| CINCINNATI BELL INC Item 1A Risk Factors The Company’s substantial debt could limit its ability to fund operations, expose it to interest rate volatility, limit its ability to raise additional capital and have a material adverse effect on its ability to fulfill its obligations and on its business and prospects generally |
| The Company has a substantial amount of debt and has significant debt service obligations |
| As of December 31, 2005 the Company had outstanding indebtedness of dlra2cmam084dtta7 million and a total shareowners’ deficit of dlra737dtta7 million |
| In addition, the Company had the ability to borrow additional amounts under its revolving credit facility, subject to compliance with certain conditions |
| The Company may incur additional debt from time to time, subject to the restrictions contained in its credit facilities and other debt instruments |
| The Company’s substantial debt could have important consequences, including the following: • the Company will be required to use a substantial portion of its cash flow from operations to pay principal and interest on its debt, thereby reducing the availability of cash flow to fund working capital, capital expenditures, strategic acquisitions, investments and alliances, and other general corporate requirements; • the Company’s interest expense could increase if interest rates, in general, increase because approximately 40prca of its debt bears interest at floating rates; • the Company’s substantial debt will increase its vulnerability to general economic downturns and adverse competitive and industry conditions and could place the Company at a competitive disadvantage compared to those of its competitors that are less leveraged; 8 ______________________________________________________________________ • the Company’s debt service obligations could limit its flexibility to plan for, or react to, changes in its business and the industry in which it operates; • the Company’s level of debt may restrict it from raising additional financing on satisfactory terms to fund working capital, capital expenditures, strategic acquisitions, investments and joint ventures and other general corporate requirements; and • a potential failure to comply with the financial and other restrictive covenants in the Company’s debt instruments, which, among other things, require it to maintain specified financial ratios could, if not cured or waived, have a material adverse effect on the Company’s ability to fulfill its obligations and on its business and prospects generally |
| The servicing of the Company’s indebtedness requires a significant amount of cash, and its ability to generate cash depends on many factors beyond its control |
| The Company’s ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors, many of which are beyond its control |
| The Company cannot provide assurance that its business will generate sufficient cash flow from operations, that additional sources of debt financing will be available or that future borrowings will be available under its credit facilities, in each case, in amounts sufficient to enable the Company to service its indebtedness, or to fund other liquidity needs |
| If the Company cannot service its indebtedness, it will have to take actions such as reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures, selling assets, restructuring or refinancing indebtedness, or seeking additional equity capital, which may adversely affect its customers and affect their willingness to remain customers |
| The Company cannot provide assurance that any of these remedies could, if necessary, be reached on commercially reasonable terms, or at all |
| In addition, the terms of existing or future debt instruments may restrict the Company from adopting any of these alternatives |
| The Company depends on the receipt of dividends or other intercompany transfers from its subsidiaries |
| Certain of the Company’s material subsidiaries are subject to regulatory issues that potentially restrict their ability to distribute funds or assets to the Company |
| If the Company’s subsidiaries were to be prohibited from paying dividends or making distributions to the Company, it would have a material adverse effect on the Company’s liquidity and the trading price of the Cincinnati Bell common stock, preferred stock, and debt instruments |
| The Company’s creditors and preferred stockholders will have claims to the assets and earnings of these subsidiaries that are superior to claims of the holders of Cincinnati Bell common stock |
| Accordingly, in the event of the Company’s dissolution, bankruptcy, liquidation, or reorganization, amounts may not be available for payments to Cincinnati Bell common stock holders until after the payment, in full, of the claims of creditors of the Company and its subsidiaries, the Company’s creditors, and preferred stockholders |
| The Company depends upon its credit facilities to provide for its financing requirements in excess of amounts generated by operations |
| The Company depends on its credit facilities to provide for temporary financing requirements in excess of amounts generated by operations |
| The Company has a dlra250 million revolving credit facility with no outstanding borrowings and dlra6dtta4 million in letters of credit issued against the facility at December 31, 2005 |
| The ability to borrow from the credit facilities is predicated on the Company’s and its subsidiaries’ compliance with covenants |
| Failure to satisfy these covenants will constrain its ability to borrow under the credit facilities |
| As of December 31, 2005, the Company was in compliance with all of the covenants of its credit facilities |
| The credit facilities and other indebtedness impose significant restrictions on the Company |
| The Company’s debt instruments impose, and the terms of any future debt may impose, operating and other restrictions on the Company |
| These restrictions affect, and in many respects limit or prohibit, among other things, the Company’s and its subsidiaries’ ability to: • incur additional indebtedness; • create liens; 9 ______________________________________________________________________ • make investments; • enter into transactions with affiliates; • sell assets; • guarantee indebtedness; • declare or pay dividends or other distributions to shareholders; • repurchase equity interests; • redeem debt that is junior in right of payment to such indebtedness; • enter into agreements that restrict dividends or other payments from subsidiaries; • issue or sell capital stock of certain of its subsidiaries; and • consolidate, merge, or transfer all or substantially all of its assets and the assets of its subsidiaries on a consolidated basis |
| In addition, the Company’s credit facilities and debt instruments include restrictive covenants that may materially limit the Company’s ability to prepay debt and preferred stock |
| The agreements governing the credit facilities also require the Company to achieve and maintain compliance with specified financial ratios |
| The restrictions contained in the terms of the credit facilities and its other debt instruments could: • limit the Company’s ability to plan for or react to market conditions or meet capital needs or otherwise restrict the Company’s activities or business plans; and • adversely affect the Company’s ability to finance its operations, strategic acquisitions, investments or alliances, or other capital needs, or to engage in other business activities that would be in its interest |
| A breach of any of these restrictive covenants or the Company’s inability to comply with the required financial ratios and financial results could result in a default under the credit facilities |
| During the occurrence and continuance of a default under the credit facilities, the lenders may elect not to provide loans until such default is cured or waived |
| Additionally, if certain defaults occur, the lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable |
| The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings |
| Additionally, the Company’s debt instruments contain cross-acceleration provisions, which generally cause each instrument to accelerate upon a qualifying acceleration of any other debt instrument |
| The Company’s future cash flows could be adversely affected if it is unable to realize fully its deferred tax assets |
| As of December 31, 2005, the Company had a net deferred tax asset of dlra680dtta6 million, which includes US federal net operating loss carryforwards of approximately dlra611dtta7 million, state and local net operating loss carryforwards of approximately dlra205dtta6 million, deferred tax temporary differences and other tax attributes of dlra47dtta2 million, and valuation allowances of dlra183dtta9 million |
| The valuation allowances have been provided against certain state and local net operating losses and other deferred assets due to the uncertainty of the Company’s ability to utilize the assets within the statutory expiration period |
| For more information concerning the Company’s net operating loss carryforwards, deferred tax assets, and valuation allowance, see Note 12 to the Consolidated Financial Statements |
| If the Company is unable for any reason to fully realize its deferred tax assets, its business and future cash flows could be adversely affected |
| The Company operates in a highly competitive industry and its customers may not continue to purchase services, which could result in reduced revenue and loss of market share |
| The telecommunications industry is very competitive |
| Either new entrants, such as cable companies, or existing competitors, attempting to respond to difficult market conditions, may reduce pricing, create new bundled offerings, or develop new, potentially disruptive technologies, products, and services |
| If the Company cannot continue to offer reliable, competitively priced, value-added services, or if the Company does not keep pace with technological advances, competitive forces could adversely affect it through a loss of market share or a 10 ______________________________________________________________________ decrease in revenue and profit margins |
| The Company has lost, and may continue to lose, access lines as a part of its customer base utilizes service of competitive wireline or wireless providers in lieu of the Company’s local wireline service |
| The Company also competes with voice over internet protocol (“VoIP”) providers as well as broadband service providers utilizing cable or powerline access technologies |
| CBT faces competition from other local exchange carriers, wireless service providers, inter-exchange carriers, and cable, broadband, and Internet service providers |
| The Company believes CBT could face greater competition as new facilities-based service providers with existing service relationships with CBT’s customers compete more aggressively and focus greater resources on the Greater Cincinnati operating area |
| In June 2004, Time Warner Cable began offering VoIP and long distance service in both Cincinnati and Dayton |
| In July 2004, both AT&T and Verizon began offering VoIP and long distance service in Cincinnati and Dayton |
| Also, in July 2004, the local gas and electric supplier began offering high-speed Internet access over electrical lines to customers in limited neighborhoods of CBT’s operating area |
| If the Company is unable to effectively implement strategies to retain access lines, the Company’s traditional telephone business will be adversely affected |
| CBW is one of several active wireless service providers in the Cincinnati and/or Dayton, Ohio metropolitan market areas, including Cingular, Sprint Nextel, T-Mobile, Verizon, and Leap, all of which are nationally known and most are well funded |
| In addition, in 2005, Time Warner Cable announced a joint venture with Sprint Nextel to explore offering wireless services |
| The Company anticipates that continued competition could compress its gross margins for wireless products and services as carriers continue to offer more minutes for equivalent or lower service fees because CBW cannot offer more minutes without incremental costs |
| CBW’s ability to compete will depend, in part, on its ability to anticipate and respond to various competitive factors affecting the telecommunications industry |
| Furthermore, as evidenced by Cingular’s acquisition of AWE and the merger of Sprint and Nextel, there has been a trend in the wireless communications industry towards consolidation through joint ventures, reorganizations, and acquisitions |
| The Company expects this consolidation to lead to larger competitors with greater resources and more service offerings than CBW Furthermore, wireless subscribers are permitted to retain their wireless phone numbers when changing to another wireless carrier within the same geographic area |
| The Company generally does not enter into long-term contracts with its wireless subscribers, and, therefore, this portability could have a significant adverse affect on the Company |
| The Company’s other subsidiaries operate in a largely local or regional area, and each of these subsidiaries faces significant competition |
| CBTS competes against numerous other information technology consulting, web-hosting, and computer system integration companies, many of which are larger, national in scope, and better financed |
| CBAD competitors include large national long-distance carriers, such as AT&T, MCI, Sprint, and emerging VoIP providers, and wireless providers that offer plans with no additional fees for long distance |
| CBCP competes against national companies, such as ADT, and against local providers |
| Public competes with several other public payphone providers, some of which are national in scope and offer lower prices for coin-based local calling services |
| Public has also continued to be adversely impacted by the growing popularity of wireless communications |
| The effect of the foregoing competition on any of the Company’s subsidiaries could have a material adverse impact on its businesses, financial condition, results of operations, and cash flows |
| This could result in increased reliance on borrowed funds and could impact the Company’s ability to maintain its wireline and wireless networks |
| Maintaining the Company’s networks requires significant capital expenditures and its inability or failure to maintain its networks would have a material impact on its market share and ability to generate revenue |
| During the year ended December 31, 2005, capital expenditures totaled dlra143 million |
| The Company expects to spend approximately 12prca of future revenue on capital expenditures in future periods, excluding any significant expenditures associated with the introduction of new products, services, or a major network or data center expansion |
| The Company may incur significant additional capital expenditures as a result of unanticipated developments, regulatory changes, and other events that impact the business |
| If the Company is unable or fails to adequately maintain or expand its networks to meet customer needs, there could be a material adverse impact on the Company’s market share and its ability to generate revenue |
| 11 ______________________________________________________________________ Maintenance of CBW’s wireless network, growth in the wireless business, or the addition of new wireless products and services may require CBW to obtain additional spectrum, which may not be available or be available only on less than favorable terms |
| The TDMA wireless network currently operates on spectrum licensed to CBW by the FCC For its GSM network, CBW uses spectrum licensed to the Company and to Cingular |
| Introduction of new wireless products and services, as well as maintenance of the existing wireless business, may require CBW to obtain additional spectrum in the Cincinnati or Dayton markets, either to supplement or to replace the existing spectrum |
| Furthermore, the Company network depends upon the deployment of radio frequency equipment on towers and atop of buildings |
| The Company both owns and leases spaces on these towers and buildings and typically leases underlying land |
| There can be no assurance that spectrum or the appropriate radio frequency equipment locations will be available to CBW or will be available on commercially favorable terms |
| Failure to obtain or to retain any needed spectrum or radio equipment locations could have a materially adverse impact on the wireless business as a whole, the quality of the wireless networks, and the ability to offer new competitive products and services |
| The regulation of the Company’s businesses by federal and state authorities may, among other things, place the Company at a competitive disadvantage, restrict its ability to price its products and services, and threaten its operating licenses |
| Several of the Company’s subsidiaries are subject to regulatory oversight of varying degrees at both the state and federal levels, which may differ from the regulatory scrutiny faced by the Company’s competitors |
| A significant portion of CBT’s revenue is derived from pricing plans that require regulatory overview and approval |
| Different interpretations by regulatory bodies may result in adjustments to revenue in future periods |
| In recent years, these regulated pricing plans have required CBT to decrease or fix the rates it charges for some services while its competition has typically been able to set rates for its services with limited restriction |
| In the future, regulatory initiatives that would put CBT at a competitive disadvantage or mandate lower rates for its services could result in lower profitability and cash flow for the Company |
| In addition, different regulatory interpretations of existing regulations or guidelines may affect the Company’s revenues in future periods |
| At the federal level, CBT is subject to the Telecommunications Act of 1996, including the rules subsequently adopted by the FCC to implement the 1996 Act, which has impacted Cincinnati Bell Telephone’s in-territory local exchange operations in the form of greater competition |
| At the state level, CBT conducts local exchange operations in portions of Ohio, Kentucky, and Indiana, and, consequently, is subject to regulation by the Public Utilities Commissions in those states |
| Various regulatory decisions or initiatives at the federal or state level may from time to time have a negative impact on Cincinnati Bell Telephone’s ability to compete in territory or upon its out-of-territory subsidiary’s ability to compete in its markets |
| CBW’s FCC licenses to provide wireless services are subject to renewal and revocation |
| Although the FCC has routinely renewed wireless licenses in the past, the Company cannot be assured that challenges will not be brought against those licenses in the future |
| Revocation or non-renewal of CBW’s licenses would result in lower operating results and cash flow for the Company |
| There are currently many regulatory actions under way and being contemplated by federal and state authorities regarding issues that could result in significant changes to the business conditions in the telecommunications industry |
| No assurance can be given that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative, or judicial initiatives relating to the telecommunications industry, will not have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows |
| Failure to anticipate the needs for and introduce new products and services or to compete with new technologies may compromise the Company’s success in the telecommunications industry |
| The Company’s success depends, in part, on being able to anticipate the needs of current and future enterprise, carrier, and residential customers |
| The Company seeks to meet these needs through new product introductions, service quality, and technological superiority |
| The Company has implemented GSM technology for wireless communications and works with vendors to ensure the newest handsets and accessories are available to its customers |
| New products and services are important to the Company’s success as its industry is 12 ______________________________________________________________________ technologically driven, such that new technologies can offer alternatives to the Company’s existing services |
| The development of new technologies could accelerate the Company’s loss of access lines and have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows |
| Terrorist attacks and other acts of violence or war may affect the financial markets and the Company’s business, financial condition, results of operations, and cash flows |
| Terrorist attacks may negatively affect the Company’s operations and financial condition |
| There can be no assurance that there will not be further terrorist attacks against the United States of America, US businesses or armed conflict involving the United States of America |
| Further terrorist attacks or other acts of violence or war may directly impact the Company’s physical facilities or those of its customers and vendors |
| These events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and world financial markets and economy |
| They could result in an economic recession in the United States or abroad |
| Any of these occurrences could have a material adverse impact on the Company’s business, financial condition, results of operations, and cash flows |
| The Company could incur significant costs resulting from complying with, or potential violations of, environmental, health, and human safety laws |
| The Company’s operations are subject to laws and regulations relating to the protection of the environment, health, and human safety, including those governing the management and disposal of, and exposure to, hazardous materials and the cleanup of contamination, and the emission of radio frequency |
| While the Company believes its operations are in substantial compliance with environmental, health, and human safety laws and regulations, as an owner or operator of property, and in connection with the current and historical use of hazardous materials and other operations at our sites, the Company could incur significant costs resulting from complying with or violations of such laws, the imposition of cleanup obligations, and third-party suits |
| For instance, a number of the Company’s sites formerly contained underground storage tanks for the storage of used oil and fuel for back-up generators and vehicles |
| In addition, a few sites currently contain underground tanks for back-up generators, and many of the Company’s sites have aboveground tanks for similar purposes |
| The Company could incur significant costs as a result of a number of putative class action and derivative lawsuits that were filed against the Company |
| A number of putative class action and derivative lawsuits have been filed against the Company and certain of its current and former officers and directors, which allege a number of violations of securities laws |
| The Company is vigorously contesting these matters, but such litigation could result in substantial costs and have a material impact on the Company’s financial condition, results of operations, and cash flows |
| In February 2006, the Company settled one of these cases, its ERISA class action lawsuit, for dlra11 million, to be paid by its insurers (refer to Note 11 to the Consolidated Financial Statements) |
| An adverse decision or settlement in any of the remaining cases could require the Company to pay substantial damages, which would have a material adverse effect on business and operations |
| The Company generates substantially all of its revenue by serving a limited geographic area |
| The Company generates substantially all of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas |
| An economic downturn or natural disaster occurring in this limited operating territory could have a disproportionate effect on the Company’s business, financial condition, results of operations, and cash flows compared to similar companies of a national scope and similar companies operating in different geographic areas |
| Third parties may claim that the Company is infringing their intellectual property, and the Company could suffer significant litigation or licensing expenses or be prevented from selling products |
| Although the Company does not believe that any of its products or services infringes the valid intellectual property rights of third parties, the Company may be unaware of intellectual property rights of others that may cover some of its technology, products or services |
| Any litigation growing out of third party patents or other intellectual property claims could be costly and time-consuming and could divert its management and key 13 ______________________________________________________________________ personnel from the business operations |
| The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks |
| Resolution of claims of intellectual property infringement might also require the Company to enter into costly license agreements |
| Likewise, the Company may not be able to obtain license agreements on acceptable terms |
| The Company also may be subject to significant damages or injunctions against development and sale of certain of its products |
| Further, the Company often relies on licenses of third party intellectual property useful for its businesses |
| The Company cannot ensure that these licenses will be available in the future on favorable terms or at all |
| Third parties may infringe the Company’s intellectual property, and the Company may expend significant resources enforcing its rights or suffer competitive injury |
| The Company’s success depends in significant part on the competitive advantage it gains from its proprietary technology and other valuable intellectual property assets |
| The Company relies on a combination of patents, copyrights, trademarks and trade secrets protections, confidentiality provisions and licensing arrangements to establish and protect its intellectual property rights |
| If the Company fails to successfully enforce its intellectual property rights, its competitive position could suffer, which could harm its operating results |
| The Company’s pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of its patents, copyrights or trademarks |
| Further, the Company may be required to spend significant resources to monitor and police its intellectual property rights |
| The Company may not be able to detect third party infringements and its competitive position may be harmed before the Company does so |
| In addition, competitors may design around the Company’s technology or develop competing technologies |
| Furthermore, some intellectual property rights are licensed to other companies, allowing them to compete with the Company using that intellectual property |
| Uncertainty in the US securities markets and adverse medical cost trends could cause the Company’s pension and postretirement costs to increase |
| The Company’s pension and postretirement costs have increased in recent years, primarily due to a continued increase in medical and prescription drug costs |
| Investment returns of the Company’s pension funds depend largely on trends in the US securities markets and the US economy in general |
| In particular, uncertainty in the US securities markets and US economy could result in investment returns less than those previously assumed and a decline in the value of plan assets used in pension and postretirement calculations, which the Company would be required to recognize over the next several years under generally accepted accounting principles |
| Should the securities markets decline and medical and prescription drug costs continue to increase significantly, the Company would expect to face increasing annual combined net pension and postretirement costs |
| Refer to Note 8 to the Consolidated Financial Statements |
| If the Company fails to extend or renegotiate its collective bargaining agreements with its labor union when they expire, or if its unionized employees were to engage in a strike or other work stoppage, the Company’s business and operating results could be materially harmed |
| The Company is a party to collective bargaining agreements with its labor union, which represent a significant number of its employees |
| Although the Company believes that its relations with its employees are satisfactory, no assurance can be given that the Company will be able to successfully extend or renegotiate its collective bargaining agreements when they expire |
| If the Company fails to extend or renegotiate its collective bargaining agreements, if disputes with its union arise, or if its unionized workers engage in a strike or a work stoppage, the Company could experience a significant disruption of operations or incur higher ongoing labor costs, either of which could have a material adverse effect on the business |