<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______.
Commission File Number 1-8519
CINCINNATI BELL INC.
Incorporated under the laws of the State of Ohio
201 East Fourth Street, Cincinnati, Ohio 45202
I.R.S. Employer Identification Number 31-1056105
Telephone - Area Code 513 397-9900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
--- ---
At October 31, 1999, 130,158,724 Common Shares were outstanding.
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Local Communications Services .............................. $ 189.1 $ 179.5 $ 556.8 $ 532.9
Directory Services ......................................... 18.9 18.0 55.3 54.8
Wireless Services .......................................... 25.8 -- 61.7 --
Other Communications Services .............................. 32.7 28.4 95.1 79.4
Intersegment ............................................... (4.1) (3.3) (10.7) (8.5)
------- ------- ------- -------
Total Revenues .......................................... 262.4 222.6 758.2 658.6
Costs and Expenses
Cost of providing services and products sold ............... 112.1 91.8 329.0 274.0
Selling, general and administrative ........................ 58.2 51.9 171.4 156.0
Depreciation and amortization .............................. 33.3 28.4 98.2 82.4
Year 2000 programming costs ................................ 0.5 2.5 4.2 7.7
Mandated telecommunications costs .......................... -- 0.9 -- 10.7
------- ------- ------- -------
Total Costs and Expenses ................................. 204.1 175.5 602.8 530.8
Operating Income ............................................. 58.3 47.1 155.4 127.8
Wireless Venture Loss ........................................ -- 7.5 -- 16.2
Minority Interest ............................................ (1.7) -- (5.8) --
Other Expense (Income), Net .................................. (.5) (0.4) (0.5) 1.6
Interest Expense ............................................. 13.9 7.0 31.9 17.8
------- ------- ------- -------
Income From Continuing Operations Before Income Taxes ........ 46.6 33.0 129.8 92.2
Income Taxes ................................................. 16.8 12.0 47.0 32.6
------- ------- ------- -------
Income From Continuing Operations ............................ 29.8 21.0 82.8 59.6
Discontinued Operations, Net of Taxes ........................ -- 27.4 -- 54.1
------- ------- ------- -------
Net Income ................................................... 29.8 48.4 82.8 113.7
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized gain on investments .............................. 11.6 (2.1) 11.6 (2.1)
Foreign currency translation adjustments .................... -- (1.0) -- (2.7)
------- ------- ------- -------
Total other comprehensive income .......................... 11.6 (3.1) 11.6 (4.8)
------- ------- ------- -------
Comprehensive income ......................................... $ 41.4 $ 45.3 $ 94.4 $ 108.9
------- ------- ------- -------
Basic Earnings Per Common Share:
Income from Continuing Operations .......................... .22 .15 .61 .44
Income from Discontinued Operations, Net of Taxes .......... -- .21 -- .40
------- ------- ------- -------
Net Income ................................................. $ .22 $ .36 $ .61 $ .84
Diluted Earnings Per Common Share:
Income from Continuing Operations .......................... .22 .15 .59 .43
Income from Discontinued Operations, Net of Taxes .......... -- .20 -- .39
------- ------- ------- -------
Net Income ................................................. $ .22 $ 35 $ .59 $ .82
Dividends Declared Per Common Share .......................... $ -- $ .10 $ .20 $ .30
Average Common Shares Used for Earnings Per Share Calculations
(millions)
Basic ...................................................... 134.1 136.0 135.8 135.9
Diluted .................................................... 137.7 138.1 139.7 138.3
Retained Earnings
Beginning of Period ........................................ $ 25.8 $ 259.9 $ -- $ 221.9
Net Income ................................................. 29.8 48.4 82.8 113.7
Common Share Dividends Declared ............................ -- (13.7) (27.2) (41.0)
Other ...................................................... -- 1.8 -- 1.8
------- ------- ------- -------
End of Period .............................................. $ 55.6 $ 296.4 $ 55.6 $ 296.4
------- ------- ------- -------
Accumulated Other Comprehensive Income:
Beginning of Period ........................................ $ (6.7) $ (9.8) $ (6.7) $ (8.1)
Unrealized gain on investments ............................. 11.6 (2.1) 11.6 (2.1)
Foreign currency translation adjustments ................... -- (1.0) -- (2.7)
------- ------- ------- -------
End of period .............................................. $ 4.9 $ (12.9) $ 4.9 $ (12.9)
------- ------- ------- -------
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 3.4 $ 10.1
Receivables, less allowances of $18.6 and $12.0.................... 146.2 138.0
Material and supplies.............................................. 20.5 16.9
Deferred income taxes.............................................. 21.1 13.8
Prepaid expenses and other current assets.......................... 21.6 18.6
------------ ------------
Total current assets....................................... 212.8 197.4
Property, plant and equipment - net.................................. 748.5 698.2
Goodwill and other intangibles....................................... 109.0 103.3
Investment in unconsolidated entities................................ 272.7 2.5
Deferred charges and other assets.................................... 89.4 39.6
------------ ------------
Total Assets......................................................... $ 1,432.4 $ 1,041.0
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Debt maturing in one year.......................................... $ 221.8 $ 186.2
Accounts payable and accrued liabilities........................... 131.8 133.5
Accrued taxes...................................................... 41.7 40.6
Advance billing and customers' deposits............................ 28.3 26.8
Other current liabilities.......................................... 14.3 18.2
------------ ------------
Total current liabilities.................................. 437.9 405.3
Long-term debt....................................................... 766.1 366.8
Deferred income taxes................................................ 57.3 15.3
Other postretirement benefits........................................ 45.7 47.5
Other long-term liabilities.......................................... 40.1 64.0
------------ ------------
Total liabilities.......................................... 1,347.1 898.9
------------ ------------
Shareowners' Equity
Preferred shares-no par value; 5,000,000 shares authorized:
no shares issued and outstanding................................ --- ---
Common shares-$.01 par value; 480,000,000 shares authorized;
130,698,076 and 136,381,309 shares issued and outstanding....... 1.4 1.4
Additional paid-in capital......................................... 157.7 147.4
Treasury shares.................................................... (134.3) ---
Retained earnings.................................................. 55.6 ---
Accumulated other comprehensive income (loss)...................... 4.9 (6.7)
------------ ------------
Total shareowners' equity.................................. 85.3 142.1
------------ ------------
Total Liabilities and Shareowners' Equity............................ $ 1,432.4 $ 1,041.0
============ ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 82.8 $ 113.7
Less: income from discontinued operations, net of taxes................................. --- 54.1
-------- --------
Net income from continuing operations................................................... 82.8 59.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 98.2 82.4
Provision for loss on receivables.................................................... 11.6 9.5
Changes in assets and liabilities net of effects from acquisitions and disposals:
Decrease (increase) in receivables................................................... (19.8) (28.9)
Decrease (increase) in other current assets.......................................... (6.7) (7.0)
Increase (decrease) in accounts payable and accrued liabilities...................... (1.7) 67.5
Increase (decrease) in other current liabilities..................................... (1.3) (42.6)
Decrease (increase) in deferred income taxes and unamortized
investment tax credits - net........................................................ (0.9) 12.4
Decrease (increase) in other assets and liabilities-net.............................. (10.2) (16.1)
-------- --------
Net cash provided by operating activities.......................................... 152.0 136.8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant................................................. (99.9) (105.4)
Capital expenditures-other........................................................... (47.9) (13.1)
Acquisitions (including costs of IXC merger)......................................... (24.3) ---
Purchase of treasury shares.......................................................... (134.3) ---
Purchase of available-for-sale equity securities..................................... (2.0) ---
Purchase of common stock of IXC Communications, Inc.................................. (250.0) ---
Other, net........................................................................... --- 0.5
-------- --------
Net cash used in investing activities.............................................. (558.4) (118.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term debt........................................... 35.6 9.5
Repayment of long-term debt.......................................................... (0.7) 0.1
Issuance of new long-term debt....................................................... 400.0 ---
Issuance of common shares............................................................ 5.9 4.9
Dividends paid....................................................................... (41.1) (41.0)
-------- --------
Net cash provided by (used in) financing activities................................ 399.7 (26.5)
-------- ---------
Net cash provided by (used in) discontinued operations............................. --- (.7)
-------- --------
Net increase in cash and cash equivalents............................................... (6.7) (7.7)
Cash and cash equivalents at beginning of period........................................ 10.1 7.8
-------- --------
Cash and cash equivalents at end of period.............................................. $ 3.4 $ .1
======== =========
Cash paid for:
Interest (net of amount capitalized).................................................. $ 16.1 $ 16.9
Income taxes.......................................................................... $ 41.1 $ 41.9
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Cincinnati Bell Inc. and its wholly owned subsidiaries
(the Company). The Company is a diversified telecommunications company
with principal businesses in four industry segments: Local
Communications Services, Directory Services, Wireless Services and
Other Communications Services.
The Local Communications Services segment provides local telephone
service, network access, high-speed data transport, Internet access,
communications equipment, long distance, and other ancillary
telecommunications services through its Cincinnati Bell Telephone
subsidiary. Data networking and Internet-based services are provided
through the Company's new ZoomTown.com subsidiary. Together, these two
subsidiaries function as a fully integrated, wireline communications
provider.
The Directory Services segment is comprised of the operations of the
Company's Cincinnati Bell Directory subsidiary, which publishes Yellow
Pages directories and sells directory advertising and informational
services primarily to business customers in Cincinnati Bell Telephone's
franchise area.
The Wireless Services segment is comprised of the operations of
Cincinnati Bell Wireless LLC (an 80%-owned venture with AT&T Wireless
PCS, Inc.), which provides advanced digital personal communications
services and related communications equipment in Cincinnati and
Dayton, Ohio.
The Other Communications Services segment holds the Company's
Cincinnati Bell Long Distance (CBLD), Cincinnati Bell Supply (CBS),
and EnterpriseWise IT Consulting (EnterpriseWise) subsidiaries. CBLD
resells long distance, Internet access, data services and
communications equipment to small- and medium-sized business customers.
CBS resells telecommunications equipment in the secondary market and
sells new computers. EnterpriseWise provides network integration and
consulting services.
Effective November 15, 1999, the Company notified the New York Stock
Exchange that it would begin doing business as BroadWing Inc. and,
accordingly, requested that its stock ticker symbol be changed from CSN
to BRW, also effective November 15, 1999.
The consolidated financial statements of Cincinnati Bell Inc. 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 necessary for a fair presentation of the results of
operations, financial position and cash flows for each period shown.
All adjustments are of a normal and recurring nature except for those
outlined in Notes 2 and 3. Certain prior year amounts have been
reclassified to conform to the current classifications with no effect
on overall 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, 1998 condensed 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
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K and other filings with the Securities and Exchange
Commission.
(2) SPIN-OFF OF CONVERGYS CORPORATION - On December 31, 1998, the Company
completed a tax-free spin-off by distributing one share of Convergys
common stock for each share of Company common stock owned by Company
shareholders of record on December 1, 1998. Accordingly, the Company
now has no ownership interest in Convergys, and consolidated financial
results for 1998 reflect the disposition of Convergys and its
subsidiaries as "discontinued operations".
5
<PAGE>
(3) ACQUISITIONS - On November 9, 1999, the Company completed its
acquisition of IXC Communications, Inc. (IXC), a leading nationwide
next-generation fiber network carrier providing advanced
telecommunications services. IXC is headquartered in Austin, Texas.
Further discussion of this matter follows in Note 11 of the Notes to
Financial Statements.
As a result of the Company's acquisition of an 80% interest in a PCS
wireless business on December 31, 1998, the Company now includes the
results of its Cincinnati Bell Wireless subsidiary in its operating
results. Of the $173 million purchase price, $162 million was recorded
on December 31, 1998, with an additional $11 million adjustment
recorded in the first quarter of 1999 as a result of the determination
of the final purchase price. The Company has recorded approximately $85
million of goodwill and other intangibles that will be amortized over a
period ranging from 20 to 40 years.
(4) INVESTMENT IN UNCONSOLIDATED ENTITIES - In May 1999, the Company
invested $2.0 million in the convertible preferred stock of Purchase
Pro International, Inc. (Purchase Pro) prior to the initial public
offering (IPO) of its equity securities in June 1999. Effective with
Purchase Pro's IPO, this investment has now been converted to 571,429
shares of publicly traded common stock (NASDAQ ticker symbol PPRO
having a market value of $19.9 million at September 30, 1999.
This investment is classified as an available-for-sale security
under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Accordingly, the Company recorded an
unrealized holding gain of $11.6 million, net of tax, in
comprehensive income and has adjusted the carrying value of this
investment.
As discussed in the Company's Form 10-Q for the quarterly period ended
June 30, 1999, the Company has, as part of its merger with IXC,
acquired approximately five million shares of IXC common stock from
General Electric Pension Trust. The aggregate purchase price of $250
million is currently being carried on the Company's books at cost. The
Company will record the effect of this investment (which constituted
approximately 13% ownership of IXC) by restating its third quarter 1999
earnings to include its pro-rata share of IXC's third quarter 1999 net
loss.
(5) LONG-TERM DEBT - In July 1999, pursuant to a private placement, the
Company sold $400 million of 10-year convertible subordinated
debentures to Oak Hill Capital Partners, L.P. These notes are
convertible into common stock of Cincinnati Bell at a price of $29.89
per common share at the option of the holder. For as long as this debt
is outstanding, these notes bear a coupon rate of 6.75% per annum with
the associated interest expense being added to the debt principal
amount (commonly referred to as "payment in kind", or PIK). Payment in
kind will take place for a five-year period, assuming that Oak Hill
does not exercise conversion rights prior to that time. On November 9,
1999, the Company filed a registration statement for these notes on
Form S-3 with the Securities and Exchange Commission.
The Company had previously guaranteed a revolving credit facility with
a capacity of $310 million on behalf of IXC in anticipation of the
Company's merger with IXC. Of this $310 million capacity, approximately
$150 million had been drawn by IXC on September 30, 1999. The Company
refinanced this amount on November 9, 1999, the merger closing date,
with funds drawn from a new credit facility further described below.
Concurrent with the close of the merger, the Company entered into a
$1.8 billion credit facility consisting of a five-year term loan and
a five-year revolving credit line with equal capacities of $900
million. As of the date of this filing, the Company has used
approximately $700 million of the term loan to refinance its previously
existing debt, as well as IXC's outstanding debt at the merger closing
date (approximately $391 million). To date, the Company has not drawn
from the revolving credit line. Terms and conditions of this new
credit facility are still subject to change during the bank
syndication process. The Company expects this process to conclude on
or near November 29, 1999.
Also concurrent with the close of the merger, the Company assumed
approximately $600 million of IXC's additional debt. This debt, in
combination with the $391 million described above, represents the
approximately $1 billion in net debt of IXC previously disclosed in
connection with announcement of the merger agreement on July 21,
1999.
6
<PAGE>
(6) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information, in millions of dollars, is for the Company's consolidated
wholly owned subsidiary, Cincinnati Bell Telephone Company:
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $189.1 $179.5 $556.8 $532.9
Costs and Expenses:
Costs of providing services and products sold 71.9 74.9 214.5 217.9
Selling, general and administrative 34.1 37.2 103.5 115.3
Depreciation and amortization 28.0 26.9 83.3 78.8
Year 2000 programming costs 0.5 2.5 4.2 7.7
Mandated telecommunications costs --- 0.9 --- 10.7
------ ------ ------ ------
Total Costs and Expenses 134.5 142.4 405.5 430.4
------ ------ ------ ------
Operating Income 54.6 37.1 151.3 102.5
Net Income $32.0 $20.8 $88.1 $57.7
</TABLE>
"Year 2000 programming costs" refers to costs incurred in order to
ready the Company's network, facilities, and internal computer systems
for the advent of the new millennium. "Mandated telecommunications
costs" refers to costs that were necessary to modify CBT's network to
accommodate connections with competing carriers, and allow customers to
maintain their telephone numbers when they switch local service
providers. Year 2000 and mandated telecommunications costs
decreased net income by $2.7 million and $12.1 million for the nine
months ended September 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
September 30, December 31,
MILLIONS OF DOLLARS 1999 1998
------------------- ---------- ----------
<S> <C> <C>
Current Assets..................................... $ 153.2 $ 151.6
Telephone Plant-Net................................ 589.3 580.8
Other Noncurrent Assets............................ 35.9 17.1
---------- ----------
Total Assets....................................... $ 778.4 $ 749.5
========== =========
Current Liabilities................................ $ 154.8 $ 144.2
Noncurrent Liabilities............................. 52.9 38.7
Long-Term Debt..................................... 316.5 317.1
Shareowner's Equity................................ 254.2 249.5
---------- ----------
Total Liabilities and Shareowner's Equity.......... $ 778.4 $ 749.5
========== ===========
</TABLE>
(7) CONTINGENCIES - The Company is from time to time subject to routine
complaints incidental to its business. The Company believes that the
results of any complaints and proceedings will not have a material
adverse effect on the Company's financial condition.
On March 24, 1999, CBT was served with a copy of a complaint filed with
the Public Utilities Commission of Ohio (PUCO) by Time Warner Telecom
of Ohio, L.P. (Time Warner). The complaint seeks a determination that
internet service provider (ISP) traffic is "local traffic" under the
parties' August 1, 1997 interconnection agreement, and that CBT is
required to pay reciprocal compensation to Time Warner for calls placed
by CBT customers to ISPs who obtain local service from Time Warner. On
April 12, 1999, CBT responded by denying the essential allegations
contained in the complaint. A hearing on this matter took place on July
27, 1999. The Company and Time Warner subsequently settled the case
prior to issuance of a PUCO order.
On July 23, 1999, the Company was named as a defendant in a lawsuit
filed against IXC Communications, Inc., the Company's merger partner. A
further discussion of this and other matters follows in Note 11 of the
Notes to Financial Statements, and in Item 1, Part II of this Quarterly
Report on Form 10-Q.
7
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(8) EARNINGS PER SHARE - Basic earnings per share is based upon the average
number of common shares outstanding during the period. Diluted earnings
per share reflect the potential dilution that would occur if common
stock equivalents were exercised. The following table is a
reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations for income from continuing
operations for the following periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dollars and shares in millions (except per share amounts) September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Income from continuing operations $ 29.8 $ 21.0 $ 82.8 $ 59.6
Average common shares outstanding 134.1 136.0 135.8 135.9
------- ------- ------- -------
Basic earnings per share from continuing operations $ .22 $ .15 $ .61 $ .44
------- ------- ------- -------
Diluted earnings per share:
Income from continuing operations $ 29.8 $ 21.0 $ 82.8 $ 59.6
Effect of dilutive securities:
Average common shares, basic earnings per share calculation 134.1 136.0 135.8 135.9
Stock options 2.8 1.5 3.1 1.8
Stock-based compensation arrangements .8 .6 .8 .6
------- ------- ------- -------
Average common shares, fully diluted 137.7 138.1 139.7 138.3
------- ------- ------- -------
Diluted earnings per share from continuing operations $ .22 $ .15 $ .59 $ .43
------- ------- ------- -------
</TABLE>
Stock options representing 212,893 and 432,367 shares were outstanding
during the nine-month period and three-month periods ended September
30, 1999, but were not included in the computation of diluted earnings
per share. This results from the weighted-average per share exercise
price of $22.58 and $22.48 for these options being greater than the
average market price of the Company's common shares for the respective
periods.
As previously discussed, the Company sold $400 million of convertible
subordinated debentures to Oak Hill Capital Partners, L.P. in July
1999. Although these bonds can be converted into common shares, they
have not been included in the calculation of diluted earnings per share
for the quarter. This results from the conversion price of $29.89 per
share being in excess of the average market price of the Company's
common shares for the quarterly period.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS - On January 1, 1999, the Company
adopted AICPA Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires the capitalization of certain expenditures for software
that is purchased or internally developed for use in the business. As
compared to prior years when these types of expenditures were expensed
as incurred, the adoption of SOP 98-1 is estimated to result in the
capitalization of as much as $9 million of internal use software
development costs in 1999. These costs will be amortized over a
three-year period. For the first nine months of 1999, the Company
capitalized $5.8 million of software development costs, resulting in a
$3.8 million increase to net income in comparison to prior period
results.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards requiring that a derivative
instrument be recorded in the balance sheet as either an asset or
liability, measured at its fair value. SFAS 133 has been subsequently
amended through the release of SFAS 137, which provides for a deferral
of the effective date of SFAS 133 to all fiscal years beginning after
June 15, 2000. Management has not yet assessed the impact of SFAS 133
on the Company's results of operations, cash flows and financial
position.
8
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(10) BUSINESS SEGMENT INFORMATION - The Company operates primarily in four
industry segments; Local Communications Services, Directory Services,
Wireless Services, and Other Communications Services. Certain corporate
administrative expenses have been allocated to segments based upon the
nature of the expense. Assets are those assets used in the operations
of the segment. The Company's business segment information is as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Millions of Dollars Ended September 30, Ended September 30,
------------------- ------------------ -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES
Local Communications Services $189.1 $179.5 $556.8 $532.9
Directory Services 18.9 18.0 55.3 54.8
Wireless Services 25.8 --- 61.7 ---
Other Communications Services 32.7 28.4 95.1 79.4
Intersegment (4.1) (3.3) (10.7) (8.5)
-------- -------- -------- --------
$262.4 $222.6 $758.2 $658.6
======== ======== ======== ========
INTERSEGMENT REVENUES
Local Communications Services $1.9 $1.4 $5.2 $3.4
Directory Services 0.7 1.0 1.5 2.3
Wireless Services 0.5 --- 1.0 ---
Other Communications Services 1.0 0.9 3.0 2.8
-------- -------- -------- --------
$4.1 $3.3 $10.7 $8.5
======== ======== ======== ========
OPERATING INCOME (LOSS)
Local Communications Services $54.6 $37.1 $151.3 $102.5
Directory Services 7.0 6.3 20.1 19.0
Wireless Services (7.5) --- (25.4) (0.6)
Other Communications Services 0.8 3.4 3.0 8.9
Corporate and Eliminations 3.4 .3 6.4 (2.0)
-------- -------- -------- --------
$58.3 $47.1 $155.4 $127.8
======== ======== ======== ========
ASSETS
Local Communications Services 778.4 $739.2
Directory Services 23.5 28.9
Wireless Services 247.9 33.1
Other Communications Services 56.7 49.7
Net Assets of Discontinued Operations --- 471.4
Corporate and Eliminations 325.9 69.5
-------- --------
$1,432.4 $1,391.8
======== ========
CAPITAL ADDITIONS
Local Communications Services $30.9 $23.2 $99.9 $105.4
Directory Services --- --- --- ---
Wireless Services 23.4 6.9 42.3 7.7
Other Communications Services 1.1 0.7 5.6 2.6
Corporate --- 2.0 --- 2.5
-------- -------- -------- --------
$55.4 $32.8 $147.8 $118.2
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Local Communications Services $28.0 $26.9 $83.3 $78.9
Directory Services --- --- --- ---
Wireless Services 3.7 --- 10.4 ---
Other Communications Services 1.6 1.2 4.5 2.7
Corporate --- 0.3 --- 0.8
-------- -------- -------- --------
$33.3 $28.4 $98.2 $82.4
======== ======== ======== ========
</TABLE>
Since the close of the last fiscal year on December 31, 1998, the
Company has added a segment known as Wireless Services, and created a
new subsidiary known as EnterpriseWise IT Consulting (whose operating
results are included in the Other Communications Services segment).
Where applicable, prior year amounts have been reclassified to conform
to the current segments. A further discussion of the accounting for
Wireless Services in 1999 and 1998 can be found in the "Management
Discussion and Analysis" section of this Quarterly Report.
9
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(11) MERGER WITH IXC COMMUNICATIONS - On July 20, 1999, the Company entered
into a definitive merger agreement with IXC Communications, Inc.
("IXC"), a leading nationwide next-generation fiber network carrier
providing advanced telecommunications services. IXC's fiber optic
network includes approximately 13,800 route miles of fiber optic
transmission facilities. The merger is a stock-for-stock transaction
that will be accounted for using the purchase method of accounting.
Based on the weighted average closing price of the Company's common
stock on the three days before and after the July 21, 1999 merger
announcement, and the assumption of approximately $1.0 billion in
IXC's net debt, this transaction is valued at approximately $3.0
billion.
Concurrent with the announcement of the merger agreement, Oak Hill
Capital Partners, L.P. purchased $400 million of 10-year convertible
subordinated debentures of Cincinnati Bell on July 21, 1999. Also, in
accordance with the terms of the merger agreement, the Company
completed the purchase of approximately five million shares of IXC
common stock at $50 per share from the General Electric Pension Trust
on August 16, 1999 (see Note 5 and Note 4 of the Notes to Financial
Statements, respectively).
A discussion of certain other matters relevant to the merger,
particularly IXC's indebtedness and the Company's establishment of a
$1.8 billion credit facility, is contained in Note 5 of the Notes to
Financial Statements.
As previously mentioned, the Company successfully completed its merger
with IXC on November 9, 1999. The Company is in the process of
evaluating the fair value of assets and liabilities received in an
effort to establish the amount that will be allocated to goodwill
and other intangibles. As discussed in the Company's Form S-4 as filed
with the Securities and Exchange Commission on September 13, 1999, the
Company's preliminary estimate of goodwill and other intangible assets
resulting from this purchase is approximately $2.5 billion. Of this
amount, the Company anticipates that as much as $300 million could be
allocated to other intangible assets, which would be amortized to
expense over periods ranging from 10 to 20 years. Amounts allocated to
goodwill are expected to be amortized over a 40-year period.
As of the date of this filing, five stockholder class action
suits were filed in the Delaware Court of Chancery against IXC and
certain present and former members of IXC's Board of Directors in
connection with the merger between the Company and IXC. The Company was
named as a defendant in one of these suits. These complaints sought
among other things, that the defendants have breached their fiduciary
duties to IXC's stockholders by failing to maximize stockholder value
in connection with entering into the merger agreement. The complaints
sought, among other things, a court order enjoining completion of the
merger. In an October 27, 1999 ruling, the Court issued an order
denying plaintiff's request for a preliminary injunction against the
merger. However, the Court did not rule on the merits of the suits, and
these suits remain pending. The Company believes that the complaints
are without merit and intends to continue vigorously defending these
actions.
Further details regarding the merger with IXC can be found in various
of the Company's Forms 8-K filed with the Securities and Exchange
Commission since the announcement of the merger agreement on
July 21, 1999.
10
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information included in this Quarterly Report on Form 10-Q contains certain
forward-looking statements that involve potential risks and uncertainties.
The Company's future results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed herein, and those discussed in the
Form 10-K for the year ended December 31, 1998. Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as
of the date thereof.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and segment data. Results for interim periods may not be
indicative of the results for the full year.
CONSOLIDATED OVERVIEW
Third quarter revenues of $262.4 million were 18% improved over the prior
year quarter, representing nearly $40 million in growth. Year-to-date
revenues of $758.2 million were nearly $100 million higher than the
respective prior period, a 15% improvement. While the Company continues to
enjoy growth in its core telephone business, the majority of the revenue
increase is coming from new businesses such as Cincinnati Bell Wireless and
EnterpriseWise IT Consulting which, in the aggregate, contributed more than
70% of the revenue increase during both periods.
The Local Communications Services segment contributed an additional $9.6
million of revenue for the quarter, and $23.9 million year-to-date, owing to
growth in several areas. Revenues from broadband and digital transport
services increased 22%, while revenues from value-added voice services such
as Caller ID and new product bundling solutions such as Complete
Connections-SM- increased 32% over prior year-to-date results. Since its
introduction in March 1999, nearly 80,000 households have signed up for
Complete Connections; representing more than 12% of CBT's residential
customer base and nearly $6 million in additional revenues. Access minutes of
use increased 7% from the third quarter of 1998, while access lines grew 2%
(largely due to business access line growth). The Wireless Services segment
added revenues of $25.8 million for the quarter and $61.7 million
year-to-date on the strength of one of the nation's most successful wireless
service introductions. The Other Communications Services segment produced
$4.3 million in new revenues for the quarter, and $15.7 million year-to-date,
with all businesses in the segment showing growth.
In addition to increasing revenues, the Company's focus on controlling costs
has resulted in improved operating margins. For the three-month and
nine-month period ended September 30, 1999, operating margins were 22.2% and
20.5%, respectively. For the same periods in 1998, operating margins were
21.2% and 19.4%. The current year improvement occurred despite the $25.4
million operating loss of the Wireless Services segment. Excluding this
operating loss, the Company's operating margin was 27.8% for the quarter and
26.0% year-to-date. The improvement in operating margin is largely
attributable to the operations of the Local Communications Services segment.
Costs and expenses were $204.1 million for the quarter and $602.8 million
year-to-date; representing 16% and 14% increases over the respective prior
periods. Although expenses increased $28.6 million for the quarter and $72.0
million year-to-date, aggregate costs and expenses for the operating segments
other than Wireless Services decreased (the expense increase for Wireless
Services was $33.2 million for the quarter and $86.5 million year-to-date).
Despite the introduction of new products and services and the growth of its
ZoomTown.com initiative, the Local Communications Services segment reduced
its core operating expenses by $5 million for the quarter and $10.7 million
year-to-date. Although this segment incurred higher advertising and
depreciation costs, its lower headcount, reduced spending on temporary labor
sources and contract services, and lower computer programming expenses
resulted in a net reduction in expense. As a measure of efficiency, access
lines per telephone employee increased from 344 to 364 during this period; a
6% improvement.
The Company incurred lower costs for Year-2000 programming during the third
quarter of 1999. These costs totaled $0.5 million for the three months ended
September 30, 1999, and $4.2 million year-to-date. Additional details
regarding the Company's Year-2000 readiness appear later in this report.
11
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mandated telecommunications costs were incurred by CBT in 1998 to modify its
network to accommodate connections with competing carriers and allow
customers to maintain their telephone numbers when they switch local service
providers. For the nine-month period ended September 30, 1998, CBT incurred
costs of $10.6 million. The program was completed during 1998. On February 1,
1999, CBT began to recover costs associated with this initiative through a
surcharge imposed on end-user customers.
Operating income was $58.3 million for the quarter, up 24% from $47.1 million
in the third quarter of 1998. For the nine-month period, operating income was
$155.4 million; a 22% increase over the same period in the prior year.
Excluding the operating loss of the wireless business, operating income
increased 39% for the quarter and 41% year-to-date.
For the quarter, interest and other expenses increased $6.8 million, or 103%,
due to higher average debt levels associated with the acquisition of the
wireless business and the issuance of $400 million in convertible
subordinated debentures to Oak Hill Capital Partners, L.P. in July 1999. For
the nine-month period, interest and other expenses increased $12.0 million,
or 62%.
Income taxes increased $4.8 million over the prior-year quarter, or 40%, as a
function of higher pre-tax income. Year-to-date income tax expense increased
$14.4 million, or 44%, versus the same period in 1998.
Income from continuing operations was $29.8 million, or $.22 per common share
for the quarter; $82.8 million, or $.59 per common share year-to-date.
Earnings per share from continuing operations increased 47% from the quarter
and 37% year-to-date. Excluding the $18.8 million year-to-date net loss for
the wireless business, income from continuing operations was $101.6 million,
or $.73 per common share.
12
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOCAL COMMUNICATIONS SERVICES
- -----------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
($ Millions) 1999 1998 Change % 1999 1998 Change %
------ ------ ------ --- ------ ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Local service $108.5 $102.3 $ 6.2 6 $317.3 $303.8 $13.5 4
Network access 46.2 44.5 1.7 4 138.8 134.8 4.0 3
Other services 34.4 32.7 1.7 5 100.7 94.3 6.4 7
------ ------ ------ ------ ------ ------
Total Revenues 189.1 179.5 9.6 5 556.8 532.9 23.9 4
Costs and expenses:
Costs of providing services 71.9 74.9 (3.0) (4) 214.5 217.9 (3.4) (2)
Selling, general and administrative 34.1 37.2 (3.1) (8) 103.5 115.3 (11.8) (10)
Depreciation and amortization 28.0 26.9 1.1 4 83.3 78.8 4.5 6
Year 2000 programming costs 0.5 2.5 (2.0) (80) 4.2 7.7 (3.5) (45)
Mandated telecommunications costs --- 0.9 (0.9) --- --- 10.7 (10.7) ---
------ ------ ------ ------ ------ ------
Total Costs and Expenses 134.5 142.4 (7.9) (6) 405.5 430.4 (24.9) (6)
Operating income $54.6 $37.1 $17.5 47 $151.3 $102.5 $48.8 48
Operating margin 28.9% 20.7% 27.2% 19.2%
Access lines (In thousands) 1,056 1,031 25 2
Minutes of use (In millions) 1,155 1,078 77 7 3,407 3,167 240 8
</TABLE>
The Local Communications Services segment provides local telephone service,
network access, high-speed data transport, Internet access, communications
equipment, long distance, and other ancillary telecommunications services
through its Cincinnati Bell Telephone subsidiary. Data networking and
Internet-based services are provided through the Company's new ZoomTown.com
subsidiary. Together, these two subsidiaries function as a fully integrated,
wireline communications provider.
For the quarter, segment revenues of $189.1 million were 5% higher than in
the prior year quarter. Year-to-date revenues increased 4% from $532.9
million to $556.8 million.
The local service category provided most of the revenue growth for the
segment. Local service revenues increased 6% for the quarter, growing from
$102.3 million to $108.5 million. Year-to-date revenues increased nearly $14
million to $317.3 million; a 4% increase. Growth is coming primarily from
increased usage of the Company's suite of custom calling services, new
product bundling offers, and data transport, which in the aggregate
contributed more than 80% (or $11 million year-to-date) of the increase for
the category. Access line growth was responsible for the remainder of the
increase, with a 2% increase in access lines contributing approximately $1
million in new revenue for the quarter and $3 million year-to-date.
Network access revenues for the quarter increased 4% to $46.2 million.
Year-to-date results were 3% higher than in the prior year, increasing from
$134.8 million to $138.8 million. Growth in this category is coming primarily
from high-capacity digital services and the recovery of mandated
telecommunications costs from end-users (beginning in February 1999).
Although access minutes of use increased 7% for the quarter and 8%
year-to-date, switched access revenues actually decreased due to the lower
rates contained in pricing plans approved by the Federal Communications
Commission and state regulatory commissions.
13
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other services revenue increased 5% for the quarter and 7% year-to-date,
growing to $34.4 million and $100.7 million, respectively. Revenues from the
Company's FUSE-SM- Internet access service increased nearly $1 million for the
quarter and $2 million year-to-date, representing 57% growth for this service
over the prior periods. Additional increases in the category are primarily
attributable to higher rent and collocation revenues. Slightly higher inside
wire installation and maintenance contract revenue is being more than offset by
lower local toll revenue as customers migrate to extended area service plans.
For the quarter, the provision for loss on receivables is slightly less than
in the prior year, but is nearly $1 million higher than the prior year on a
year-to-date basis.
Total operating expenses of $134.5 million for the quarter were $7.9 million
less than the same period last year, representing a 6% decrease. For the
nine-month period, operating expenses also decreased 6% ($24.9 million) from
$430.4 million to $405.5 million.
Costs of providing services decreased $3.0 million for the quarter and $3.4
million year-to-date. This is primarily due to lower expenditures for payroll
and temporary labor sources resulting from CBT's continuing efforts at
increasing productivity. These efforts have resulted in a 6% increase in
access lines per employee since the beginning of 1999.
Selling, general and administrative expenses decreased by $3.1 million for
the current quarter, with an $11.8 million decrease in this category
year-to-date. Advertising expense increased approximately $1 million for the
quarter, and $3 million year-to-date, in support of new calling services and
the Company's ZoomTown.com Internet presence. Consulting and contract
services were approximately $1 million and $5 million lower for the quarter
and nine months, respectively, as CBT seeks to increase productivity and control
costs through lower usage of external labor sources. Computer programming
expenses and right-to-use fees decreased by approximately $4 million for the
quarter and $12 million year-to-date. This is due to a reduction in projects
initiated, and the capitalization of approximately $6 million in internal use
software as required by AICPA Statement of Position 98-1, nearly $3 million of
which was incurred in the third quarter (similar costs were expensed in the
prior year; see Note 9 of Notes to Financial Statements). Depreciation expense
increased $1.1 million for the quarter and $4.5 million year-to-date as a
function of higher telephone plant balances.
Year-2000 programming expenses were lower than in the prior year,
reflecting the progress previously made on critical systems. Current quarter
expenditures of $0.5 million were $2.0 million less than in the prior year,
with a similar reduction in year-to-date spending ($4.2 million versus $7.7
million in prior year). Mandated telecommunications costs decreased by $0.9
million for the quarter and $10.7 million for the nine-month period,
reflecting the completion of the local number portability initiative and
initial interconnection expenses in 1998.
For the quarter, operating income improved by $17.5 million, or 47%, over the
same period in the prior year. Similarly, year-to-date operating income
increased $48.8 million, or 48%, over the first nine months of 1998. This led
to substantial gains in operating margin percentage for the quarter and for
the year, improving approximately eight percentage points over the same
periods in the prior year.
14
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DIRECTORY SERVICES
- ------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
($ Millions) 1999 1998 Change % 1999 1998 Change %
------ ------ ------ --- ------ ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $18.9 $18.0 $0.9 5 $55.3 $54.8 $0.5 1
Costs and Expenses:
Costs of providing services 7.0 6.7 0.3 4 20.5 21.0 (0.5) (2)
Selling, general and administrative 4.9 5.0 (0.1) (2) 14.7 14.8 (0.1) (1)
----- ----- ----- ----- ----- -----
Total Costs and Expenses 11.9 11.7 0.2 2 35.2 35.8 (0.6) (2)
----- ----- ----- ----- ----- -----
Operating income $7.0 $6.3 $0.7 11 $20.1 $19.0 $1.1 6
Operating margin 37.0% 35.0% 36.3% 34.7%
</TABLE>
The Directory Services segment is comprised of the operations of the
Company's Cincinnati Bell Directory subsidiary, which publishes Yellow Pages
directories and sells directory advertising and informational services in
Cincinnati Bell Telephone's franchise area. These services are available to
the customer via the traditional printed directory, an Internet-based service
known as "Cincinnati Exchange," or on CD-Rom.
The majority of the revenues for this segment come from Yellow Pages
publishing, and it is the Company's practice to recognize revenues, and
associated direct expenses, over the lifespan of the respective publications
(generally twelve months). Primary expenses of this segment are sales
commissions paid to sales agents and printing costs associated with its
directory publications.
Third quarter revenues of $18.9 million exceeded results of the prior year
quarter by nearly $1 million, as the positive outcome of the 1999 sales
campaign began to materialize. The strong third quarter performance helped to
reverse lower revenues during the early part of the year that were
attributable to a more difficult sales climate in 1998. In the current
quarter, local advertising revenues are beginning to improve, as are
contributions from the "Cincinnati Exchange" service, but these are being
somewhat offset by lower national advertising revenues due to business
consolidations. Year-to-date revenues of $55.3 million exceeded results in
the prior year period by $0.5 million, with the largest increase coming from
the national advertising category.
Costs and expenses were virtually unchanged for the quarter, increasing $0.2
million to $11.9 million. The 2% increase during the third quarter is
attributable to the sales commissions that are a function of advertising
revenue (however, the Company benefited in the earlier part of the year from
the lower sales commissions that prevailed with the prior sales campaign).
Printing costs were equivalent during the comparative three-month periods,
with a slight increase in this expense category for the nine-month period.
Selling, general and administrative expenses were virtually unchanged versus
the prior year. On a year-to-date basis, costs and expenses trended lower by
2%, or $0.6 million.
Operating income and operating margin increased during both periods.
Operating income increased by $0.7 million for the quarter and $1.1 million
year-to-date, representing an 11% and 6% improvement, respectively. Operating
margin increased from 35% to 37% in the third quarter, representing a 6%
improvement.
15
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WIRELESS SERVICES
- -----------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended June 30,
-------------------------------- ------------------------------
($ Millions, except ARPU) 1999 1998 Change % 1999 1998 Change %
---- ---- ------ --- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Service $23.0 $ --- $23.0 --- $ 53.2 $ --- $53.2 ---
Equipment 2.8 --- 2.8 --- 8.5 --- 8.5 ---
------- ------- ------- ------- -------
Total Revenues 25.8 --- 25.8 --- 61.7 --- 61.7 ---
Costs and Expenses:
Costs of providing services 15.1 --- 15.1 --- 41.1 --- 41.1 ---
Selling, general and administrative 14.5 0.1 14.4 --- 35.6 0.6 35.0 ---
Depreciation and amortization 3.7 --- 3.7 --- 10.4 --- 10.4 ---
------- ------- ------- ------- ------- -------
Total Costs and Expenses 33.3 0.1 33.2 --- 87.1 0.6 86.5 ---
------- ------- ------- ------- ------- -------
Operating income (loss) $(7.5) $(0.1) $(7.4) --- $ (25.4) $(0.6) $(24.8) ---
Operating margin (29.1)% --- (41.2)% ---
Number of subscribers 112,471 112,471
Average revenue per unit (ARPU) $78 $72
Customer churn 1.51% 1.43%
</TABLE>
The Wireless Services segment is comprised of the operations of Cincinnati
Bell Wireless LLC (an 80%-owned venture with AT&T Wireless PCS, Inc.) which
provides advanced digital personal communications services and related
communications equipment in Cincinnati and Dayton, Ohio.
The Company acquired an 80% ownership interest in this business on December
31, 1998. Accordingly, current year results for the wireless business are now
reflected in the operating results of the Company. This differs from the
accounting treatment given this investment in the prior year, where the
results attributable the Company's minority interest (then 20%) were
reflected in the Consolidated Statements of Income and Retained Earnings
under the caption "Wireless Venture Loss". As a result, current and prior
year amounts are not comparable.
Revenues for the quarter were $25.8 million, a 25% increase over the $20.7
million reported for the second quarter of 1999. Service revenues accounted
for $23.0 million of the total, with the remaining $2.8 million coming from
the sale of handsets and related equipment. Service revenues are growing on
the basis of increasing subscribership, higher average revenue per unit
(ARPU), and relatively low customer churn. Current quarter equipment revenues
are a function of subscribership and have remained steady across all quarters
this year.
For the quarter, expenses of $33.3 million were 14% higher than in the prior
quarter. Costs of providing services were $15.1 million for the quarter, the
majority of which is attributable to incollect expense (incollect expense is
incurred when subscribers use their handset while outside the Company's
service area). The Company's cost per gross activation is decreasing with
each successive quarter. Selling, general and administrative expenses were
$14.5 million for the quarter and include such costs as sales commissions,
advertising, customer support, and equipment subsidies (handsets are
typically sold at a negative margin and the Company expects this trend to
continue in the near term). Depreciation and amortization increased $3.7
million for the quarter and $10.4 million year-to-date, as the Company
continues its build-out of its digital network and other facilities, and
amortize the goodwill resulting from its acquisition of this business from
AT&T PCS.
The third quarter operating loss was $7.5 million and increased the operating
loss for the year to $25.4 million. The net loss (which includes interest and
income tax expense, offset by minority interest income) of $6.0 million for
the quarter and $18.8 million year-to-date, is dilutive to the Company's
earnings in the amount of $.04 and $.13 per common share, respectively.
16
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER COMMUNICATIONS SERVICES
- -----------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
($ Millions) 1999 1998 Change % 1999 1998 Change %
------ ------ ------ --- ------ ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $32.7 $28.4 $4.3 15 $95.1 $79.4 $15.7 20
Costs and Expenses:
Costs of providing services 21.5 18.3 3.2 17 62.4 50.6 11.8 23
Selling, general and administrative 8.7 5.5 3.2 58 25.2 17.2 8.0 47
Depreciation and amortization 1.6 1.2 0.4 33 4.5 2.7 1.8 67
----- ----- ----- ----- ----- -----
Total Costs and Expenses 31.8 25.0 6.8 27 92.1 70.5 21.6 31
----- ----- ----- ----- ----- -----
Operating income $0.9 $3.4 $(2.5) (74) $3.0 $8.9 $(5.9) (66)
Operating margin 2.8% 12.0% 3.2% 11.2%
</TABLE>
The Other Communications Services segment holds the Company's Cincinnati Bell
Long Distance (CBLD), Cincinnati Bell Supply (CBS), and EnterpriseWise IT
Consulting (EnterpriseWise) subsidiaries. CBLD resells long distance,
Internet access, data services and communications equipment to small- and
medium-sized business customers. CBS resells telecommunications equipment in
the secondary market and sells new computers. EnterpriseWise provides network
integration and consulting services.
For the quarter, revenues increased to $32.7 million, or 15% higher than for
the same period in the prior year. Year-to-date revenues increased to $95.1
million; a 20% gain. Revenue from the long distance operations was unchanged
in comparison to the prior year quarter, but was $2 million higher on a
year-to-date basis, as an increase in billed minutes and revenues from the
introduction of the new services was offset by lower rates necessitated by
increasing competition. CBS benefited from new services and sales contracts,
contributing an additional $.8 million for the quarter and $5.0 million
year-to-date. EnterpriseWise provided additional revenue of $3.5 million for
the quarter and $8.7 million year-to-date through its original sales channels
and its acquisition of KSM Consulting (subsequently renamed to
"EnterpriseWise") in October 1998.
Operating expenses increased $6.8 million for the quarter and $21.6 million
year-to-date; 27% and 31% increases, respectively. Costs of providing
services were approximately $3 million higher for the quarter and $12 million
for the nine-month period, with all subsidiaries experiencing increases due
to higher sales volumes. Selling, general and administrative costs (SG&A)
were approximately $3 million higher for the quarter and $8 million
year-to-date. The increase in SG&A expenses can be largely attributed to
entry into new lines of business. CBLD experienced a $1.9 million increase in
SG&A for the quarter and $4.4 million year-to-date in support of its
introduction of data transport, high-speed Internet, and local exchange
services. An additional $1.1 million for the quarter and $2.8 million
year-to-date in SG&A expense is attributable to EnterpriseWise; a business
that reported no SG&A costs for the first nine months of 1998 due to its
acquisition by the Company late in 1998. CBS incurred higher expenses to
establish a new call center in support of a sales agency arrangement they
have with a large equipment vendor.
Operating income of $0.9 million for the quarter and $3.0 million
year-to-date was $2.5 million and $5.9 million less than in the respective
prior periods, representing a 74% decrease for the quarter and 66% decline
year-to-date. Operating margin suffered a substantial decline versus both
prior periods and is the result of increasing pressure on per-minute long
distance rates, and the operating loss of EnterpriseWise.
17
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME STATEMENT ITEMS
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
($ Millions) 1999 1998 Change % 1999 1998 Change %
------ ------ ------ --- ------ ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wireless Venture Loss $ --- $ 7.5 $(7.5) --- $ --- $16.2 $(16.2) ---
Minority Interest $(1.7) $ --- $(1.7) --- $(5.8) $ --- $ (5.8) ---
Other Expense (Income), Net $(0.5) $(0.4) $(0.1) (25) $(0.5) $ 1.6 $ (2.1) (131)
Interest Expense $13.9 $ 7.0 $ 6.9 99 $31.9 $17.8 $ 14.1 79
Income Taxes $16.8 $12.0 $ 4.8 40 $47.0 $32.6 $ 14.4 44
</TABLE>
WIRELESS VENTURE LOSS AND MINORITY INTEREST - In 1998, the Company agreed to
fund losses during the period of time that the wireless business was operated
by AT&T PCS. Accordingly, a $16.2 million loss was recorded and shown in the
Consolidated Statements of Income and Retained Earnings under the caption
"Wireless Venture Loss" ($7.5 million of which was reflected in the third
quarter of 1998). With the Company's acquisition of an 80% ownership interest
in this business on December 31, 1998, current year results for the wireless
business are now reflected in the operating results of the Company. In 1999,
the Company has recorded $5.8 million in minority interest income in order to
recognize AT&T PCS' 20% ownership interest in the operating loss of the
wireless business; $1.7 million of which was reflected in the third quarter.
Due to the distinction between these two accounting methods, comparisons to
prior year do not yield meaningful results.
INTEREST AND OTHER EXPENSE - Interest and other expense increased $6.8
million, or 103%, and $12.0 million year-to-date, or 62%. These increases are
attributable to higher average debt levels associated with the acquisition of
the wireless business and the issuance of $400 million in convertible
subordinated debentures to Oak Hill Capital Partners, L.P. in July 1999.
INCOME TAXES - Income taxes of $16.8 million for the quarter increased by
$4.8 million over the same period in 1998, representing an 40% increase. For
the nine-month period, income taxes of $47.0 million are $14.4 million higher
than in the prior year; a 44% increase. The approximate effective composite
tax rate for the current year is 36%, as compared to 35% in the prior year.
18
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Although the Company's cash flow from operations is generally sufficient to
provide for investing activities, the merger with IXC Communications, Inc.
(IXC) will significantly alter the Company's capital structure and capital
requirements (and has to a certain degree already). Concurrent with its July
21, 1999 announcement of the merger with IXC, the Company sold $400 million
of 10-year convertible subordinated debentures to Oak Hill Capital Partners,
L.P. (Oak Hill). These notes are convertible into common stock of Cincinnati
Bell at a price of $29.89 per common share at the option of the holder. For
as long as this debt is outstanding, these notes bear a coupon rate of 6.75%
per annum with the associated interest expense being added to the debt
principal amount (commonly referred to as "payment in kind", or PIK). Payment
in kind will take place for a five-year period, assuming that Oak Hill does
not exercise conversion rights prior to that time. Assuming conversion, these
notes would not require a future cash payment.
Of the $400 million in debt issue proceeds received in July 1999, the Company
has used $250 million to purchase approximately five million shares of IXC
common stock held by General Electric Pension Trust. The remainder of the
proceeds has been used for working capital requirements and a stock
repurchase plan for the purchase of the Company's common stock. As of the
date of this filing, the stock repurchase plan has required approximately
$145 million of the $200 million authorized for this program.
Effective with the closing of the merger with IXC, the Company assumed
approximately $1 billion in net debt of IXC (further discussed in Note 5 of
the Notes to Financial Statements). Furthermore, the considerable capital
investment required to complete IXC's fiber-optic network, combined with
IXC's operating losses and the Company's own investment in new and existing
businesses, will significantly increase the amount of cash needed by the
Company in Year 2000 and beyond. Accordingly, the Company has obtained a $1.8
billion credit facility that is being used to refinance currently existing
IXC debt, fund capital expenditures, and provide working capital to the newly
combined company. This consists of a five-year term loan and a five-year
revolving credit line with equal capacities of $900 million. As of the date
of this filing, the Company has used approximately $700 million of the term
loan to refinance its previously existing debt, as well as IXC's outstanding
debt. To date, the Company has not drawn from the revolving credit line
(further discussion of this credit facility is contained in Note 5 of the
Notes to Financial Statements).
CASH FLOW
Income from continuing operations, adjusted for non-cash expenses, was $193
million for the first nine months of 1999 compared to $152 million in 1998; a
$41 million increase. Receivables grew at a smaller rate in 1999 than in
1998, contributing an additional $9 million versus the prior year. Accounts
payable and accrued liabilities, and other current liabilities, decreased
approximately $27 million versus the prior year, largely due to the
liquidation of prior year liabilities for the wireless venture. An increase
in other assets and liabilities in 1999 served to reduce cash flows by $8
million. As a result of the above, cash provided by operating activities
equaled $152 million; $15 million more than the $137 million during the same
period in 1998.
The Company has engaged in many significant investment activities during the
first nine months of 1999, several of which are related to its merger with
IXC, and are further described above and in the Notes to Financial
Statements. Through the first nine months of 1999, capital expenditures
(excluding acquisitions) were approximately $148 million; a $29 million
increase versus the prior year (the estimate of 1999 capital expenditures,
including capitalization of software as required by AICPA Statement of
Position 98-1, is $210 million). This increase in capital expenditures is the
result of investment in the infrastructure of the Company's wireless business.
In the current year, acquisitions totaled $24 million due to the additional
investment in the wireless business, the incurrence of merger-related costs,
and the purchase of a long distance reseller. The Company has expended
approximately $134 million to acquire its own common shares, and $250 million
to purchase approximately five million shares of IXC's common stock as part
of the Company's merger with IXC. Additionally, $2 million was invested in
the equity securities of an unaffiliated e-commerce vendor.
In order to fund the items noted above, the Company incurred an additional
$36 million in short-term debt in 1999. Additionally, the Company sold $400
million in convertible subordinated debentures to Oak Hill Partners, L.P. in
July 1999 (see Note 5 of Notes to Financial Statements). Dividends paid to
shareholders reduced cash equally ($41 million) in both periods. Concurrent
with its announcement of the merger with IXC, the Company discontinued its
dividend
19
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
payment effective after the second quarter 1999 payment in August 1999. At
current levels, this will provide approximately $14 million per quarter in
reduced cash requirements.
BALANCE SHEET
The $7 million decrease in cash and cash equivalents is the net result of the
items discussed above. Although the Company increased its provision for
doubtful accounts, net receivables increased $8 million as a function of
higher revenues (receivables as a percent of sales actually decreased in the
quarter). Inventory levels increased by $4 million due to the inventory
requirements of the Company's wireless business. Goodwill and other
intangibles increased $6 million as a result of the acquisition of a
long-distance reseller and the adjustment to the purchase price for the
wireless business (described in Note 3 of the Notes to Financial Statements).
The $50 million increase in net property, plant and equipment is a function
of current year capital expenditures, less depreciation. The $36 million
increase in short-term debt and the approximately $400 million increase to
long-term debt are discussed in more detail above. The $57 million decrease
to shareowners' equity is the net result of the buyback of the Company's
common shares more than offsetting year-to-date net income, stock option
exercises, and an unrealized gain on investments.
CAPITALIZATION
As of the date of this filing, the Company maintains the following debt and
corporate credit ratings:
<TABLE>
<CAPTION>
Duff & Phelps
Standard and Credit Rating Moody's Investor
Entity Description Poor's Service Service
- ------ ----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
CBI Senior Unsecured Debt A A A3
CBI Corporate Credit Rating A --- A3
CBI Commercial Paper A-1 D-1 P-2
CBT Senior Unsecured Debt AA- AA- A-2
</TABLE>
Each of the aforementioned ratings services has placed the Company's ratings
under review for possible downgrade as a result of the Company's merger with
IXC. As of the date of this filing, the Company is not aware of any changes
to these ratings but expects to be informed of these changes in the course of
the next several weeks.
REGULATORY MATTERS AND COMPETITIVE TRENDS
FEDERAL - In February 1996, Congress enacted the Telecommunications Act of
1996 (the 1996 Act), the primary purpose of which was to introduce greater
competition into the market for telecommunications services. The 1996 Act
seeks to facilitate competition by eliminating many of the legal and
regulatory barriers that, until then, had operated to restrict competitive
entry in the areas of local exchange telephone service, long distance
telephone service, and cable television service. Since February 1996, the
Federal Communications Commission (FCC) has initiated numerous rulemaking
proceedings to adopt regulations pursuant to the 1996 Act. Some of these
regulations have already taken effect; others are currently being challenged
before various United States Circuit Courts of Appeal. The 1996 Act and the
FCC's rulemaking proceedings can be expected to impact CBT's in-territory
local exchange operations in the form of greater competition. However, these
statutes and regulations also create opportunities for the Company to expand
the scope of its operations, both geographically and in terms of products and
services offered.
OHIO - In March 1998, CBT and several intervening parties reached agreement
on the terms of a proposed settlement of most of the outstanding issues
associated with CBT's application for approval of an alternative regulation
plan known as CBT's "Commitment 2000" plan. The proposed settlement was
subsequently approved by the Public Utilities Commission of Ohio (PUCO) on
April 9, 1998. The terms of the Commitment 2000 plan approved by the PUCO
include: (1) the elimination of rate-of-return regulation and greater pricing
flexibility for most services; (2) no increase in basic residential access
line rates for the term of the plan; (3) greater pricing flexibility for
business services; and (4) a 30% reduction in basic rates for qualified,
low-income residential consumers. The plan has an initial term of three and
one-half years, which can be extended up to two additional years at CBT's
discretion so long as certain service quality benchmarks are maintained. The
portion of CBT's alternative regulation case dealing with the rates CBT can
charge to competitive local exchange carriers for unbundled network elements
is still pending. The hearing on this portion of the case was conducted in
March and April 1999. On November 4, 1999, the PUCO issued its Supplemental
Opinion and
20
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Order, specifying certain parameters and methods CBT must use to set its
rates for unbundled network elements and requiring compliant cost studies
within three months. We have not yet been able to assess the full impact of
this decision on CBT's rates, but believe that most rates will be below the
levels CBT had requested, particularly with respect to local loops. CBT is
considering whether to seek rehearing or an appeal of the decision.
KENTUCKY - On June 29, 1998, CBT filed an application with the Public Service
Commission of Kentucky (PSCK) seeking approval of an alternative regulation
plan similar to the Commitment 2000 plan approved by the PUCO in Ohio. On
January 25, 1999, the PSCK issued an order approving the Kentucky alternative
regulation plan with certain modifications. One of the modifications was the
adoption of an earnings-sharing provision whereby customers would receive
one-half of earnings on equity in excess of 13.5%. The PSCK also ordered that
residential rates be frozen for three years and required rate reductions of
approximately $3 million per year versus current rates. On February 12, 1999,
CBT filed a petition seeking rehearing of the PSCK's January 25, 1999 order.
On July 26, 1999, the PSCK issued an order that eliminated the automatic
earnings-sharing provision and revised the required rate reductions to $2.3
million per year, instead of the $3 million per year previously ordered.
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other
industries with the communications industry are causes for increasing
competition throughout the communications industry. The range of
communications services, the equipment available to provide and access such
services, and the number of competitors offering such services, continue to
increase. These initiatives and developments could make it difficult for the
Company to maintain current revenue and profit levels.
CBT's current and potential competitors include other incumbent local
exchange carriers, wireless services providers, interexchange carriers,
competitive local exchange carriers and others. To date, CBT has signed
various interconnection agreements with competitors and approximately 7,200
net access lines have been transferred to competitors.
The Company's other subsidiaries face intense competition in their markets,
principally from larger companies. These subsidiaries primarily seek to
differentiate themselves by leveraging the strength and recognition of the
Company brand equity, by providing customers with superior service and by
focusing on niche markets and opportunities to develop and market customized
packages of services.
CBD's competitors are directory services companies, newspapers and other
media advertising services providers in the Cincinnati metropolitan market
area. CBD now competes with its former sales representative for Yellow Pages
directory customers. This competition may affect CBD's ability to grow or
maintain profits and revenues.
CBW is one of six active wireless service providers in the Cincinnati and
Dayton, Ohio metropolitan market areas.
CBLD's competitors include interexchange carriers and certain local exchange
companies. As evidenced by its acquisition of Discounted Long Distance, CBLD
is now expanding its reach into other markets. In addition to long distance
and local exchange services, CBLD is also offering new services such as data
transport and Internet access. CBS's competitors include vendors of new and
used computer and communications equipment operating regionally and across
the nation. EnterpriseWise competes with Intranet hardware vendors, wiring
vendors, and other integration and consulting businesses.
The Company's merger with IXC is a response to these competitive pressures
and represents a belief that the Company's reputation for quality service and
innovative products can be successfully exported outside of its current
franchise area. The Company plans to blend its provisioning and marketing
expertise with IXC's next-generation, fiber-optic network to introduce
advanced calling and data transport services throughout the U.S. The Company
hopes to retain market share with respect to its current service offerings,
and pursue rapid growth in data transport services. The Company also expects
that each of its current subsidiaries will benefit from this business
combination through the addition of new potential customers, sales channels,
and markets.
21
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 PROGRAMMING -
Since 1996, the Company has devoted significant time and resources to achieve
Year-2000 (Y2K) compliance.
A Steering Committee, chaired by a Senior Vice President of the Company and
composed of upper-level management personnel, sets the direction and monitors
the activity of the Y2K Program Management Office (PMO). The PMO's
responsibility is to make CBT Y2K compliant and to provide oversight for the
Company's other subsidiaries as they track the status of their Y2K projects.
In addition to internal Y2K activities, the PMO is communicating with
suppliers and clients with which CBT's systems interface or rely upon to
determine their progress toward Y2K compliance.
For the first nine months of 1999 and 1998, the Company incurred Y2K expenses
of $4.2 million and $7.7 million, respectively. Y2K expenses in 1999 are
estimated to be in the range of $5 million to $8 million.
CBT and the rest of the Company's subsidiaries have completed all
remediation, replacement, and compliance testing efforts for critical
components of its Network, Facilities, and Information Technology. Each of
the Company's subsidiaries will spend the remainder of the year performing
additional enterprise testing and testing interfaces with outside business
partners. Work will continue with suppliers and business partners to monitor
their progress.
CBT is also testing and refining its contingency plans working with the U.S.
Government's National Communications System, National Telecommunications
Alliance (NTA), and other industry members. These organizations will link to
other communications companies through the Alerting and Coordinating Network,
a private emergency network built by the major communications carriers and
managed by the NTA. The Communications/Command Center will monitor and report
on the status of the telecommunications industry across the world during the
rollover period.
Although the Company anticipates minimal business disruption as a result of
the century change, failure to ready the Company's software and systems for
the Year 2000 or preparing adequate plans to avoid business interruption
would have a material adverse impact on the Company. This material adverse
effect could include a disruption to the provision of services to its
customers and damaged customer relationships, which could result in lost
revenues or material contractual penalties.
The failure of one of the Company's significant customers to modify its
systems for the Year 2000 successfully or to provide the appropriate business
continuity planning also could have an adverse impact on the Company as the
Company is, to a certain extent, dependent on the success of its customers.
The Company's success in becoming Y2K compliant largely depends on the
Company's vendors and business partners being Y2K compliant. The PMO is
working diligently with the Company's vendors and business partners to assure
itself, to the extent possible, that the vendors and business partners are
taking the necessary steps to become Y2K compliant. To the extent that any of
the Company's vendors or business partners experience Y2K technology
difficulties which materially affect their businesses, such difficulties
could have a material adverse effect on the Company's business, results of
operations and financial condition.
BUSINESS DEVELOPMENT - To enhance shareholder value, the Company continues to
review opportunities for acquisitions, divestitures, and strategic
partnerships.
22
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, five stockholder class action suits were filed
in the Delaware Court of Chancery (the Court) against IXC and certain present
and former members of IXC's Board of Directors in connection with the
announcement of the merger between the Company and IXC. The Company has been
named as a defendant in one of these suits. These complaints allege, among
other things, that the defendants have breached their fiduciary duties to
IXC's stockholders by failing to maximize stockholder value in connection
with entering into the merger agreement. The complaints sought, among other
things, a court order enjoining completion of the merger. In an October 27,
1999 ruling, the Court issued an order denying plaintiff's request for a
preliminary injunction against the merger. However, the Court did not rule on
the merits of the suits, and these suits remain pending. The Company believes
that the complaints are without merit and intends to continue vigorously
defending these actions.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 21, 1999, Oak Hill Capital Partners, L.P. purchased $400 million of
the Company's 10-year convertible subordinated debentures. These bonds bear a
coupon rate of 6.75% per annum, and are initially convertible at a price of
$29.89 per share of Cincinnati Bell common stock. Now that the merger with
IXC has been consummated, these notes are convertible into common stock of
Cincinnati Bell at $29.89 per common share at the option of the holder.
Of the $400 million in debt issue proceeds received in July 1999, the Company
has used $250 million to purchase approximately five million shares of IXC
common stock held by General Electric Pension Trust. The remainder of the
proceeds has been used for a stock repurchase plan for the purchase of the
Company's common stock. As of the date of this filing, the stock repurchase
plan has required approximately $145 million of the $200 million authorized
for this program. The combination of these two stock purchase initiatives has
required approximately $395 million of the proceeds. The excess of the debt
issue proceeds over the cash requirements for these initiatives has been used
for working capital purposes.
The Company did not employ an underwriter or placement agent in connection
with the issuance of these securities, nor did it pay fees or incur discounts
associated with the sale of these debentures. The Company initially claimed
exemption from registration of these securities pursuant to Regulation D of
the Securities and Exchange Commission's Rule 501, but has subsequently filed
a registration statement for these notes on Form S-3 with the Securities
and Exchange Commission (filed on November 9, 1999).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 29, 1999, the Company conducted a special meeting of its security
holders in order to vote on the issuance of Cincinnati Bell common stock to
stockholders of IXC in the merger of IXC and a subsidiary of Cincinnati Bell.
This was the only item submitted for a vote of security holders during this
special meeting. The Company's shareholders approved the merger, with
82,156,679 common shares (87.04%) voting in favor of the merger, 12,238,220
common shares (12.04%) voting against the merger, and 1,417,918 common shares
abstaining.
ITEM 5. OTHER INFORMATION
Other information pertaining to the Company and its merger with IXC can be
found on the Company's Forms 8-K described in Item 6(b). Certain information
pertaining to IXC can be found on IXC's Forms 8-K and on its Form 10-Q as
filed with the Securities and Exchange Commission on November 15, 1999.
Effective November 15, 1999, the Company notified the New York Stock
Exchange, Inc. that it would begin doing business as BroadWing Inc. and,
accordingly, requested that its stock ticker symbol be changed from CSN to
BRW effective with the opening of trading on Monday, November 15, 1999.
23
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following is filed as an Exhibit to Part I of this Form 10-Q:
Exhibit
Number
-------
27 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K, date of report October 13, 1999, reporting that certain
sections of the Company's merger agreement with IXC Communications,
Inc. had been amended in response to a decision of the Delaware Court
of Chancery in the case of Phelps Dodge Corporation vs. Cyprus Amax
Minerals Company. The Company's merger agreement with IXC
Communications, Inc. was previously filed in a Form 8-K, date of
report July 23, 1999.
Form 8-K, date of report October 22, 1999, reporting on the Company's
results of operations for the three months ended September 30, 1999.
Form 8-K, date of report November 8, 1999, setting forth certain
historical financial statements of the Company's merger partner, IXC
Communications, Inc.
Form 8-K, date of report November 12, 1999, reporting that the
Company's merger with IXC Communications, Inc. was successfully
completed on November 9, 1999.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cincinnati Bell Inc.
Date: November 15, 1999 /s/ Kevin W. Mooney
------------------- ----------------------------------
Kevin W. Mooney
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,400
<SECURITIES> 0
<RECEIVABLES> 164,800
<ALLOWANCES> 18,600
<INVENTORY> 20,500
<CURRENT-ASSETS> 212,800
<PP&E> 2,010,500
<DEPRECIATION> 1,262,000
<TOTAL-ASSETS> 1,432,400
<CURRENT-LIABILITIES> 437,900
<BONDS> 766,100
0
0
<COMMON> 1,400
<OTHER-SE> 90,200
<TOTAL-LIABILITY-AND-EQUITY> 1,432,400
<SALES> 0
<TOTAL-REVENUES> 758,200
<CGS> 0
<TOTAL-COSTS> 602,800
<OTHER-EXPENSES> (5,800)
<LOSS-PROVISION> 18,600
<INTEREST-EXPENSE> 31,900
<INCOME-PRETAX> 129,800
<INCOME-TAX> 47,000
<INCOME-CONTINUING> 82,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,800
<EPS-BASIC> .61
<EPS-DILUTED> .59
</TABLE>
