SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
December 29, 1999
(Date of earliest event reported)
CINCINNATI BELL INC.
(Exact name of registrant as specified in its charter)
Ohio 1-8519 31-1056105
(State or other jurisdiction (Commission (I.R.S. Employer
of organization) File Identification Number)
Number)
201 East Fourth Street
Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
(513) 397-9900
(Registrant's telephone number, including area code)
1
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Item 5. Other Events
On November 9, 1999 Cincinnati Bell Inc. consummated its acquisition
of IXC Communications, Inc. ("IXC"). Cincinnati Bell Inc. currently conducts
business and its common stock is traded on the New York Stock Exchange under
the name "Broadwing Inc." In this Form 8-K we refer to Cincinnati Bell Inc.
d/b/a Broadwing Inc. as "Cincinnati Bell," unless the context clearly
indicates otherwise.
Financial Statements and Exhibits
IXC Communications, Inc. and Subsidiaries September 30, 1999
Quarterly Condensed Consolidated Financial Statements and Notes
Thereto (unaudited):
(i) Unaudited IXC Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998
(ii) Unaudited IXC Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1999 and 1998
(iii) Unaudited IXC Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(iv) IXC Notes to Condensed Consolidated Financial Statements
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<CAPTION>
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
As of As of
Assets September 30, 1999 December 31, 1998
------ ------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents.................................................. $ 147,576 $ 264,826
Accounts and other receivables, net of allowance for doubtful accounts of
$43,780 at September 30, 1999 and $16,664 at December 31, 1998........ 86,481 107,558
Current portion of notes receivable........................................ -- 63,748
Note receivable from Westel................................................ -- 9,421
Other current assets....................................................... 17,846 10,965
----------- -----------
Total current assets.............................................. 251,903 456,518
Property and equipment..................................................... 1,733,312 1,193,655
Less: accumulated depreciation............................................ (313,095) (209,979)
----------- -----------
Property and equipment, net....................................... 1,420,217 983,676
Non-current marketable securities.......................................... 372,954 219,880
Investments in unconsolidated subsidiaries................................. 6,071 9,505
Deferred charges and other non-current assets, net......................... 168,386 78,658
----------- -----------
Total assets...................................................... $ 2,219,531 $ 1,748,237
=========== ===========
Liabilities, Redeemable Preferred Stock and Stockholders' Deficit
Current portion of long-term debt and capital lease obligations........... $ 162,332 $ 13,984
Accounts payable trade..................................................... 157,952 33,558
Accrued service cost....................................................... 36,131 43,177
Accrued liabilities........................................................ 124,424 72,307
Current portion of unearned revenue........................................ 52,224 33,640
----------- -----------
Total current liabilities......................................... 533,063 196,666
Long-term debt and capital lease obligations, less current portion......... 813,735 679,016
Unearned revenue -- noncurrent............................................. 557,457 488,395
Other noncurrent liabilities............................................... 55,821 8,848
7 1/4% Junior Convertible Preferred Stock; $.01 par value; 3,000,000 shares
of all classes of Preferred Stock authorized; 1,074,500 shares issued
and outstanding at September 30, 1999 and December 31, 1998
(aggregate liquidation preference of $107,450 at September 30, 1999).. 103,965 103,623
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock authorized; 383,232
and 349,434 shares issued and outstanding at September 30, 1999 and
December 31, 1998 (aggregate liquidation preference of $389,207 at
September 30, 1999 including accrued dividends of $5,898)............. 379,308 344,235
Stockholders' deficit:
6 3/4% Cumulative Convertible Preferred Stock, $.01 par value;
3,000,000 shares of all classes of Preferred Stock authorized;
155,250 shares issued and outstanding at September 30, 1999 and
December 31, 1998 (aggregate liquidation preference of $155,250 at
September 30, 1999)................................................... 2 2
Common Stock, $.01 par value; 300,000,000 shares authorized;
37,580,106 and 36,409,709 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively................ 376 364
Additional paid-in capital................................................. 238,276 253,429
Unrealized gain on marketable securities................................... 89,351 --
Accumulated deficit........................................................ (551,823) (326,341)
----------- -----------
Total stockholders' deficit........................................... (223,818) (72,546)
----------- -----------
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As of As of
Assets September 30, 1999 December 31, 1998
------ ------------------ -----------------
(Unaudited)
Total liabilities, redeemable preferred stock and stockholders' deficit $ 2,219,531 $ 1,748,237
=========== ===========
See accompanying notes.
</TABLE>
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<CAPTION>
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net operating revenue:
Private line service........................... $ 76,073 $ 61,908 $ 220,506 $ 154,480
Long distance switched services............. 77,535 110,741 230,180 330,010
Data and Internet services.................. 5,556 3,631 16,084 5,308
Other....................................... 10,963 8,989 22,607 8,989
--------- --------- --------- ---------
170,127 185,269 489,377 498,787
Operating expenses:
Cost of services.......................... 106,360 109,984 319,453 325,526
Operations and administration............... 66,318 40,094 179,075 99,422
Restructuring charges....................... 6,744 -- 32,570 --
Depreciation and amortization............... 50,651 34,801 126,494 77,589
Merger and other infrequent costs........... 1,078 444 1,223 8,089
--------- --------- --------- ---------
Operating loss:......................... (61,024) (54) (169,438) (11,839)
Interest income.................................. 1,039 2,159 8,702 7,080
Interest expense................................. (10,536) (7,580) (30,645) (22,421)
Equity loss from unconsolidated subsidiaries (3,066) (8,307) (19,048) (30,326)
Other income (expense)........................... (4) 181 (12,729) 357
--------- --------- --------- ---------
Loss before provision for income taxes and
minority interest........................... (73,591) (13,601) (223,158) (57,149)
Benefit (provision) for income taxes............. 4,493 (1,647) (1,818) (8,266)
Minority interest................................ -- (216) (509) (641)
--------- --------- --------- ---------
Loss before extraordinary item................... (66,098) (15,464) (225,485) (66,056)
--------- --------- --------- ---------
Extraordinary gain (loss), net................... -- 163 -- (69,647)
--------- --------- --------- ---------
Net loss......................................... (69,098) (15,301) (225,485) (135,703)
--------- --------- --------- ---------
Dividends applicable to preferred stock.......... (16,729) (15,341) (49,119) (42,548)
--------- --------- --------- ---------
Net loss applicable to common stockholders....... (85,827) (30,642) (274,604) (178,251)
--------- --------- --------- ---------
Other comprehensive income:
Change in unrealized gain on marketable securities
net of tax of ($27,860) and $48,112......... (51,740) -- 89,351 --
--------- --------- --------- ---------
Comprehensive loss............................... $(137,567) $ (30,462) $(185,253) $(178,251)
========= ========== ========= =========
Basic and diluted loss per share:
Before extraordinary item................... $ (2.29) $ (0.86) $ (7.43) $ (3.03)
Extraordinary item.......................... -- 0.01 -- (1.95)
--------- --------- --------- ---------
Net loss......................................... $ (2.29) $ (0.85) $ (7.43) $ (4.98)
========= ========= ========= =========
Weighted average shares outstanding.............. 37,470 36,014 36,942 35,774
========= ========= ========= =========
See accompanying notes.
</TABLE>
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<CAPTION>
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Nine Months
Ended September 30,
----------------------
1999 1998
------ ------
<S> <C> <C>
Net cash provided by operating activities.................................. $ 140,165 $ 127,876
--------- ---------
Investing activities:
Capital Expenditures.................................................. (449,691) (336,609)
Proceeds from collection of notes receivable.......................... 750 2,025
Acquisitions, net of cash acquired and stock issued................... (73,324) (22,699)
Proceeds from sale of property and equipment......................... (264) --
Investments in unconsolidated subsidiaries............................ (6,220) (26,885)
--------- ---------
Net cash used in investing activities...................................... (528,749) (384,168)
--------- ---------
Financing activities:
Proceeds from sale of 9% Senior Notes................................. -- 450,000
Proceeds from sale of 6 3/4% Cumulative Convertible Preferred Stock... -- 147,213
Proceeds from issuance of debt and capital lease obligations.......... 288,907 14,022
Principal payments on debt and capital lease obligations.............. (15,840) (349,361)
Redemption of 10% Junior Series 3 Cumulative Preferred Stock.......... -- (708)
Stock option exercises................................................ 6,731 3,445
Payment of dividends on preferred stock............................... (8,464) (6,544)
Other financing activities............................................ -- (14,438)
--------- ---------
Net cash provided by financing activities 271,334 243,629
--------- ---------
Effect of differing year-ends from merged entities......................... -- (1,502)
--------- ---------
Net decrease in cash and cash equivalents.................................. (117,250) (14,165)
Cash and cash equivalents at beginning of period........................... 264,826 155,855
--------- ---------
Cash and cash equivalents at end of period................................. $ 147,576 $ 141,690
========= =========
Supplemental Disclosure of cash flow information:
Cash paid for:
Interest.......................................................... $ 5,943 $ 23,117
========= =========
Taxes............................................................. $ 1,369 $ 3,092
========= =========
See accompanying notes.
</TABLE>
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial
statements of IXC Communications, Inc. and its subsidiaries ("the Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation for the periods indicated have been included. Operating results
for the three and nine month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. The accompanying unaudited condensed consolidated financial
statements have been restated for 1998 to include the operations of Eclipse
Telecommunications, Inc., formerly Network Long Distance, Inc. ("Eclipse"),
which was acquired on June 3, 1998 in a transaction accounted for as a pooling
of interests. The condensed consolidated balance sheet at December 31, 1998
has been derived from the Company's audited financial statements but does not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. The accompanying
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended
December 31, 1998. Certain amounts shown in the Company's 1998 financial
statements have been reclassified to conform to the 1999 presentation.
2. ACQUISITIONS
On May 10, 1999, the Company acquired Coastal Telecom Limited
Company, and other related companies under common control ("Coastal"). Coastal
is a retail long distance reseller. The acquisition of Coastal was accounted
for as a purchase and was effective as of May 10, 1999. The purchase price
amounted to approximately $110.1 million and was comprised of $73.2 million of
cash, $10.0 million of notes payable, $25.0 million of the Company's common
stock, and warrants to purchase 75,000 shares of the Company's common stock.
Goodwill from this acquisition totaled $103.3 million and is being amortized
over a period of 7 years.
On November 9, 1999 the Company completed a merger with Cincinnati
Bell Inc. ("CBI"), a diversified telecommunications company headquartered in
Cincinnati, Ohio. For further discussion of this matter, see Note 10 of the
condensed consolidated financial statements.
3. MARKETABLE SECURITIES
PSINet Investment
The Company owns approximately 10.2 million shares of common stock
of PSINet, Inc. ("PSINet"). This investment had a fair market value of
approximately $368.0 million as of September 30, 1999. Of the total fair
value, $240.0 million was recorded as unearned revenue because it represented
the sale to PSINet of an agreement for an indefeasible right to use ("IRU")
capacity on the Company's network. The remaining fair value, net of tax, was
reported as unrealized gain on marketable securities because the PSINet
investment is "available-for-sale" as defined in Statement of Financial
Accounting Standards ("SFAS") No. 115. The change in
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the unrealized gain amount, net of tax, is included in other comprehensive
income on the accompanying condensed consolidated statement of operations.
In June and July, 1999, the Company received approximately $111.8
million representing amounts from a financial institution in connection with
two prepaid, forward-sale contracts on 3.0 million shares of PSINet common
stock. This amount is accounted for as notes payable and is secured by 3.0
million shares of PSINet common stock owned by the Company. The forward-sale
obligation for the first 1.5 million shares of PSINet stock may be settled at
a specified date in the second quarter of 2002 for a maximum amount of 1.5
million shares of PSINet stock, or, at the Company's option, the equivalent
value in cash.
The forward-sale obligation for the second 1.5 million shares of
PSINet common stock may be settled at a specified date in the first quarter of
2002 for a maximum of the 1.5 million PSINet shares or, at the Company's
option, the equivalent value of the 1.5 million shares in cash.
DCI Telecommunications
In November 1998 the Company entered into an agreement to acquire
4.25 million shares of common stock of DCI Telecommunications, Inc. ("DCI"),
as consideration for payment of amounts due from one of the Company's
customers that was also a vendor of DCI. The agreement provided that DCI was
to issue additional shares of common stock to the Company if the market value
of the shares the Company owned did not reach $17.7 million by June 1, 1999.
As of June 1, 1999, and subsequent thereto, the market value of the shares the
Company owned was less than the $17.7 million guaranteed in the November 1998
agreement. DCI has publicly disclosed that it does not intend to issue
additional shares to the Company. The Company intends to vigorously pursue the
remedies to which it is entitled under the November 1998 agreement. As of
September 30, 1999, the Company has written down its investment in DCI by
$12.8 million to $5 million as a result of these uncertainties. This writedown
was recorded in the second quarter 1999 in other income/expense in the
condensed consolidated statement of operations contained in the Company's Form
10-Q for such quarter. As of September 30, 1999, the quoted market price
declined from June 30, 1999. The Company considered the decline temporary and
did not further reduce its investment in DCI. The investment in DCI is
included in non-current marketable securities in the accompanying condensed
consolidated balance sheet.
4. INCOME TAXES
The provision or benefit for income taxes recorded during interim
periods is calculated based on an estimated annual effective tax rate. For
1999, the effective tax rate includes the impact of IRU transactions
anticipated to occur during the year. During the third quarter the Company
reduced its profitability assumptions for the year resulting in an income tax
benefit for the quarter. A valuation allowance was applied against the
deferred tax assets arising during 1999 due to uncertainty regarding their
realizability. As of September 30, 1999, the Company has a total valuation
allowance of $213.6 million against deferred tax assets.
8
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES
On July 21, 1999, July 23, 1999 and July 27, 1999, five lawsuits
were filed by the Company's stockholders in the Court of Chancery of the State
of Delaware relating to the Company's merger agreement with CBI. A further
discussion of this and other matters relative to the merger with CBI is
contained in Note 10 and in Part II, Item I of the Form 10-Q.
In conjunction with the merger with CBI, potential areas of concern
have arisen regarding the Company's reporting under various Environmental
Protection Agency ("EPA") regulations. By comparing information with CBI,
potential EPA violations have been identified. The Company is in the process
of inspecting its facilities over the next 60 days. If any violations are
identified, the related penalties will be recorded during the fourth quarter
of 1999. As the inspection process is underway, it is not possible at this
time to estimate the amount of penalties, if any, that may be due.
Twenty-two Equal Employment Opportunity ("EEOC") suits, alleging
sexual and racial discrimination and retaliation, have been filed by employees
located in the Company's Houston, Texas office of its retail operations.
Management was quick to respond to these allegations and is closely monitoring
the discovery process. At this point, it is not possible to determine the
amount, if any, of penalities which may arise from these lawsuits.
The Company is also involved in other legal proceedings arising in
the ordinary course of business, some of which are covered by insurance. In
the opinion of management, none of the claims relating to such proceedings
will have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
6. SEGMENT REPORTING
The Company's financial reporting segments are based on the way the
different types of products the Company offers. The segments consist of the
private line segment, the switched long distance segment, and the
data/Internet segment. The segments are separately evaluated because the
products or services sold are subject to different market forces and sales
strategies. Management reviews the gross profits of each reporting segment,
but views the costs of the network and administrative functions as supporting
all business segments. Therefore, assets (other than accounts receivable),
liabilities, general and administrative expenses, interest expense and income,
and other expenses are not identified to any one segment. Losses from equity
method subsidiaries are not identified to any one segment because those
subsidiaries may have operations in multiple segments. All operating revenue
shown is derived from sales to external customers. Revenue related to the sale
of options in fibers that are jointly owned with other carriers are not
reported in any segment. The summarized segment data is as follows (in
thousands):
9
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<CAPTION>
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Switched Long Data &
Three Months Ended September 30, 1999 Private Line Distance Internet Other Total
------------------------------------- ------------ ------------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Net operating revenue...................... $76,073 $ 77,535 $5,556 $10,963 $170,127
Cost of services........................... 26,772 73,897 5,691 -- 106,360
------- -------- ------ ------- --------
Gross profit............................... 49,301 3,638 (135) 10,963 63,767
Operations and administration.............. 66,318
Restructuring charges...................... 6,744
Depreciation and amortization.............. 50,651
Merger and other infrequent costs.......... 1,078
--------
Operating loss............................. (61,024)
Interest income............................ 1,039
Interest expense........................... (10,536)
Equity loss from unconsolidated
Subsidiaries.......................... (3,066)
Other, net................................. (4)
--------
Loss before provision for income taxes,
minority interest, and extraordinary
item.................................. $(73,591)
=========
Switched Long Data &
Three Months Ended September 30, 1998 Private Line Distance Internet Other Total
------------------------------------- ------------ ------------- -------- ----------- -----
Net operating revenue...................... $61,908 $110,741 $3,631 $ 8,989 $185,269
Cost of services........................... 19,750 86,337 3,897 -- 109,984
------- -------- ------ ------- --------
Gross profit............................... 42,158 24,404 (266) 8,989 75,285
Operations and administration.............. 40,094
Depreciation and amortization.............. 34,801
Merger and other infrequent costs.......... 444
--------
Operating loss............................. (54)
Interest income............................ 2,159
Interest expense........................... (7,580)
Equity loss from unconsolidated
subsidiaries.......................... (8,307)
Other, net................................. 181
--------
Loss before provision for income taxes,
minority interest, and extraordinary
item.................................. $(13,601)
========
</TABLE>
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<CAPTION>
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Switched Long Data &
Nine Months Ended September 30, 1999 Private Line Distance Internet Other Total
------------------------------------- ------------ ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net operating revenue...................... $220,506 $230,180 $16,084 $22,607 $ 489,377
Cost of services........................... 79,005 225,536 14,912 -- 319,453
-------- -------- ------- ------- ---------
Gross profit............................... 141,501 4,644 1,172 22,607 169,924
Operations and administration.............. 179,075
Restructuring charges...................... 32,570
Depreciation and amortization.............. 126,494
Merger and other infrequent costs.......... 1,223
---------
Operating loss............................. (169,438)
Interest income............................ 8,702
Interest expense........................... (30,645)
Equity loss from unconsolidated
subsidiaries.......................... (19,048)
Other, net................................. (12,729)
---------
Loss before provision for income taxes,
minority interest, and extraordinary
item.................................. $(223,158)
=========
Switched Long Data &
Nine Months Ended September 30, 1998 Private Line Distance Internet Other Total
------------------------------------- ------------ ------------- -------- ----------- --------
Net operating revenue...................... $154,480 $330,010 $ 5,308 $ 8,989 $ 498,787
Cost of services........................... 61,387 255,598 8,541 -- 325,526
-------- -------- ------- ------- ---------
Gross profit............................... 93,093 74,412 (3,233) 8,989 173,261
Operations and administration.............. 99,422
Depreciation and amortization.............. 77,589
Merger and other infrequent costs.......... 8,089
---------
Operating loss............................. (11,839)
Interest income............................ 7,080
Interest expense........................... (22,421)
Equity loss from unconsolidated
subsidiaries.......................... (30,326)
Other, net................................. 357
---------
Loss before provision for income taxes,
minority interest, and extraordinary
item.................................. $ (57,149)
=========
</TABLE>
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
At December 31, 1998, the Company was owed $9.4 million by Westel
International ("Westel"), the Company's partner in Progress International LLC
("Progress"). The note was secured by Westel's ownership in Progress, and
repayment was due on May 31, 1999. Westel failed to make scheduled payments on
the note and thereby transferred their share rights to the Company. As a
result of that forfeiture, the Company now owns 65.4% of Progress.
In February 1999 Marca-Tel S.A. de C.V. ("MarcaTel") and its primary
creditor agreed to allow MarcaTel to defer certain payments to the creditor
until June 1999. The creditor was given the right to acquire up to 10% of
MarcaTel and the creditor acquired additional shares which diluted the
Company's indirect interest from 32.1% (after taking into consideration the
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
additional share rights forfeited by Westel) to 30.5%. In June 1999 MarcaTel
did not pay the creditor, and a default was declared on the loan. Management
of MarcaTel and the Company have been meeting with the creditor during the
third quarter to work out the default provisions and an operating plan going
forward. The Company's indirect investment in MarcaTel was written down to
zero in 1998.
In July 1999, the Company entered into an agreement with Unidial
Communications, Inc. to sell its share of Unidial Communications Services, LLC
("Unidial"). In conjunction with this agreement, the Company is relieved from
making any further capital contributions to Unidial. During the second quarter
of 1999, the Company reported losses totaling approximately $10.9 million
related to its investment in Unidial. As of September 30, 1999, the Company's
investment in Unidial was zero.
The Company is currently in discussions with Telenor Carrier
Services as its joint venture partner, regarding the Company's exit from the
joint venture in Europe ("Storm"). As those discussions are continuing, and it
is probable that the Company will not recover any of its investment in the
Storm joint venture, the Company has written its investment in Storm down to
zero. The total loss from unconsolidated subsidiaries related to the Storm
joint venture recorded by the Company during the third quarter of 1999 was
approximately $1.8 million.
8. RESTRUCTURING CHARGE
In the second quarter of 1999, the Company recorded a charge of
approximately $25.8 million to exit certain operations in the switched
wholesale business. The restructuring charge consists of severance and various
other costs associated with workforce reduction, network decommissioning, and
various terminations. The workforce reduction of 94 people included employees
contributing to the network operations. The restructuring activities are
expected to be substantially complete by March 31, 2000. With the merger
agreement reached between CBI and the Company during the third quarter, it was
determined that the merged companies would need the switches that had been
marked for decommissioning in the second quarter's restructuring charge.
Additionally, it was determined that the total period contemplated for lease
payments relating to an abandoned office would not be required. As a result,
the second quarter's restructuring charge was reduced by $1.2 million during
the third quarter related to decommissioning the switches and $0.4 million
related to reduction in the lease pay off requirement.
In the third quarter of 1999, the Company recorded a charge of
approximately $8.3 million relating to the restructuring of the organization
and to exit certain foreign operations. The plan was developed by the new
Chief Executive Officer after reviewing the Company's operations. The
workforce reduction of 15 employees included management, administrative and
foreign sales personnel. The employees were notified of this program during
July and August of 1999. Generally, all of the charges are expected to be paid
by the first quarter of 2000.
Activity in the accrued restructuring liabilities recorded in the
second and third quarters of 1999 are as follows (in thousands):
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<TABLE>
<CAPTION>
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Accrued at
Restructuring Amount Paid or September 30,
Charge Written Down Adjustments 1999
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
SECOND QUARTER :
Severance............................ $ 2,864 $ 1,367 $ -- $ 1,497
Network Decommissioning.............. 3,872 158 1,193 2,521
Asset Write-downs.................... 12,722 658 -- 12,064
Terminate contractual
obligations and exit facilities... 6,368 285 380 5,703
------- -------- ------- -------
Total restructuring costs............ $25,826 $ 2,468 $ 1,573 $21,785
======= ======== ======= =======
THIRD QUARTER:
Severance............................ $ 7,554 $ 2,743 $ -- $ 4,811
Terminate contractual
obligations and exit facilities.... 770 30 -- 740
------- -------- ------- -------
$ 8,324 $ 2,773 $ $ 5,551
======= ======== ======= =======
</TABLE>
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that derivative instruments be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 was
amended by SFAS No. 137 to be effective for all fiscal years beginning after
June 15, 2000. Management has not yet assessed the impact of SFAS No. 133 on
the Company's results of operations, cash flows and financial position.
In June 1999 the FASB issued Interpretation No. 43 on FASB Statement
No. 66. Statement No. 66 deals with accounting for real estate transactions.
Interpretation No. 43 specifies that leases of real property cannot be
considered sales type leases unless title to the property transfers at some
point during the lease term. Under this definition, profit relating to IRU
agreements for fiber optic wires or capacity cannot be recorded when the fiber
or capacity is delivered unless title to the fiber changes hands during the
term of the IRU agreement. None of the Company's IRU agreements include title
transfer. The Company has always recognized the profit from IRU agreements
over the term of the IRU agreement; therefore, no change in accounting will be
required.
10. MERGER WITH CINCINNATI BELL, INC.
On July 20, 1999, the Company entered into a definitive merger
agreement with CBI, a diversified telecommunications company headquartered in
Cincinnati, Ohio. In accordance with the terms of the merger agreement, CBI
purchased approximately 5 million shares of the Company's common stock for $50
per share, in cash, from the General Electric Pension Trust ("GEPT").
In July 1999, five purported stockholder class action suits were
filed in the Delaware Court of Chancery (the "Court") against the Company,
certain former members of the Company's board of directors, CBI and Ivory
Merger Inc. These complaints allege, among other things, that the defendants
had breached their fiduciary duties to the Company's stockholders by
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
failing to maximize stockholder value in connection with entering into the
merger agreement. The complaints seek charges and a court order enjoining
completion of the merger. On August 12, 1999, plaintiffs in the various
actions moved for a preliminary injunction to prevent the completion of the
merger pending a full hearing on the merits. A hearing in connection with that
motion was held on October 20, 1999. In an October 27, 1999 ruling, the Court
denied plaintiffs' request for a pecuniary injunction. However, the Court did
not rule on the merits of the class action suits, and these suits remain
subject to further litigation. The Company believes that the suits are without
merit and intends to vigorously defend against these complaints.
On November 9, 1999 the Company consummated the merger with CBI
whereby the Company's stockholders exchanged each share of common stock for
2.0976 shares of CBI common stock. The merger was recorded under the purchase
method of accounting by CBI. In conjunction with the merger, CBI refinanced
bank loans totaling approximately $371.1 million plus accrued interest and
terminated the Company's existing credit facilities with the banks. CBI also
refinanced other loans totaling $20.2 million plus accrued interest at the
merger date. In connection with the merger, CBI and IXC entered into a $1.8
billion credit facility. This credit facility will be utilized to fund the
combined company. The Company's 7 1/4% Junior Convertible Preferred Stock Due
2007 (the "7 1/4% Preferred Stock") and the 6 3/4% Cumulative Convertible
Stock (the "6 3/4% Preferred Stock") were replaced with similar issues of CBI
preferred stock. Shares of the 12 1/2% Series B Junior Exchangeable Preferred
Stock (the "12 1/2% Preferred Stock") and the $450 million of 9% Senior
Subordinated Notes (the "9% Notes") remain outstanding after the merger.
11. CREDIT FACILITY
In September 1999, the Company completed a $310 million financing
through Bank of America and amended its existing credit facility. The credit
facility was comprised of two secured revolving loans. During the time the
loans were outstanding, they bore interest at the Company's option of the
bank's prime rate or LIBOR. At September 30, 1999 the interest rate was 8.25%
and the Company borrowed $150 million under this credit facility. In September
1999, an amendment was made to the $600 million credit facility which fixed
the maximum amount of borrowings at $200 million. On November 9, 1999, the
date of the consummation of the merger, IXC repaid all outstanding borrowings
under both credit facilities.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
CINCINNATI BELL INC.
by: /s/ Thomas E. Taylor
------------------------------------
Name: Thomas E. Taylor
Title: General Counsel and Secretary
Date: December 29, 1999
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