadband assets, which is reported in the
Broadband segment (refer to Note 2). The Broadband segment continues to
offer information technology consulting ("IT consulting"), data
collocation and managed services through the Company's Cincinnati Bell
Technology Solutions subsidiary.
For segment reporting purposes, the Local segment historically reported
revenue for services provided by the Broadband segment in the Greater
Cincinnati area and a corresponding cost of service related to such
broadband revenue equal to approximately 80% of such revenue. The
Broadband segment recorded revenue equal to the cost recorded in the Local
segment. In connection with the sale, the Company
24
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
entered into an agreement with the buyer to continue to market the buyer's
broadband products to customers in the Greater Cincinnati area market.
Under this agreement, as of June 13, 2003, the Local segment began
recording commission revenue for services provided by the buyers and the
buyers began recording a marketing expense for the corresponding services
sold by the Local segment. Historical results for both the Local segment
and Broadband segment have been recast to reflect the marketing agreement
as if it had been in place in all periods presented. The net impact to the
Local segment is a reduction in revenue and a corresponding reduction in
cost of services, with no impact on operating income. The net impact to
the Broadband segment is an increase in revenue and a corresponding
increase in SG&A expense, with no impact on operating income. On a
consolidated basis the recasting of these results had no impact on the
Company's results of operations, financial position, and cash flows.
For segment reporting purposes through the June 13, 2003 first stage
closing of the sale of the broadband assets, the Other segment reported
revenue for long distance switched voice minutes provided by the Broadband
segment to customers in the Greater Cincinnati area. The Other segment
recorded a corresponding cost of service based on the market rate margins
for the resale of long distance switched voice minutes to third parties.
The Broadband segment recorded revenue equal to the cost recorded in the
Other segment. The cost recorded by the Other segment and revenue recorded
by the Broadband segment were eliminated in consolidation. After the
completion of the sale of the broadband assets, the Other segment will
continue to record revenue for customers in the Greater Cincinnati area,
but will record costs to an unrelated third-party vendor, the buyer, which
will no longer be eliminated in consolidation.
Certain corporate 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:
25
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
(dollars in millions) 2003 2002 2003 2002
- --------------------- ---- ---- ---- ----
REVENUE
Local $ 203.4 $ 202.8 $ 611.7 $ 616.6
Wireless 65.1 68.9 196.9 201.8
Other 20.8 20.5 61.7 61.6
Broadband 32.0 298.3 422.1 848.2
Intersegment (6.0) (20.2) (45.8) (58.9)
-------- -------- -------- --------
Total Revenue $ 315.3 $ 570.3 $1,246.6 $1,669.3
======== ======== ======== ========
INTERSEGMENT REVENUE
Local $ 4.2 $ 9.1 $ 22.7 $ 25.8
Wireless 0.5 0.1 0.7 0.2
Other 0.2 0.1 0.3 0.1
Broadband 1.1 10.9 22.1 32.8
-------- -------- -------- --------
Total Intersegment Revenue $ 6.0 $ 20.2 $ 45.8 $ 58.9
======== ======== ======== ========
OPERATING INCOME (LOSS)
Local $ 79.6 $ 70.6 $ 227.1 $ 213.0
Wireless 19.4 22.0 61.0 56.1
Other 3.1 0.9 6.6 1.8
Broadband 33.2 (28.1) 297.1 (156.8)
Corporate and Eliminations (5.7) (4.7) (18.5) (8.8)
-------- -------- -------- --------
Total Operating Income $ 129.6 $ 60.7 $ 573.3 $ 105.3
======== ======== ======== ========
CAPITAL ADDITIONS
Local $ 20.8 $ 22.7 $ 58.0 $ 57.1
Wireless 16.1 4.4 32.2 25.2
Other 0.3 0.1 0.6 0.6
Broadband 0.1 12.9 3.9 56.9
Corporate and Eliminations -- 0.1 0.1 0.1
-------- -------- -------- --------
Total Capital Additions $ 37.3 $ 40.2 $ 94.8 $ 139.9
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Local $ 31.5 $ 38.0 $ 93.9 $ 109.9
Wireless 7.5 8.2 22.8 23.3
Other 0.5 0.5 1.5 1.4
Broadband 0.1 80.0 2.4 235.8
Corporate and Eliminations 0.2 0.1 0.4 0.4
-------- -------- -------- --------
Total Depreciation and Amortization $ 39.8 $ 126.8 $ 121.0 $ 370.8
======== ======== ======== ========
ASSETS (AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002)
Local $ 800.4 $ 767.4
Wireless 385.8 379.3
Other 21.7 17.1
Broadband 31.0 239.1
Corporate and Eliminations 129.3 64.7
-------- --------
Total Assets $1,368.2 $1,467.6
======== ========
12. SUPPLEMENTAL GUARANTOR INFORMATION
CBT NOTES
CBT, a wholly owned subsidiary of the Parent Company, has registered debt
outstanding that is guaranteed by the Parent Company but not by other
subsidiaries of the Parent Company. The guarantee is full and unconditional and
is joint and several. Substantially all of the Parent Company's income and cash
flow is generated by its subsidiaries. Generally, funds necessary to meet the
Parent Company's debt service obligations are provided by distributions or
advances from its subsidiaries.
26
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following information sets forth the consolidating balance sheets of the
Company as of September 30, 2003 and December 31, 2002, the consolidating
statements of operations for the three-month and nine-month periods ended
September 30, 2003 and 2002, and the consolidating statements of cash flows for
the nine-month periods ended September 30, 2003 and 2002 of (i) Cincinnati Bell
Inc. the Parent Company and guarantor (ii) Cincinnati Bell Telephone, the issuer
and (iii) the non guarantor subsidiaries on a combined basis:
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
For the quarter ended September 30, 2003
-------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
----------- -------- ---------------- ------------ -----
Revenue $ -- $203.4 $117.9 $ (6.0) $315.3
Operating costs, expenses, gains and losses 5.7 123.8 62.2 (6.0) 185.7
------ ------ ------ ------- ------
Operating income (loss) (5.7) 79.6 55.7 -- 129.6
Equity in earnings (loss) of subsidiaries 241.9 -- -- (241.9) --
Interest expense 59.1 5.3 18.4 (15.6) 67.2
Other expense (income), net (6.7) (0.1) 21.0 15.6 29.8
------ ------ ------ ------- ------
Income (loss) before income taxes 183.8 74.4 16.3 (241.9) 32.6
Income tax expense (benefit) 139.1 26.5 (177.7) -- (12.1)
------ ------ ------ ------- ------
Income (loss) from continuing operations 44.7 47.9 194.0 (241.9) 44.7
------ ------ ------ ------- ------
Net income (loss) 44.7 47.9 194.0 (241.9) 44.7
Preferred stock dividends 2.6 -- -- -- 2.6
------ ------ ------ ------- ------
Net income (loss) applicable to
common shareowners $ 42.1 $ 47.9 $194.0 $(241.9) $ 42.1
====== ====== ====== ======= ======
For the quarter ended September 30, 2002
-------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
----------- -------- ---------------- ------------ -----
Revenue $ -- $202.8 $387.7 $(20.2) $570.3
Operating costs and expenses 4.6 132.2 393.0 (20.2) 509.6
------ ------ ------ ------ ------
Operating income (loss) (4.6) 70.6 (5.3) -- 60.7
Equity in earnings (loss) of subsidiaries 23.0 -- -- (23.0) --
Interest expense 33.9 5.4 20.9 (20.1) 40.1
Other expense (income), net (7.7) (0.7) 5.2 20.1 16.9
------ ------ ------ ------ ------
Income (loss) before income taxes (7.8) 65.9 (31.4) (23.0) 3.7
Income tax expense (benefit) (11.8) 23.3 (11.8) -- (0.3)
------ ------ ------ ------ ------
Income (loss) from continuing operations 4.0 42.6 (19.6) (23.0) 4.0
------ ------ ------ ------ ------
Net income (loss) 4.0 42.6 (19.6) (23.0) 4.0
Preferred stock dividends 2.6 -- -- -- 2.6
------ ------ ------ ------ ------
Net income (loss) applicable to
common shareowners $ 1.4 $ 42.6 $(19.6) $ (23.0) $ 1.4
====== ====== ====== ====== ======
27
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
For the nine months ended September 30, 2003
--------------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
----------- -------- ---------------- ------------ -----
Revenue $ -- $ 611.7 $ 680.7 $ (45.8) $1,246.6
Operating costs, expenses, gains and losses 18.5 384.6 316.0 (45.8) 673.3
-------- -------- -------- -------- --------
Operating income (loss) (18.5) 227.1 364.7 -- 573.3
Equity in earnings (loss) of subsidiaries 615.1 -- -- (615.1) --
Interest expense 147.6 15.7 66.8 (56.3) 173.8
Other expense (income), net (23.9) (0.7) 27.4 56.3 59.1
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 472.9 212.1 270.5 (615.1) 340.4
Income tax expense (benefit) 120.4 75.4 (207.9) -- (12.1)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
and cumulative effect of change in
accounting principle 352.5 136.7 478.4 (615.1) 352.5
Cumulative effect of change in accounting
principle, net of tax 85.9 86.3 (0.4) (85.9) 85.9
-------- -------- -------- -------- --------
Net income (loss) 438.4 223.0 478.0 (701.0) 438.4
Preferred stock dividends 7.8 -- -- -- 7.8
-------- -------- -------- -------- --------
Net income (loss) applicable to common
shareowners $ 430.6 $ 223.0 $ 478.0 $ (701.0) $ 430.6
======== ======== ======== ======== ========
For the nine months ended September 30, 2002
--------------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
----------- -------- ---------------- ------------ -----
Revenue $ -- $ 616.6 $1,111.8 $ (59.1) $1,669.3
Operating costs and expenses 9.0 403.6 1,210.7 (59.3) 1,564.0
--------- -------- ---------- -------- ---------
Operating income (loss) (9.0) 213.0 (98.9) 0.2 105.3
Equity in earnings (loss) of subsidiaries
and discontinued operations 237.1 -- -- (237.1) --
Interest expense 99.5 16.8 59.0 (57.9) 117.4
Other expense (income), net (21.1) (2.0) 10.0 57.9 44.8
--------- -------- ---------- -------- ---------
Income (loss) before income taxes,
discontinued operations
and cumulative effect of change in
accounting principle 149.7 198.2 (167.9) (236.9) (56.9)
Income tax expense (benefit) (20.1) 70.2 (59.2) -- (9.1)
--------- -------- ---------- -------- ---------
Income (loss) before discontinued
operations and cumulative effect of
change in accounting principle 169.8 128.0 (108.7) (236.9) (47.8)
Income from discontinued operations, net
of tax -- -- 217.6 -- 217.6
Cumulative effect of change in accounting
principle, net of tax (2,008.7) -- (2,008.7) 2,008.7 (2,008.7)
--------- -------- ---------- -------- ---------
Net income (loss) (1,838.9) 128.0 (1,899.8) 1,771.8 (1,838.9)
Preferred stock dividends 7.8 -- -- -- 7.8
--------- -------- ---------- -------- ---------
Net income (loss) applicable to common
shareowners $(1,846.7) $ 128.0 $(1,899.8) $1,771.8 $(1,846.7)
========= ======== ========== ======== ==========
28
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS
(DOLLARS IN MILLIONS)
As of September 30, 2003
--------------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
----------- -------- ---------------- ------------ -----
Cash and cash equivalents $ 29.9 $ 2.1 $ 0.9 $ -- $ 32.9
Receivables, net -- 77.0 62.0 -- 139.0
Other current assets 300.5 51.3 12.0 (294.1) 69.7
-------- -------- -------- -------- --------
Total current assets 330.4 130.4 74.9 (294.1) 241.6
Property, plant and equipment, net 1.3 657.6 264.3 -- 923.2
Goodwill and other intangibles, net -- -- 88.3 -- 88.3
Advances and investments in subsidiaries 212.5 -- -- (212.5) --
Other noncurrent assets (38.1) 12.4 16.6 124.2 115.1
-------- -------- -------- -------- --------
TOTAL ASSETS $ 506.1 $ 800.4 $ 444.1 $ (382.4) $1,368.2
======== ======== ======== ======== ========
Short-term debt $ 106.0 $ 26.9 $ 2.8 $ -- $ 135.7
Accounts payable 1.0 33.6 24.4 -- 59.0
Other current liabilities 53.9 73.3 255.9 (141.1) 242.0
-------- -------- -------- -------- --------
Total current liabilities 160.9 133.8 283.1 (141.1) 436.7
Long-term debt, less current portion 1,791.1 276.2 140.7 -- 2,208.0
Other noncurrent liabilities 86.9 110.7 47.5 (28.8) 216.3
Intercompany payables -- 19.8 559.9 (579.7) --
-------- -------- -------- -------- --------
Total liabilities 2,038.9 540.5 1,031.2 (749.6) 2,861.0
Minority interest -- -- 40.0 -- 40.0
Shareowners' equity (deficit) (1,532.8) 259.9 (627.1) 367.2 (1,532.8)
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY (DEFICIT) $ 506.1 $ 800.4 $ 444.1 $ (382.4) $1,368.2
======== ======== ======== ======== ========
As of December 31, 2002
-------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
----------- -------- ---------------- ------------ -----
Cash and cash equivalents $ 38.6 $ 2.6 $ 3.7 $ -- $ 44.9
Restricted Cash 7.0 -- -- -- 7.0
Receivables, net -- 87.1 203.5 -- 290.6
Other current assets 4.7 43.4 19.8 (0.6) 67.3
Intercompany receivables -- 64.7 -- (64.7) --
-------- -------- -------- -------- --------
Total current assets 50.3 197.8 227.0 (65.3) 409.8
Property, plant and equipment, net 1.7 560.8 305.4 -- 867.9
Goodwill and other intangibles, net -- -- 88.7 -- 88.7
Advances and investments in subsidiaries (571.7) -- -- 571.7 --
Other noncurrent assets 113.1 8.8 22.8 (43.5) 101.2
-------- -------- -------- -------- --------
TOTAL ASSETS $ (406.6) $ 767.4 $ 643.9 $ 462.9 $1,467.6
======== ======== ======== ======== ========
Short-term debt $ 172.1 $ 26.8 $ 4.8 $ -- $ 203.7
Accounts payable 1.7 50.8 76.9 -- 129.4
Other current liabilities 36.4 78.5 284.9 4.2 404.0
-------- -------- -------- -------- --------
Total current liabilities 210.2 156.1 366.6 4.2 737.1
Long-term debt, less current portion 1,835.4 278.9 240.4 -- 2,354.7
Other noncurrent liabilities 96.1 74.8 357.6 (48.3) 480.2
Intercompany payables -- -- 1,804.9 (1,804.9) --
-------- -------- -------- -------- --------
Total liabilities 2,141.7 509.8 2,769.5 (1,849.0) 3,572.0
Minority interest -- -- 29.5 414.4 443.9
Redeemable preferred stock -- -- 414.4 (414.4) --
Shareowners' equity (deficit) (2,548.3) 257.6 (2,569.5) 2,311.9 (2,548.3)
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY (DEFICIT) $ (406.6) $ 767.4 $ 643.9 $ 462.9 $1,467.6
======== ======== ======== ======== ========
29
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
For the nine months ended September 30, 2003
----------------------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
---------- --------- ---------------- ------------ ---------
Cash Flows provided by (used in)
operating activities $ 41.7 $ 196.4 $ (7.5) $ -- $ 230.6
--------- --------- --------- --------- ---------
Capital expenditures (0.1) (58.0) (36.7) -- (94.8)
Proceeds from sale of broadband assets -- -- 82.7 -- 82.7
Other investing activities 3.2 -- (2.2) -- 1.0
--------- --------- --------- --------- ---------
Cash Flows provided by (used in)
investing activities 3.1 (58.0) 43.8 -- (11.1)
--------- --------- --------- --------- ---------
Issuance of long-term debt 850.0 -- -- -- 850.0
Capital contributions and other
intercompany transactions 111.8 (136.2) 24.4 -- --
Repayment of long-term debt (955.8) -- (52.3) -- (1,008.1)
Short-term borrowings (repayments), net -- (2.7) (2.0) -- (4.7)
Issuance of common shares - exercise of
stock options 1.6 -- -- -- 1.6
Other financing activities (61.1) -- (9.2) -- (70.3)
--------- --------- --------- --------- ---------
Cash Flows provided by (used in)
financing activities (53.5) (138.9) (39.1) -- (231.5)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents (8.7) (0.5) (2.8) -- (12.0)
Beginning cash and cash equivalents 38.6 2.6 3.7 -- 44.9
--------- --------- --------- --------- ---------
Ending cash and cash equivalents $ 29.9 $ 2.1 $ 0.9 $ -- $ 32.9
========= ========= ========= ========= =========
For the nine months ended September 30, 2002
-----------------------------------------------------------------
Parent CBT Other
(Guarantor) (Issuer) (Non-guarantors) Eliminations Total
---------- --------- ---------------- ------------ ---------
Cash Flows provided by (used in)
operating activities $ 13.4 $243.5 $(126.8) $ -- $130.1
------ ------ ------ ------ ------
Capital expenditures (0.1) (57.1) (82.7) -- (139.9)
Proceeds from sale of discontinued
operations -- -- 345.0 -- 345.0
Other investing activities -- -- 23.3 -- 23.3
------ ------ ------ ------ ------
Cash Flows provided by (used in) from
investing activities (0.1) (57.1) 285.6 -- 228.4
------ ------ ------ ------ ------
Issuance of long-term debt -- -- 113.1 -- 113.1
Capital contributions and other
intercompany transactions 399.9 (156.3) (243.6) -- --
Repayment of long-term debt (398.8) (20.0) -- -- (418.8)
Short-term borrowings (repayments), net -- (5.0) (2.5) -- (7.5)
Issuance of common shares - exercise of
stock options 0.5 -- -- -- 0.5
Other financing activities (16.4) -- (24.7) -- (41.1)
------ ------ ------ ------ ------
Cash Flows provided by (used in)
financing activities (14.8) (181.3) (157.7) -- (353.8)
------ ------ ------ ------ ------
Increase (decrease) in cash and cash equivalents (1.5) 5.1 1.1 -- 4.7
Beginning cash and cash equivalents 17.3 -- 12.7 -- 30.0
------ ------ ------ ------ ------
Ending cash and cash equivalents $ 15.8 $ 5.1 $ 13.8 $ -- $ 34.7
====== ====== ====== ====== ======
7-1/4% SENIOR NOTES DUE 2013 AND 8-3/8% SENIOR SUBORDINATED NOTES DUE 2014
The Parent Company issued debt on July 11, 2003 and November 19, 2003 (refer to
Note 15) that is guaranteed by the following subsidiaries of the Parent Company:
Cincinnati Bell Public Communications Inc., ZoomTown.com Inc., Cincinnati Bell
Complete Protection Inc., BRFS LLC, BRHI Inc., Cincinnati Bell Any Distance
Inc., Cincinnati Bell Telecommunication Services Inc., Cincinnati Bell Wireless
Company and Cincinnati Bell Wireless Holdings LLC. The debt is not guaranteed by
other subsidiaries of the Parent Company. Each subsidiary guarantor is 100%
owned by the Parent Company. The guarantees are full and unconditional and are
joint and several. Substantially all of the Parent
30
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Company's income and cash flow is generated by its subsidiaries. Generally,
funds necessary to meet the Parent Company's debt service obligations are
provided by distributions or advances from its subsidiaries.
The following information sets forth the consolidating balance sheets of the
Company as of September 30, 2003 and December 31, 2002, the consolidating
statements of operations for the three-month and nine-month periods ended
September 30, 2003 and 2002, and the consolidating statements of cash flows for
the nine-month periods ended September 30, 2003 and 2002 of (i) Cincinnati Bell
Inc., the Parent Company and issuer (ii) the guarantor subsidiaries on a
combined basis and (iii) the non-guarantor subsidiaries on a combined basis:
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
For the quarter ended September 30, 2003
------------------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
-------- ---------- -------------- ------------ -----
Revenue $ -- $ 46.9 $ 274.4 $ (6.0) $315.3
Operating costs, expenses, gains and losses 5.7 39.7 146.3 (6.0) 185.7
------ ------ ------- -------- ------
Operating income (loss) (5.7) 7.2 128.1 -- 129.6
Equity in earnings (loss) of subsidiaries 241.9 -- -- (241.9) --
Interest expense 59.1 1.2 22.5 (15.6) 67.2
Other expense (income), net (6.7) 3.6 17.3 15.6 29.8
------ ------ ------- -------- ------
Income (loss) before income taxes 183.8 2.4 88.3 (241.9) 32.6
Income tax expense (benefit) 139.1 7.0 (158.2) -- (12.1)
------ ------ ------- -------- ------
Income (loss) from continuing operations 44.7 (4.6) 246.5 (241.9) 44.7
------ ------ ------- -------- ------
Net income (loss) 44.7 (4.6) 246.5 (241.9) 44.7
Preferred stock dividends 2.6 -- -- -- 2.6
------ ------ ------- -------- ------
Net income (loss) applicable to common
shareholders $ 42.1 $ (4.6) $ 246.5 $(241.9) $ 42.1
====== ====== ======= ======= ======
For the quarter ended September 30, 2002
----------------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
-------- ---------- -------------- ------------ -----
Revenue $ -- $ 54.6 $535.9 $(20.2) $570.3
Operating costs and expenses 4.6 50.1 475.1 (20.2) 509.6
------ ------ ------ ------ ------
Operating income (loss) (4.6) 4.5 60.8 -- 60.7
Equity in earnings (loss) of subsidiaries
and discontinued operations 23.0 -- -- (23.0) --
Interest expense 33.9 1.0 25.3 (20.1) 40.1
Other expense (income), net (7.7) 4.5 -- 20.1 16.9
------ ------ ------ ------ ------
Income (loss) before income taxes (7.8) (1.0) 35.5 (23.0) 3.7
Income tax expense (benefit) (11.8) 5.5 6.0 -- (0.3)
------ ------ ------ ------ ------
Income (loss) from continuing operations 4.0 (6.5) 29.5 (23.0) 4.0
------ ------ ------ ------ ------
Net income (loss) 4.0 (6.5) 29.5 (23.0) 4.0
Preferred stock dividends 2.6 -- -- -- 2.6
------ ------ ------ ------ ------
Net income (loss) applicable to common
shareholders $ 1.4 $ (6.5) $ 29.5 $(23.0) $ 1.4
====== ====== ======= ====== ======
31
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
For the nine months ended September 30, 2003
-----------------------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
---------- ---------- -------------- ------------ --------
Revenue $ -- $ 160.9 $1,131.5 $ (45.8) $1,246.6
Operating costs, expenses, gains and losses 18.5 144.2 556.4 (45.8) 673.3
-------- -------- -------- -------- --------
Operating income (loss) (18.5) 16.7 575.1 -- 573.3
Equity in earnings (loss) of subsidiaries 615.1 -- -- (615.1) --
Interest expense 147.6 3.5 79.0 (56.3) 173.8
Other expense (income), net (23.9) 10.8 15.9 56.3 59.1
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 472.9 2.4 480.2 (615.1) 340.4
Income tax expense (benefit) 120.4 18.9 (151.4) -- (12.1)
-------- -------- -------- -------- --------
Income (loss) from continuing operations before --
cumulative effect of change in
accounting principle 352.5 (16.5) 631.6 (615.1) 352.5
Cumulative effect of a change in
accounting principle, net of tax 85.9 0.1 85.8 (85.9) 85.9
-------- -------- -------- -------- --------
Net income (loss) 438.4 (16.4) 717.4 (701.0) 438.4
Preferred stock dividends 7.8 -- -- -- 7.8
-------- -------- -------- -------- --------
Net income (loss) applicable to common
shareowners $ 430.6 $ (16.4) $ 717.4 $ (701.0) $ 430.6
======== ======== ======== ======== ========
For the nine months ended September 30, 2002
--------------------------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
-------- ---------- -------------- ------------ -----
Revenue $ -- $ 164.5 $1,563.9 $ (59.1) $1,669.3
Operating costs and expenses 9.0 153.3 1,461.0 (59.3) 1,564.0
--------- -------- --------- -------- ---------
Operating income (loss) (9.0) 11.2 102.9 0.2 105.3
Equity in earnings (loss) of subsidiaries
and discontinued operations 237.1 -- -- (237.1) --
Interest expense 99.5 2.9 72.9 (57.9) 117.4
Other expense (income), net (21.1) 9.0 (1.0) 57.9 44.8
--------- -------- --------- -------- ---------
Income (loss) before income taxes,
discontinued operations
and cumulative effect of change
in accounting principle 149.7 (0.7) 31.0 (236.9) (56.9)
Income tax expense (benefit) (20.1) 14.1 (3.1) -- (9.1)
--------- -------- --------- -------- ---------
Income (loss) from continuing operations
before discontinued operations
and cumulative effect of change in
accounting principle 169.8 (14.8) 34.1 (236.9) (47.8)
Income from discontinued operations, net -- -- 217.6 -- 217.6
Cumulative effect of a change in
accounting principle, net of tax (2,008.7) -- (2,008.7) 2,008.7 (2,008.7)
--------- -------- --------- -------- ---------
Net income (loss) (1,838.9) (14.8) (1,757.0) 1,771.8 (1,838.9)
Preferred stock dividends 7.8 -- -- -- 7.8
--------- -------- --------- -------- ---------
Net income (loss) applicable to common
shareowners $(1,846.7) $ (14.8) $(1,757.0) $1,771.8 $ (1,846.7)
========= ======== ========= ======== =========
32
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS
(DOLLARS IN MILLIONS)
September 30, 2003
-------------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
-------- ---------- -------------- ------------ -----
Cash and cash equivalents $ 29.9 $ 0.2 $ 2.8 $ -- $ 32.9
Restricted cash -- -- -- -- --
Receivables, net -- 36.4 102.6 -- 139.0
Other current assets 300.5 8.5 54.8 (294.1) 69.7
-------- -------- -------- -------- --------
Total current assets 330.4 45.1 160.2 (294.1) 241.6
Property, plant and equipment, net 1.3 13.0 908.9 -- 923.2
Goodwill and other intangibles, net -- 10.3 78.0 -- 88.3
Other noncurrent assets (38.1) 11.4 17.6 124.2 115.1
Advances and investments in subsidiaries 212.5 229.1 27.4 (469.0) --
-------- -------- -------- -------- --------
TOTAL ASSETS $ 506.1 $ 308.9 $1,192.1 $ (638.9) $1,368.2
======== ======== ======== ======== ========
Short-term debt $ 106.0 $ -- $ 29.7 $ -- $ 135.7
Accounts payable 1.0 23.1 34.9 -- 59.0
Other current liabilities 53.9 13.8 315.4 (141.1) 242.0
-------- -------- -------- -------- --------
Total current liabilities 160.9 36.9 380.0 (141.1) 436.7
Long-term debt, less current portion 1,791.1 -- 416.9 -- 2,208.0
Other noncurrent liabilities 86.9 39.9 118.3 (28.8) 216.3
Intercompany payables -- 289.1 438.1 (727.2) --
-------- -------- -------- -------- --------
Total liabilities 2,038.9 365.9 1,353.3 (897.1) 2,861.0
Minority interest -- 11.5 28.5 -- 40.0
Redeemable preferred stock -- -- -- -- --
Shareowners' equity (deficit) (1,532.8) (68.5) (189.7) 258.2 (1,532.8)
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY (DEFICIT) $ 506.1 $ 308.9 $1,192.1 $ (638.9) $1,368.2
======== ======== ======== ======== ========
December 31, 2002
-------------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
-------- ---------- -------------- ------------ -----
Cash and cash equivalents $ 38.6 $ 0.2 $ 6.1 $ -- $ 44.9
Restricted cash 7.0 -- -- -- 7.0
Receivables, net -- 37.5 253.1 -- 290.6
Other current assets 4.7 4.3 58.9 (0.6) 67.3
Intercompany receivables -- -- 28.2 (28.2) --
-------- -------- -------- -------- --------
Total current assets 50.3 42.0 346.3 (28.8) 409.8
Property, plant and equipment, net 1.7 10.4 855.8 -- 867.9
Goodwill and other intangibles, net -- 10.3 78.4 -- 88.7
Other noncurrent assets 113.1 14.2 17.4 (43.5) 101.2
Advances and investments in subsidiaries (571.7) 288.5 51.7 231.5 --
-------- -------- -------- -------- --------
TOTAL ASSETS $ (406.6) $ 365.4 $1,349.6 $ 159.2 $1,467.6
======== ======== ======== ======== ========
Short-term debt $ 172.1 $ -- $ 31.6 $ -- $ 203.7
Accounts payable 1.7 33.8 93.9 -- 129.4
Other current liabilities 36.4 (0.8) 364.2 4.2 404.0
-------- -------- -------- -------- --------
Total current liabilities 210.2 33.0 489.7 4.2 737.1
Long-term debt, less current portion 1,835.4 -- 519.3 -- 2,354.7
Other noncurrent liabilities 96.1 35.7 396.7 (48.3) 480.2
Intercompany payables -- 328.9 1,670.7 (1,999.6) --
-------- -------- -------- -------- --------
Total liabilities 2,141.7 397.6 3,076.4 (2,043.7) 3,572.0
Minority interest -- -- 29.5 414.4 443.9
Redeemable preferred stock -- -- 414.4 (414.4) --
Shareowners' equity (deficit) (2,548.3) (32.2) (2,170.7) 2,202.9 (2,548.3)
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY (DEFICIT) $ (406.6) $ 365.4 $1,349.6 $ 159.2 $1,467.6
======== ======== ======== ======== ========
33
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
For the nine months ended September 30, 2003
----------------------------------------------------------------
Parent
(Issuer) Guarantors Non-guarantors Eliminations Total
-------- ---------- -------------- ------------ -----
Cash flows provided by (used in) operating activities $ 41.7 $ 16.2 $ 172.7 $ -- $ 230.6
-------- -------- -------- -------- --------
Capital expenditures (0.1) (3.7) (91.0) -- (94.8)
Proceeds from sale of broadband assets -- -- 82.7 -- 82.7
Other investing activities 3.2 3.8 (6.0) -- 1.0
-------- -------- -------- -------- --------
Cash flows provided by (used in) investing activities 3.1 0.1 (14.3) -- (11.1)
-------- -------- -------- -------- --------
Issuance of long-term debt 850.0 -- -- -- 850.0
Capital contributions and other intercompany transactions 111.8 (16.3) (95.5) -- --
Repayment of long-term debt (955.8) -- (52.3) -- (1,008.1)
Short-term borrowings (repayments), net -- -- (4.7) -- (4.7)
Issuance of common shares - exercise of stock options 1.6 -- -- -- 1.6
Other financing activities (61.1) -- (9.2) -- (70.3)
-------- -------- -------- -------- --------
Cash flows provided by (used in) financing activities (53.5) (16.3) (161.7) -- (231.5)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents (8.7) -- (3.3) -- (12.0)
Beginning cash and cash equivalents 38.6 0.2 6.1 -- 44.9
-------- -------- -------- -------- --------
Ending cash and cash equivalents $ 29.9 $ 0.2 $ 2.8 $ -- $ 32.9
======== ======== ======== ======== ========
For the nine months ended September 30, 2002
----------------------------------------------------------
Parent Non-
(Issuer) Guarantors guarantors Eliminations Total
-------- ---------- ---------- ------------ -----
Cash flows provided by (used in) operating activities $ 13.4 $ 10.3 $106.4 $ -- $130.1
------ ------ ------ ------ ------
Capital expenditures (0.1) (4.0) (135.8) -- (139.9)
Proceeds from sale of discontinued operations -- -- 345.0 -- 345.0
Other investing activities -- 23.3 -- -- 23.3
------ ------ ------ ------ ------
Cash flows provided by (used in) investing activities (0.1) 19.3 209.2 -- 228.4
------ ------ ------ ------ ------
Issuance of long-term debt -- -- 113.1 -- 113.1
Capital contributions and other intercompany transactions 399.9 (29.4) (370.5) -- --
Repayment of long-term debt (398.8) -- (20.0) -- (418.8)
Short-term borrowings (repayments), net -- -- (7.5) -- (7.5)
Issuance of common shares - exercise of stock options 0.5 -- -- -- 0.5
Other financing activities (16.4) -- (24.7) -- (41.1)
------ ------ ------ ------ ------
Cash flows provided by (used in) financing activities (14.8) (29.4) (309.6) -- (353.8)
------ ------ ------ ------ ------
Increase (decrease) in cash and cash equivalents (1.5) 0.2 6.0 -- 4.7
Beginning cash and cash equivalents 17.3 -- 12.7 -- 30.0
------ ------ ------ ------ ------
Ending cash and cash equivalents $ 15.8 $ 0.2 $ 18.7 $ -- $ 34.7
====== ====== ====== ====== ======
13. DISCONTINUED OPERATIONS
On March 8, 2002, the Company sold substantially all of the assets of its
former Cincinnati Bell Directory ("CBD") subsidiary to a group of
investors for $345.0 million in cash and a 2.5% equity stake in the newly
formed entity. CBD published Yellow Pages directories and sold directory
advertising and informational services in Cincinnati Bell Telephone's
local service area. In the first quarter of 2002, the Company recorded a
pre-tax gain of $328.3 million ($211.8 million, net of taxes) and $5.8
million of net income related to the operations of CBD from January 1
through March 8, 2002 in the Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) under the caption "Income from
discontinued operations, net of taxes."
Selected financial information for the discontinued operations is as
follows:
34
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in millions) 2003 2002 2003 2002
- --------------------- ---- ---- ---- ----
Revenue $ -- $ -- $ -- $ 15.7
======= ======= ======= =======
Income from discontinued operations -- -- -- 9.0
Gain on disposition of discontinued operations -- -- -- 328.3
Income tax expense (including $116.5 expense on
disposition of discontinued operations) -- -- -- 119.7
------- ------- ------- -------
Income from discontinued operations, net of tax $ -- $ -- $ -- $ 217.6
======= ======= ======= =======
The effective tax rate of discontinued operations was 35.5% in all periods
presented.
14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
In 1998, the Company entered into a ten-year contract with Convergys
Corporation ("Convergys"), a provider of billing, customer service and
other services, which remains in effect until June 30, 2008. The contract
states that Convergys will be the primary provider of certain data
processing, professional and consulting, technical support and customer
support services for the Company. In return, the Company will be the
exclusive provider of local telecommunications services to Convergys. The
Company's annual minimum commitment is $45.0 million.
The broadband business had contractual obligations to utilize network
facilities from various interexchange and local exchange carriers. These
contracts were based on a fixed monthly rate with terms extending on
certain contracts through 2021. The buyer of substantially all of the
broadband assets assumed capital lease commitments and certain liabilities
of $390.2 million and operating contractual commitments of approximately
$271.1 million, including the obligations associated with network
utilization, upon the first stage closing of the sale on June 13, 2003.
CONTINGENCIES
In the normal course of business, the Company is subject to various
regulatory proceedings, lawsuits, claims and other matters. Such matters
are subject to many uncertainties and outcomes that are not predictable
with assurance.
During 2002 and 2003, a number of putative class action and derivative
lawsuits were filed in the United States District Court for the Southern
District of Ohio and the Ohio Court of Common Pleas, Hamilton County
Division, respectively, on behalf of purchasers of the securities of the
Company between January 17, 2001 and May 20, 2002, inclusive (the "Class
Period"). The complaints allege that the Company, and two of its former
Chief Executive Officers ("CEOs") violated federal securities laws by
allegedly issuing material misrepresentations to the market during the
Class Period, which misrepresentations resulted in an artificially
inflated market price for the Company's securities. In a separate action,
a number of complaints have been filed in the United States District Court
for the Southern District of Ohio on behalf of the Company's retirement
savings plan and its beneficiaries alleging that the Company and several
of its directors violated the Employee Retirement Income Security Act by
allegedly exposing the beneficiaries' retirement savings to unreasonable
risk of loss and injury. The Company intends to defend these claims
vigorously.
35
Cincinnati Bell Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In June 2000, BRCOM entered into a long-term construction contract to
build a 1,774-mile fiber route system. During the second quarter of 2002,
the customer alleged a breach of contract and requested the Company to
cease all construction activities, requested a refund of $62.0 million in
progress payments previously paid to the Company, and requested conveyance
of title to all routes constructed under the contract. Subsequently, the
Company notified the customer that such purported termination was improper
and constituted a material breach under the terms of the contract, causing
the Company to terminate the contract. As a result of the contract
termination, the Company expensed $13.3 million in both costs incurred
under the contract and estimated shutdown costs during the second quarter
of 2002. In addition, the Company's balance sheet included $50.5 million
in unbilled accounts receivable (including both signed change orders and
claims) as of December 31, 2002 related to this contract. On July 30,
2003, the company reached a tentative settlement agreement with the
customer regarding the construction contract in dispute. As a result,
during the second quarter of 2003, the Company recorded a non-cash charge
of $50.5 million to reserve against the unbilled accounts receivable
related to this contract. While the Company believes a final settlement
will be reached during the fourth quarter of 2003 based on the tentative
agreement, failure to do so, and a subsequent unfavorable outcome in
arbitration could have a material effect on the financial condition and
results of operations of the Company.
15. SUBSEQUENT EVENTS
On October 30, 2003, the Company announced that it was offering $540.0
million principal amount of Senior Subordinated Notes due 2014 by means of
a private placement (the "Offering"). The new notes will bear interest at
a rate of 8-3/8% per annum. The net proceeds of the Offering, after
deducting the initial purchasers' discounts and fees and expenses related
to the Offering are expected to total $528.2 million. The Company will use
$524.6 million of the net proceeds to purchase all of the Company's
outstanding Convertible Subordinated Notes due 2009, which bear interest
at a rate of 9%, at a discounted price equal to 97% of their accreted
value on the expected closing date of November 19, 2003. The remaining
proceeds will be used to pay fees related a credit facility amendment
described below and reduce outstanding borrowings under the revolving
credit facility. The Offering is conditioned upon the execution of this
amendment and the consent of the Company's lenders under its credit
facilities. Concurrently with the Offering, the Company expects to amend
its credit facilities to provide for a new term loan facility of $525
million. The net proceeds of the new term loan facility will be used to
prepay all outstanding term loans under the Company's credit facilities
and to permanently pay down a portion of the Company's revolving credit
facility. The new term loan is expected to mature in June 2008 and bear
interest at a rate of 250 basis points over LIBOR.
On October 30, 2003, Standard & Poor's Ratings Services raised the
Company's corporate credit rating to 'B+' from 'B' and the rating was
removed from CreditWatch, where it was placed in August 2003.
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