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Exhibit 99
CERTAIN INFORMATION CONCERNING CINCINNATI BELL AND CINCINNATI BELL TELEPHONE
RELATIONSHIP BETWEEN CINCINNATI BELL AND CONVERGYS CORPORATION
BACKGROUND OF THE CONVERGYS DISTRIBUTION
In April 1998, Cincinnati Bell announced its intent to separate its
billing and information services business (operated by Cincinnati Bell
Information Systems Inc. ("CBIS")) and its customer management solutions
business (operated by MATRIXX Marketing Inc. ("MATRIXX")) from its
telecommunications business (including Cincinnati Bell Telephone). As the
initial step of this separation, Cincinnati Bell established a wholly owned
subsidiary, Convergys Corporation ("Convergys"), and contributed to it the
businesses of CBIS and MATRIXX. Cincinnati Bell's Board of Directors believes
that the separation of the businesses will (1) permit the management of each
business to focus on their respective core businesses without regard to the
corporate objectives and policies of the other businesses and (2) permit the
financial community to focus separately on Cincinnati Bell and Convergys and
their respective business opportunities.
In July 1998, Cincinnati Bell and Convergys executed a Plan of
Reorganization and Distribution Agreement (the "Distribution Agreement") to
implement the separation. In the first step, completed in August 1998, Convergys
sold approximately 10% of its outstanding stock in an initial public offering
(the "Offering"). In the second step, Cincinnati Bell will distribute the
balance of its shares of Convergys (approximately 90% of the outstanding stock
of Convergys) to Cincinnati Bell shareholders (the "Convergys Distribution").
Under the terms of the Distribution Agreement, Cincinnati Bell may set the date
of the Convergys Distribution at any time prior to February 18, 1999, although
Cincinnati Bell currently intends to complete the Convergys Distribution by
December 31, 1998. Cincinnati Bell's obligation to complete the Convergys
Distribution is subject to the satisfaction or waiver by the Cincinnati Bell
Board of Directors in its sole discretion, of certain conditions. These
conditions include the following: (i) any material consents necessary to
consummate the Convergys Distribution shall have been obtained and shall
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be in full force and effect; (ii) no order, injunction or decree or other legal
restraint or prohibition preventing the consummation of the Convergys
Distribution shall be in effect; and (iii) no other events or developments
shall have occurred that, in the judgment of the Cincinnati Bell Board of
Directors, would result in the Convergys Distribution having a material adverse
effect on Cincinnati Bell or on the shareholders of Cincinnati Bell. In
addition, Cincinnati Bell and Convergys may terminate the Convergys
Distribution by mutual agreement at any time prior to the date of the Convergys
Distribution. At the date of this filing, Cincinnati Bell is not aware of any
condition that would prevent it from completing the Convergys Distribution.
Prior to the Offering, Cincinnati Bell provided Convergys with significant
management functions and services, including treasury, accounting, tax, human
resources, employee benefits and other support services. Cincinnati Bell
charged and/or allocated Convergys approximately $6.1 million, $6.7 million and
$7.7 million for such functions and services in 1995, 1996 and 1997,
respectively, and $3.8 million and $5.4 million for the six months ended
June 30, 1997 and 1998, respectively. The costs of these services have been
directly charged and/or allocated using methods that Cincinnati Bell's and
Convergys' management believe are reasonable. Such charges and allocations are
not necessarily indicative of the costs that Convergys would have incurred to
obtain these services had it been a separate entity. Neither Cincinnati Bell
nor Convergys has conducted any study or obtained any estimates from third
parties to determine what the cost of obtaining such services from third
parties may have been.
Cincinnati Bell and Convergys have entered into or will enter into a number
of agreements for the purpose of defining their continuing relationship. These
agreements were negotiated in the context of a parent-subsidiary relationship
and therefore are not the result of negotiations between independent parties.
It is the intention of Cincinnati Bell and Convergys that such agreements and
the transactions provided for therein, taken as a whole, should accommodate the
parties' interests in a manner that is fair to both parties, while continuing
certain mutually beneficial arrangements. The parties intend that such
agreements and transactions provide fair market value to them on terms no less
favorable to Convergys as would otherwise be available from unaffiliated
parties. Due to the complexity of the various relationships between Cincinnati
Bell and Convergys, however, there can be no assurance that each of such
agreements, or the transactions provided for therein, will be effected on terms
at least as favorable to Convergys as could have been obtained from
unaffiliated third parties.
The agreements summarized in this section have been filed as exhibits to
Convergys Corporation's Form S-1 Registration Statement No. 333-53619, as
amended, originally filed with the Securities and Exchange Commission on May
26, 1998 (the "Convergys S-1") and the following summaries are qualified in
their entirety by reference to the agreements as filed. Capitalized terms used
in this section and not otherwise defined herein shall have their respective
meanings set forth in the Distribution Agreement. While these agreements will
provide Convergys with certain benefits, Convergys may not enjoy benefits from
its relationship with Cincinnati Bell beyond the term of the agreements. There
can be no assurance that upon termination of such assistance from Cincinnati
Bell, Convergys will be able to provide adequately such services internally or
obtain favorable arrangements from third parties to replace such services.
Additional or modified arrangements and transactions may be entered into by
Cincinnati Bell and Convergys. Any such future arrangements and transactions
will be determined through negotiations between Cincinnati Bell and Convergys.
Convergys has adopted a policy that all future agreements between Cincinnati
Bell and Convergys will be on terms that Convergys believes are no less
favorable to Convergys than the terms Convergys believes would be available
from unaffiliated parties. However, there can be no assurance that any such
arrangements or transactions will be the same as that which would be negotiated
between independent parties.
AGREEMENTS BETWEEN CINCINNATI BELL AND CONVERGYS
As described above, the Distribution Agreement provides that, subject
to the terms and conditions thereof, Cincinnati Bell and Convergys will take all
reasonable steps necessary and
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appropriate to cause all conditions to the Convergys Distribution to be
satisfied and to effect the Convergys Distribution.
Cincinnati Bell and Convergys have agreed that neither of the parties
will take, or permit any of their affiliates to take, any action which
reasonably could be expected to prevent the Convergys Distribution from
qualifying as a tax-free distribution within the meaning of Section 355 of the
Code. The parties have also agreed to take any reasonable actions necessary for
the Distribution to qualify as a tax-free distribution pursuant to Section 355
of the Code.
The Distribution Agreement also provides for a full and complete
release and discharge upon consummation of the Offering of all liabilities
existing or arising from all acts and events occurring or failing to occur or
alleged to have occurred or to have failed to occur and all conditions existing
or alleged to have existed on or before the Offering, between or among
Cincinnati Bell and its affiliates, on the one hand, and Convergys and its
affiliates, on the other hand (including any contractual agreements or
arrangements existing or alleged to exist between or among them on or before the
Offering), except as expressly set forth in the Distribution Agreement, the
Employee Benefits Agreement, the Services Agreement and the Tax Allocation
Agreement described below.
Convergys has agreed to indemnify, defend and hold Cincinnati Bell and
its affiliates harmless from and against all liabilities relating to, arising
out of or resulting from (i) the failure of Convergys or any other person to
pay, perform or otherwise promptly discharge any Convergys liabilities in
accordance with their respective terms, (ii) Convergys' business, (iii) any
breach by Convergys of the Distribution Agreement or any ancillary agreements,
and (iv) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, with respect
to all information contained in the Convergys S-1.
Cincinnati Bell has agreed to indemnify, defend and hold Convergys and
its affiliates harmless from and against all liabilities relating to, arising
out of or resulting from (i) the failure of Cincinnati Bell or any other person
to pay, perform or otherwise promptly discharge any liabilities of Cincinnati
Bell, (ii) the business of Cincinnati Bell, (iii) any breach by Cincinnati Bell
or any of its affiliates of the Distribution Agreement or any ancillary
agreements, and (iv)
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any untrue statement or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, with respect to all
information about Cincinnati Bell contained in the Convergys S-1.
The Distribution Agreement
The Distribution Agreement provides that as to inter-company debt payable to
Cincinnati Bell by Convergys, Convergys' obligation will be to repay to
Cincinnati Bell on the date of the Convergys Distribution the amount reflected
in its balance sheet dated March 31, 1998 (approximately $725 million) adjusted
for the net cash flows resulting from Convergys' operating and investing
activities for the period April 1, 1998 to the date of repayment and for any
other repayments made to Cincinnati Bell in that period. The repayment amount
would have been approximately $752 million at June 30, 1998. Upon the closing
date of the Offering, Convergys applied all the net proceeds of the Offering to
reduce Convergys' portion of its inter-company debt. For the period between the
closing date of the Offering through the day preceding the date of the Convergys
Distribution, Cincinnati Bell shall continue to provide Convergys with working
capital funding pursuant to the existing inter-company arrangements at an
interest rate equal to Cincinnati Bell's average short-term borrowing cost or
through external short-term or long-term financing to be arranged by Cincinnati
Bell; provided, however, that Convergys may obtain and procure its own separate
funding with such third parties as it deems in its sole discretion appropriate
and at its own expense. Cincinnati Bell shall cooperate with Convergys in its
efforts to obtain such financing.
In the Distribution Agreement, Cincinnati Bell and Convergys have
agreed that each of them or their applicable subsidiaries will execute and
deliver deeds, lease assignments and assumptions, leases or subleases to be
mutually agreed upon for properties identified in the agreement and have agreed
on the method of determining whether tenant improvements, fixtures, furniture,
office equipment and other tangible property located on any of the subject real
property shall be transferred or retained.
The Distribution Agreement provides for indemnification by Cincinnati
Bell and Convergys with respect to Contingent Liabilities primarily relating to
their respective businesses or otherwise assigned to them ("Exclusive Contingent
Liabilities"). The Distribution Agreement
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also provides for the sharing of Shared Contingent Liabilities and Shared
Contingent Gains. With respect to any Shared Contingent Liability and Shared
Contingent Gains, the parties have agreed that Cincinnati Bell will be
responsible for or receive the benefit of 50% and Convergys will be responsible
for or receive the benefits of 50% of such Shared Contingent Liability or Shared
Contingent Gains, as the case may be.
The Distribution Agreement provides that Cincinnati Bell and Convergys
will have the exclusive right to any benefit received with respect to any
Contingent Gain that primarily relates to the business of, or that is expressly
assigned to, Cincinnati Bell or Convergys, respectively (an "Exclusive
Contingent Gain"). Each of Cincinnati Bell and Convergys will have sole and
exclusive authority to manage, control and otherwise determine all matters
whatsoever with respect to an Exclusive Contingent Gain that primarily relates
to its respective business. The parties have agreed that Cincinnati Bell will
have the sole and exclusive authority to manage, control and otherwise determine
all matters whatsoever with respect to any Shared Contingent Gain.
The Distribution Agreement contains provisions that govern, except as
otherwise provided in any ancillary agreement, the resolution of disputes,
controversies or claims that may arise between or among the parties. These
provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to mandatory,
binding arbitration, subject to the provisions of the Distribution Agreement.
The Distribution Agreement contains procedures for the selection of a sole
arbitrator of the dispute, controversy or claim and for the conduct of the
arbitration hearing, including certain limitations on discovery rights of the
parties. These procedures are intended to produce an expeditious resolution of
any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is
reasonably likely to be, in excess of $25 million, or in the event that an
arbitration award in excess of $25 million is issued in any arbitration
proceeding commenced under the Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent
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jurisdiction and the arbitration provisions contained in the Distribution
Agreement will not apply. In the event that the parties do not agree that the
amount in controversy is in excess of $25 million, the Distribution Agreement
provides for arbitration of such disagreement.
The Distribution Agreement also provides that during the period prior
to the Convergys Distribution, Convergys will reimburse Cincinnati Bell for its
proportionate share of premiums paid or accrued on insurance policies under
which Convergys continues to have coverage.
Employee Benefits Agreement
Prior to the Convergys Distribution, Cincinnati Bell and Convergys will
enter into an Employee Benefits Agreement that will govern certain employee
benefits obligations of Convergys. Under the Employee Benefits Agreement,
Convergys will assume and agree to pay all liabilities relating to (a) those
employees of Cincinnati Bell or its subsidiaries who will become employed by
Convergys or its subsidiaries at or prior to the Convergys Distribution, (b)
those directors of Cincinnati Bell who will become directors of Convergys and
(c) those former employees who are assigned to Convergys for purposes of
allocating employee benefit obligations.
Effective immediately after the Convergys Distribution, Convergys will
establish Convergys' Pension Plan, which generally will be the same as the
Cincinnati Bell pension plans which cover employees of CBIS and MATRIXX prior to
the Convergys Distribution. The Convergys Pension Plan will assume all
liabilities under the Cincinnati Bell pension plans for those employees and
former employees who are employed by or transferred to Convergys. The assets of
the trust established in conjunction with the Cincinnati Bell pension plans will
be divided between the trust for the Cincinnati Bell pension plans and the trust
for the Convergys Pension Plan in the manner agreed to by Cincinnati Bell and
Convergys.
With respect to each Cincinnati Bell Option outstanding at the
Convergys Distribution, each optionee will receive a Convergys Option to
purchase an equal number of Convergys common shares under Convergys' 1988 Long
Term Incentive Plan ("1998 LTIP"). The exercise price of each outstanding
Cincinnati Bell Option will be adjusted, and the exercise price of each new
Convergys Option will be determined, so that (a) the sum of the exercise prices
of the new
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Convergys Option and the Cincinnati Bell Option after the adjustment will be
equal to the exercise price of the Cincinnati Bell Option prior to the
adjustment and (b) the ratio of the exercise prices of each Convergys Option and
Cincinnati Bell Option after the adjustment will be equal to the ratio of the
fair market values of each Convergys common share and Cincinnati Bell common
share after the adjustment. The terms of each Convergys Option will be the same
as the terms of each outstanding Cincinnati Bell Option, except that termination
of employment shall mean (a) for each Cincinnati Bell Option held by an employee
of Convergys, termination of employment with Convergys and (b) for each
Convergys Option held by an employee of Cincinnati Bell, termination of
employment with Cincinnati Bell.
With respect to any outstanding Cincinnati Bell common share issued
under the Cincinnati Bell Long Term Incentive Plan which are subject to
restrictions at the time of the Convergys Distribution, each shareholder shall
receive a Convergys common share under the Convergys 1998 LTIP which shall be
subject to the same restrictions, except that termination of employment shall
mean (a) for each restricted Cincinnati Bell common share held by an employee of
the Company, termination of employment with the Company, and (b) for each
restricted Common Share held by an employee of Cincinnati Bell, termination of
employment with Cincinnati Bell.
Services Agreement
Cincinnati Bell and Convergys have entered into a services agreement
(the "Services Agreement"), pursuant to which Cincinnati Bell will continue to
provide corporate support services to Convergys through the date of the
Convergys Distribution and Convergys may provide similar services to Cincinnati
Bell after the date of the Convergys Distribution, including treasury,
accounting, tax, human resources functions, food services, transportation
services and insurance and employee benefit program administration.
The term of the Service Agreement began on the closing date of the
Offer and continues until a date that is six months after the date of the
Convergys Distribution unless terminated earlier (i) by the mutual consent of
the parties, (ii) by the receiving party terminating any or all of the services
that it is receiving upon 30 days written notice to the providing party of such
services, or (iii) by the non-defaulting party if the other party is in material
default under this
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Agreement and fails to cure such default within the cure period. The charges for
the services described in the Services Agreement will be the cost actually
incurred by the providing party or such other charges as the parties may agree.
In the Services Agreement, Cincinnati Bell has agreed that, to the
extent that Cincinnati Bell is providing indemnification (through insurance or
otherwise) to any "Covered Individual" at any time prior to the date of the
Convergys Distribution for such individual's acts and omissions in any capacity,
Cincinnati Bell shall continue to provide such indemnification, for any acts or
omissions occurring prior to the date of the Convergys Distribution, through the
last day of the five-year period commencing on the date of the Convergys
Distribution. To the extent that such indemnification is being provided through
insurance, any premiums for such insurance payable after the date of the
Convergys Distribution shall be shared equally by Cincinnati Bell and Convergys.
For purposes of this paragraph, "Covered Individual" means an officer, director
or employee of Cincinnati Bell or a Cincinnati Bell affiliate (and, where
appropriate, their spouses, estates, heirs, legal representatives and assigns)
(i) who is insured, in any capacity, under Cincinnati Bell's Directors and
Officers and Convergys Reimbursement Policy at any time prior to the date of the
Convergys Distribution and (ii) who is an officer, director or employee of
Convergys or a Convergys affiliate on the day immediately following the date of
the Convergys Distribution. The above-stated Cincinnati Bell obligations survive
the termination of the Services Agreement.
The Services Agreement provides that, to the extent that at the date of
the Convergys Distribution, the Cincinnati Bell Foundation has assets in excess
of its commitments, the parties shall cause such Foundation's trustees to
contribute half of such excess to a foundation established by Convergys which
qualifies as a charitable entity under Section 501(c)(3) of the Internal Revenue
Code.
Tax Allocation Agreement
Cincinnati Bell and Convergys have entered into a Tax Separation and
Allocation Agreement (the "Tax Allocation Agreement"), pursuant to which
Convergys will make a payment to Cincinnati Bell, or Cincinnati Bell will make a
payment to Convergys, as appropriate, of an amount in respect of taxes shown as
due attributable to the operations of
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Convergys on the consolidated federal income tax return and combined or
consolidated state income or franchise tax returns filed by Cincinnati Bell for
the period commencing on January 1, 1998 and ending on the date on which
Convergys ceases to be a member of the Cincinnati Bell consolidated group. In
addition, each party has agreed to indemnify the other party and its
subsidiaries for (i) any liability for taxes arising from or attributable to any
of the transactions that are directly related to the Convergys Distribution
failing to qualify under Section 355 of the Internal Revenue Code, but only if
such failure (A) was caused by an act that occurred after the Convergys
Distribution in which such party participated or (B) was otherwise attributable
to certain representations and warranties contained in the Tax Allocation
Agreement failing to be true as of the date of the agreement, (ii) any liability
or damage resulting from a breach by such party of any representation or
covenant contained in the Tax Allocation Agreement, (iii) any tax liability
resulting from the Convergys Distribution and attributable to any action of such
party and (iv) all liabilities, costs, expenses (including attorneys' fees and
expenses), losses, damages, settlements or judgments arising out of or incident
to the imposition, assertion or assessment of any tax liability or damage
described in the preceding subclauses. The Tax Allocation Agreement also sets
forth procedures for dealing with audits, settlements, the payment of taxes and
tax deficiencies, the recovery of refunds and the filing of tax returns by the
parties.
Cincinnati Bell/Convergys Contract
Cincinnati Bell and Convergys have entered into a ten-year contract
which remains in effect until June 30, 2008. Convergys will continue to be the
primary provider of certain data processing, professional and consulting,
technical support and customer support services for Cincinnati Bell Telephone,
and Cincinnati Bell Telephone will be the exclusive provider of local
telecommunications services to Convergys. CBIS provides these data processing
and professional and consulting services for selected operational support
systems of Cincinnati Bell Telephone in the areas of repair, provisioning and
miscellaneous operational functions. Data processing services consist of
operating and maintaining the computer programs comprising the Cincinnati Bell
Telephone systems. Professional and consulting services consist of developing,
testing and implementing enhancements to the Cincinnati Bell Telephone systems
based on Cincinnati Bell Telephone requests. The technical support and customer
support services consist of providing dedicated services to Cincinnati Bell
Telephone. MATRIXX currently acts as
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Cincinnati Bell Telephone's sales account management team to sell Cincinnati
Bell Telephone's complete product line (including Lucent Technologies telephone
systems, AT&T network services and Cincinnati Bell Telephone local services) to
approximately 35,000 small business market customers. MATRIXX also currently
provides customer management services to support Cincinnati Bell Telephone's
credit and collections functions, satellite television operations, wireless
communications operations and Internet (FUSE(R)) marketing initiatives. MATRIXX
also functions as Cincinnati Bell Telephone's help desk to support FUSE start-up
and on-going services. In 1997, Cincinnati Bell Telephone paid Convergys
approximately $49 million for these services, and Convergys paid Cincinnati Bell
Telephone approximately $1.2 million for telecommunications services.
YEAR 2000
Since 1996, Cincinnati Bell has devoted significant time and resources
to achieve Year 2000 compliance. Accordingly, Cincinnati Bell will incur a
substantial amount of Year 2000 remediation costs to repair or replace
non-compliant network elements, operations support systems and application
software prior to the new millennium.
A Steering Committee, chaired by Cincinnati Bell's Chief Operations
Officer and composed of upper-level management personnel, sets the direction and
monitors the activity of Cincinnati Bell's Year 2000 Program Management Office.
The Program Management Office's responsibility is to make Cincinnati Bell Year
2000 compliant.
Cincinnati Bell (excluding Convergys) incurred Year 2000 costs of
approximately $4 million prior to 1998. Cincinnati Bell (excluding Convergys)
expects Year 2000 costs in 1998 to be in the range of $10 million to $15
million, with costs in 1999 estimated in the range of $5 million to $8 million.
Cincinnati Bell Telephone's goal is to have its network, information
technology ("IT") and facilities systems equipped with any required fixes or
upgrades and tested by March 31, 1999. Certain other systems and equipment will
be replaced rather than fixed, and Cincinnati Bell Telephone's goal is to have
these replacements installed and tested within the first six months of 1999.
Cincinnati Bell Long Distance Inc. ("CBLD"), a wholly owned subsidiary
of Cincinnati
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Bell, hopes to have its network, IT and facilities systems, other than its
billing system, equipped with any required fixes or upgrades and tested by March
31, 1999. CBLD's goal is to have its billing system equipped with any required
fixes or upgrades and tested by June 30, 1999.
Cincinnati Bell Directory Inc. ("CBD"), a wholly owned subsidiary of
Cincinnati Bell, hopes to have its network, IT and facilities systems equipped
with any required fixes or upgrades and tested by March 31, 1999. Certain other
systems and equipment will be replaced rather than fixed, and CBD's goal is to
have these replacements installed and tested within the first six months of
1999.
Cincinnati Bell Supply Company, a wholly owned subsidiary of Cincinnati
Bell, hopes to have its systems equipped with any required fixes or upgrades and
tested by December 31, 1998.
Cincinnati Bell's success in becoming Year 2000 compliant on or before
June 30, 1999 largely depends on Cincinnati Bell's vendors and business partners
being Year 2000 compliant on or before June 30, 1999. The Program Management
Office is working diligently with Cincinnati Bell'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 Year 2000 compliant.
Cincinnati Bell's worst case scenario is that such vendors and business partners
will not be Year 2000 compliant. To the extent that any of Cincinnati Bell's
vendors or business partners experience Year 2000 technology difficulties which
materially affect their businesses, such difficulties could have a material
adverse effect on Cincinnati Bell's business, results of operations and
financial condition.
Cincinnati Bell currently does not have a contingency plan for the Year
2000; however, Cincinnati Bell plans to develop a contingency plan beginning in
the fourth quarter of 1998. Cincinnati Bell will conduct an evaluation of its
existing Disaster Recovery and Business Continuity Plans to evaluate whether
such plans need to be supplemented in connection with planning for the Year
2000. In addition, Cincinnati Bell will establish a plan for addressing issues
and problems that could arise between December 31, 1999 and January 3, 2000 and
after such period if necessary.
Although Cincinnati Bell has currently targeted June 30, 1999 for
achieving full Year 2000 compliance, its original goal was December 31, 1998.
Cincinnati Bell currently believes that the June 30, 1999 target date can be
achieved but, because of the complexity of the Year 2000 problem, there can be
no assurance that Cincinnati Bell will achieve complete Year 2000 compliance by
this date or before the year 2000. Cincinnati Bell's failure to achieve Year
2000 compliance could have a material adverse
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effect on Cincinnati Bell's business, results of operation and financial
condition.
REGULATORY MATTERS
As reported in Cincinnati Bell's Form 10-Q for the quarter ended June
30, 1998, Cincinnati Bell Telephone and numerous other local exchange carriers
(LECs) filed appeals in the United States Court of Appeals for the Eighth
Circuit challenging various aspects of the FCC's May 16, 1997 First Report and
Order in the access charge reform proceeding. On August 19, 1998, the Eighth
Circuit issued a decision upholding the FCC's order. Since Cincinnati Bell
Telephone is already complying with the FCC's order, the Eighth Circuit's
decision is not expected to have a material impact on Cincinnati Bell
Telephone's financial condition.
FINANCIAL DATA
In connection with the registration of the Cincinnati Bell debt
securities and the Cincinnati Bell Telephone guaranteed debt securities, the
following consolidated pro forma financial data of Cincinnati Bell and
historical financial data of Cincinnati Bell Telephone are presented.
CINCINNATI BELL CONSOLIDATED PRO FORMA FINANCIAL DATA
The following table presents consolidated pro forma financial
data for Cincinnati Bell, giving effect to the acquisition by MATRIXX on
February 28, 1998 of American Transtech, Inc. and the assets of AT&T Canada
Enterprises, Inc., AT&T's Canadian customer care business, (collectively
"Transtech") from AT&T Corp. (the "Transtech Acquisition") and the Convergys
Distribution. The pro forma statement of operations data for each of the three
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1997 and 1998 are taken from, or prepared on a basis consistent with, and should
be read along with, the Cincinnati Bell Consolidated Pro Forma Financial
Statements and notes thereto beginning on page 19.
The consolidated pro forma balance sheet data have been presented as if
the Convergys Distribution had occurred on June 30, 1998. The consolidated
pro forma statement of operations data for the year ended December 31, 1997 and
the six months ended June 30, 1997 and 1998 have been presented as if the
Transtech Acquisition had occurred on January 1, 1997. The consolidated pro
forma statement of operations data for the years ended December 31, 1995, 1996
and 1997 and the six months ended June 30, 1997 and 1998 have been presented as
if the Convergys Distribution had occurred on January 1, 1995.
The consolidated pro forma financial data provided below are unaudited,
are presented for informational purposes only and do not necessarily indicate
what the actual results of operations would have been had the Transtech
Acquisition and the Convergys Distribution occurred on the dates assumed, or
what the future operating results or financial position of Cincinnati Bell may
be. The data provided below should be read along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated historical and consolidated pro forma financial statements and the
notes thereto of Cincinnati Bell included in the following documents previously
filed by Cincinnati Bell (collectively, "Previously Filed Documents"):
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- Annual Report on Form 10-K for the year ended December 31, 1997;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998; and
- Current Reports on Form 8-K, dates of report February 2, 1998,
March 3, 1998 (as amended by Form 8-K/A, date of report March 3, 1998)
and September 2, 1998.
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CINCINNATI BELL CONSOLIDATED PRO FORMA FINANCIAL DATA
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- --------------- ------------- ------------ ----------------
STATEMENT OF OPERATIONS DATA: (IN MILLIONS EXCEPT FOR PER SHARE INFORMATION, OPERATING DATA AND RATIOS)
Revenues $ 736.0 $ 779.8 $ 834.5 $ 407.0 $ 436.0
Costs and expenses:
Costs of providing services and
products sold 301.9 321.3 344.6 168.8 182.2
Selling, general and administrative 176.7 186.6 184.7 93.7 104.1
Depreciation and amortization 116.4 121.0 124.3 61.3 54.0
Year 2000 programming costs --- --- 4.2 --- 5.2
Mandated telecommunications costs --- --- 6.3 2.2 9.8
Special items (credits) (1) 131.6 (29.7) (21.0) (21.0) ---
---------- ----------- ----------- ---------- ----------
Total costs and expenses 726.6 599.2 643.1 305.0 355.3
Operating income (2) 9.4 180.6 191.4 102.0 80.7
Other income (expense), net (3) (9.1) 0.5 (2.7) (1.3) (10.7)
Interest expense (4) 45.4 27.9 30.1 15.5 10.8
---------- ----------- ----------- ---------- ----------
Income (loss) before income taxes (45.1) 153.2 158.6 85.2 59.2
Income taxes (16.0) 53.7 56.3 30.0 20.6
Income (loss) from continuing ---------- ----------- ----------- ---------- ----------
operations (5) $ (29.1) $ 99.5 $ 102.3 $ 55.2 $ 38.6
========== =========== =========== ========== ==========
Earnings (loss) per common share
Basic $(.22) $.74 $.76 $.41 $.28
Diluted $(.22) $.73 $.74 $.40 $.28
Weighted average common shares
outstanding and equivalents:
Basic 132.0 133.9 135.2 135.1 135.9
Diluted 132.0 137.2 137.7 137.6 138.5
OTHER FINANCIAL DATA:
Capital additions (including
acquisitions) $ 92.8 $ 106.4 $ 159.6 $ 89.5 $ 79.4
Ratio of earnings to fixed charges (6) --- 5.96 5.66 5.98 5.74
OPERATING DATA:
Network access lines (in thousands) 906 958 1,005 984 1,025
Employees 3,088 3,109 3,318 3,178 3,509
--------------
AS OF JUNE
30, 1998
--------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 0.1
Net property, plant and equipment 604.5
Total assets 842.7
Debt:
Maturing within one year 151.1
Long-term 267.6
--------
Total debt 418.7
Shareowners' equity (7) 128.8
14
15
NOTES TO CINCINNATI BELL CONSOLIDATED PRO FORMA FINANCIAL DATA
(1) The special item in 1995 was a $131.6 million charge, net of settlement
gains, associated with a restructuring of Cincinnati Bell and Cincinnati
Bell Telephone operations. The special credits recorded in 1996 and in 1997
were non-cash settlement gains resulting from lump-sum pension
distributions pursuant to the 1995 Cincinnati Bell and Cincinnati Bell
Telephone restructuring plan.
(2) Operating income includes special items as discussed in Note 1 above.
Excluding special items, pro forma operating income was $141.0 million in
1995, $150.9 million in 1996, $170.4 million in 1997 and $81.0 million for
the six months ended June 30, 1997. Pro forma operating income for the six
months ended June 30, 1998 was not affected by special items.
(3) Other income (expense), net for 1995 includes a charge of $5.0 million to
reduce real estate held for sale to its fair market value. Other income
(expense), net for the six months ended June 30, 1998 includes $8.8
million in equity losses from the Cincinnati Bell Wireless venture with
AT&T.
(4) Interest expense in 1996 includes a $2.5 million reversal of accrued
interest related to liabilities to interexchange carriers.
(5) Income from continuing operations excludes a $7.0 million extraordinary
charge, net of tax benefit, recorded in 1995 for debt extinguishment and a
non-cash $210.0 million extraordinary charge, net of tax benefit, recorded
in 1997 resulting from Cincinnati Bell Telephone's discontinuance of
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation."
(6) For these ratios, "earnings" is determined by adding "total fixed charges"
(excluding capitalized interest), income taxes, minority interest and
amortization of capitalized interest to income from continuing operations
after eliminating equity in undistributed earnings. For this purpose,
"total fixed charges" consists of (i) interest on all indebtedness and
amortization of debt discount and expense, (ii) capitalized interest and
(iii) the interest component of rental expense. Cincinnati Bell's earnings
in 1995, pro forma for the Convergys Distribution, were insufficient to
cover fixed charges by $45.1 million. Cincinnati Bell's ratio of earnings
to fixed charges, pro forma for the Convergys Distribution, reflects
special items (credits) of $131.6 million in 1995, $(29.7) million in 1996,
and $(21.0) million in 1997 and $(21.0) million for the first six months of
1997. Excluding these special items, Cincinnati Bell's ratio of earnings to
fixed charges, pro forma for the Convergys Distribution, would have been
2.75 in 1995, 5.00 in 1996, 5.05 in 1997 and 4.75 for the six months ended
June 30, 1997. Cincinnati Bell's ratio of earnings to fixed charges, pro
forma for the Convergys Distribution, for the six months ended June 30,
1998 was not affected by special items.
(7) Pro forma shareowners' equity reflects the elimination of Convergys'
shareowners' equity from Cincinnati Bell's historical amounts and the
incurrence of approximately $10 million in nonrecurring costs (net of tax
benefit) related to the Convergys Distribution. Included in the elimination
of Convergys' shareowners' equity is an estimated amount of approximately
$33 million (net of deferred tax benefit) resulting from the allocation of
Cincinnati Bell pension trust assets and obligations to Convergys. The
actual amount of shareowners' equity transferred to Convergys as a result
of the allocation of the Cincinnati Bell pension trust assets will be
determined by calculations agreed to by the management of Cincinnati Bell
and Convergys, and may differ from the amount reflected. The final
allocation may differ due to the discount rates and other assumptions used
in the final calculation at the time of the Convergys Distribution. In
addition, the final pension asset allocation will be subject to regulatory
approval.
15
16
CINCINNATI BELL TELEPHONE HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data of
Cincinnati Bell Telephone. The statement of operations data for each of the
three years ended December 31, 1995, 1996 and 1997 and the balance sheet data
at December 31, 1996 and 1997 are taken from and should be read along with the
audited consolidated financial statements and the notes thereto of Cincinnati
Bell included in the Previously Filed Documents. The statement of operations
data for the six months ended June 30, 1997 and 1998 and the balance sheet data
at June 30, 1997 and 1998 are taken from financial statements which are
unaudited but which, management of Cincinnati Bell believes, fairly present
Cincinnati Bell Telephone's financial position and results of operations for
those periods.
Cincinnati Bell Telephone is a wholly owned subsidiary of Cincinnati
Bell, and it receives general and administrative services from Cincinnati Bell.
Cincinnati Bell Telephone's cash is managed by Cincinnati Bell and its
operations are partially financed through borrowings of Cincinnati Bell. The
financial data provided below are presented for informational purposes only and
does not necessarily indicate what the results of operations and financial
position of Cincinnati Bell Telephone would have been if Cincinnati Bell
Telephone were not a wholly owned subsidiary of Cincinnati Bell, or what
Cincinnati Bell Telephone's future performance may be.
16
17
CINCINNATI BELL TELEPHONE HISTORICAL FINANCIAL DATA
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- --------------- ------------- ------------ ----------------
STATEMENT OF OPERATIONS DATA: (IN MILLIONS EXCEPT FOR OPERATING DATA AND RATIOS)
Revenues $ 624.4 $ 650.8 $ 670.1 $ 326.7 $ 353.4
Costs and expenses:
Costs of providing services and
products sold 253.6 257.7 267.6 131.3 143.0
Selling, general and administrative 142.1 149.3 145.6 74.7 78.0
Depreciation and amortization 113.0 116.6 120.6 59.7 52.0
Year 2000 programming costs --- --- 4.2 --- 5.2
Mandated telecommunications cost --- --- 6.3 2.2 9.8
Special items (credits) (1) 121.7 (28.5) (21.0) (21.0) ---
----------- ----------- ----------- ---------- ----------
Total costs and expenses 630.4 495.1 523.3 246.9 288.0
Operating income (loss) (2) (6.0) 155.7 146.8 79.8 65.4
Other income, net 11.4 3.9 5.7 3.0 ---
Interest expense (3) 26.9 17.4 20.4 10.2 9.5
----------- ----------- ----------- ---------- ----------
Income (loss) before income taxes (21.5) 142.2 132.1 72.6 55.9
Income taxes (10.2) 49.6 46.9 25.6 19.0
Income (loss) from continuing ----------- ----------- ----------- ---------- ----------
operations (11.3) 92.6 85.2 47.0 36.9
----------- ----------- ----------- ---------- ----------
Extraordinary item (4) --- --- (210.0) --- ---
----------- ----------- ----------- ---------- ----------
Net income (loss) $ (11.3) $ 92.6 $ (124.8) $ 47.0 $ 36.9
=========== =========== =========== ========== ==========
OTHER FINANCIAL DATA:
Capital additions $ 90.3 $ 101.4 $ 141.1 $ 75.7 $ 82.3
Ratio of earnings to fixed charges (5) --- 8.15 6.60 7.25 5.95
OPERATING DATA:
Network access lines (in thousands) 906 958 1,005 984 1,025
Employees 2,732 2,710 2,863 2,772 2,958
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------- -----------------------------
1996 1997 1997 1998
--------------- ------------- ------------ ----------------
BALANCE SHEET DATA:
Cash and cash equivalents (6) $ (2.3) $ (3.6) $ (4.7) $ (3.6)
Net property, plant and equipment (4) 855.2 550.6 870.9 581.2
Total assets 1,005.5 706.4 1,040.0 752.6
Notes payable to parent 56.6 63.4 72.2 101.3
Debt maturing within one year 0.8 3.4 3.5 3.3
Long-term debt 221.5 218.4 219.0 218.0
Shareowner's equity (4) 450.6 240.2 441.4 246.7
17
18
NOTES TO CINCINNATI BELL TELEPHONE HISTORICAL FINANCIAL DATA
(1) The special item in 1995 was a $121.7 million charge, net of settlement
gains, associated with a restructuring of Cincinnati Bell Telephone
operations. The special credits recorded in 1996 and 1997 were non-cash
settlement gains resulting from lump-sum pension distributions
pursuant to the 1995 Cincinnati Bell Telephone restructuring.
(2) Operating income (loss) includes special items as discussed in Note 1
above. Excluding special items, operating income would have been $115.7
million in 1995, $127.2 million in 1996, $125.8 million in 1997 and $58.8
million for the six months ended June 30, 1997. Operating income for the
six months ended June 30, 1998 was not affected by special items.
(3) Interest expense in 1996 includes a $2.5 million reversal of accrued
interest related to liabilities to interexchange carriers.
(4) The extraordinary item recorded in 1997 was a non-cash charge of $210.0
million, net of tax benefit, resulting from Cincinnati Bell Telephone's
discontinuance of SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation." The charge resulted in a $327.7 million reduction in
Cincinnati Bell Telephone's property, plant and equipment and a $210.0
million reduction in shareowner's equity.
(5) For these ratios, "earnings" is determined by adding "total fixed charges"
(excluding capitalized interest), income taxes, minority interest and
amortization of capitalized interest to income from continuing operations
after eliminating equity in undistributed earnings. For this purpose,
"total fixed charges" consists of (i) interest on all indebtedness and
amortization of debt discount and expense, (ii) capitalized interest and
(iii) the interest component of rental expense. Cincinnati Bell Telephone's
earnings in 1995 were insufficient to cover fixed charges by $21.4 million.
Cincinnati Bell Telephone's ratio of earnings to fixed charges reflects
special items (credits) of $121.7 million in 1995, $(28.6) million in 1996,
$(21.0) million in 1997 and $(21.0) million for the first six months of
1997. Excluding these special items, Cincinnati Bell Telephone's ratio of
earnings to fixed charges would have been 4.28 in 1995, 6.71 in 1996, 5.71
in 1997 and 5.49 for the six months ended June 30, 1997. Cincinnati Bell
Telephone's ratio of earnings to fixed charges for the six months ended
June 30, 1998 was not affected by special items.
(6) Cincinnati Bell has historically managed cash on a centralized basis, which
resulted in negative cash balances for Cincinnati Bell Telephone for
financial reporting purposes at the dates presented above.
18
19
CINCINNATI BELL CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following consolidated pro forma financial statements present pro
forma information for Cincinnati Bell, giving effect to the Transtech
Acquisition and the Convergys Distribution. These consolidated pro forma
financial statements are based upon the historical consolidated financial
statements of Cincinnati Bell for each of the periods presented and on the
historical financial statements of Transtech for the year ended December 31,
1997 and the two months ended February 28, 1998. The historical consolidated
financial statements of Cincinnati Bell as of and for the six months ended June
30, 1998 and the historical financial statements of Transtech for the two months
ended February 28, 1998 are unaudited.
The consolidated pro forma statements of operations for the year ended
December 31, 1997 and the six months ended June 30, 1998 have been presented as
if the Transtech Acquisition had occurred on January 1, 1997. The consolidated
pro forma statements of operations for the years ended December 31, 1995, 1996,
1997 and the six months ended June 30, 1998 have been presented as if the
Convergys Distribution had occurred on January 1, 1995. The consolidated pro
forma statements of operations for the periods indicated above reflect
the Transtech Acquisition using the purchase method of accounting and the
resulting amortization of goodwill and other intangibles as well as the
financing of, and interest expense related to the acquisition.
The consolidated pro forma balance sheet as of June 30, 1998 has been
presented as if the Convergys Distribution had occurred on June 30, 1998. (The
Transtech Acquisition was completed on February 28, 1998 and is reflected in the
historical consolidated balance sheet of Cincinnati Bell as of June 30, 1998.)
The consolidated pro forma financial statements are unaudited, are
presented for informational purposes only and do not necessarily indicate what
the actual results of operations would have been had the Transtech Acquisition
and the Convergys Distribution occurred on the dates assumed, or what the future
operating results or financial position of Cincinnati Bell may be. The
consolidated pro forma financial statements should be read along with
"Management's Discussion
19
20
and Analysis of Financial Condition and Results of Operations" and the
consolidated historical financial statements and the notes thereto of Cincinnati
Bell included in the Previously Filed Documents.
20
21
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------------------------
PRO FORMA
HISTORICAL BEFORE
HISTORICAL TRANSTECH CONVERGYS CONVERGYS
CINCINNATI (1/1/98 - ACQUISITION DISTRIBUTION DISTRIBUTION
BELL 2/28/98) ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- --------------- -------------- -------------- ----------
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
Revenues $ 1,075.3 $ 62.4 --- $ 1,137.7 $ (701.7) (4) $ 436.0
Costs and expenses 906.4 61.1 $ 3.9 (1) 971.4 (616.1) (5) 355.3
--------- --------- ------- -------- --------- ---------
Operating income 168.9 1.3 (3.9) 166.3 (85.6) 80.7
Other income (expense), net 0.8 --- --- 0.8 (11.5) (6) (10.7)
Interest expense 28.4 --- 6.1 (2) 34.5 (23.7) (7) 10.8
---------- -------- -------- --------- --------- ---------
Income before income taxes 141.3 1.3 (10.0) 132.6 (73.4) 59.2
Income taxes 49.6 0.5 (3.8) (3) 46.3 (25.7) (8) 20.6
---------- ---------- -------- --------- --------- ---------
Income from continuing
operations $ 91.7 $ 0.8 $ (6.2) $ 86.3 $ (47.7) $ 38.6
=========== ========== ========= ========= ========= =========
Earnings per common share
Basic $ .67 $ .64 $ .28
Diluted $ .66 $ .62 $ .28
Weighted average common shares
outstanding including
equivalents:
Basic 135.9 135.9 135.9
Diluted 138.5 138.5 138.5
21
22
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------------
PRO FORMA
BEFORE
HISTORICAL CONVERGYS CONVERGYS
CINCINNATI HISTORICAL ACQUISITION DISTRIBUTION DISTRIBUTION
BELL TRANSTECH ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- ------------- ------------- ---------------- ------------
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
Revenues $1,756.8 $ 402.4 --- $2,159.2 $(1,324.7) (4) $ 834.5
Costs and expenses 1,443.7 364.0 $ 23.5 (1) 1,831.2 (1,188.1) (5) 643.1
---------- --------- -------- -------- -------- --------
Operating income 313.1 38.4 (23.5) 328.0 (136.6) 191.4
Other income (expense), net 19.3 1.1 --- 20.4 (23.1) (6) (2.7)
Interest expense 35.5 0.2 36.3 (2) 72.0 (41.9) (7) 30.1
---------- --------- -------- -------- -------- --------
Income before income taxes 296.9 39.3 (59.8) 276.4 (117.8) 158.6
Income taxes 103.3 15.2 (22.6) (3) 95.9 (39.6) (8) 56.3
--------- -------- -------- -------- -------- --------
Income from continuing
operations $ 193.6 $ 24.1 $ (37.2) $ 180.5 $ (78.2) $ 102.3
========= ========= ======== ======== ======== ========
Earnings per common share
Basic $ 1.43 $ 1.34 $ .76
Diluted $ 1.41 $ 1.31 $ .74
Weighted average common shares
outstanding including
equivalents:
Basic 135.2 135.2 135.2
Diluted 137.7 137.7 137.7
22
23
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
CONVERGYS
HISTORICAL DISTRIBUTION
CINCINNATI BELL ADJUSTMENTS PRO FORMA
----------------- ---------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues $ 1,573.7 $ (793.9)(4) $ 779.8
Costs and expenses 1,267.2 (668.0)(5) 599.2
----------- ---------- ---------
Operating income 306.5 (125.9) 180.6
Other income (expense), net 12.1 (11.6)(6) 0.5
Interest expense 33.9 (6.0)(7) 27.9
----------- ---------- ---------
Income before income taxes 284.7 (131.5) 153.2
Income taxes 99.7 (46.0)(8) 53.7
----------- ---------- ---------
Income from continuing operations $ 185.0 $ (85.5) $ 99.5
=========== ========== =========
Earnings per common share
Basic $ 1.38 $ .74
Diluted $ 1.35 $ .73
Weighted average common shares
outstanding including equivalents:
Basic 133.9 133.9
Diluted 137.2 137.2
23
24
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
CONVERGYS
HISTORICAL DISTRIBUTION
CINCINNATI BELL ADJUSTMENTS PRO FORMA
--------------- --------------- --------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues $ 1,336.1 $ (600.1) (4) $ 736.0
Costs and expenses 1,289.4 (562.8) (5) 726.6
------------ --------- ---------
Operating income 46.7 (37.3) 9.4
Other income (expense), net (13.5) 4.4 (6) (9.1)
Interest expense 52.8 (7.4) (7) 45.4
------------ --------- ---------
Loss before income taxes (19.6) (25.5) (45.1)
Income taxes 5.7 (21.7) (8) (16.0)
------------ --------- ---------
Loss from continuing operations $ (25.3) $ (3.8) $ (29.1)
============ ========= =========
Loss per common share
Basic $ (0.19) $ (0.22)
Diluted $ (0.19) $ (0.22)
Weighted average common shares
outstanding including equivalents:
Basic 132.0 132.0
Diluted 132.0 132.0
24
25
NOTES TO CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
(1) Adjustment gives effect to the amortization of intangible assets
acquired and depreciation of property and equipment acquired.
Cincinnati Bell's allocation of the Transtech purchase price is as
follows: acquired contracts - $68.2 million; in-process research and
development - $42.6 million; assembled workforce - $11.4 million;
internally-developed software - $4.4 million; fair value of other
tangible assets acquired - $91.0 million; and goodwill - $414.4
million. Assigned lives for the acquired intangible assets are as
follows: acquired contracts - 8 years; assembled workforce - 15
years; and goodwill - 30 years. Assigned lives for property and
equipment are as follows: software and personal computers - 3
years; equipment - 5 years; and buildings - 30 years.
(2) The Transtech Acquisition and associated costs were financed entirely
through short-term variable rate commercial paper issued by
Cincinnati Bell. Interest expense has been recorded at the rate (5.75%)
for the commercial paper that was issued to finance the acquisition.
(3) Adjustment reflects the income tax effect of the acquisition
adjustments at Convergys' statutory tax rate for the respective period.
(4) Adjustment eliminates Convergys' revenues or pro forma revenues after
giving effect to the Transtech Acquisition.
(5) Adjustment eliminates Convergys' expenses or pro forma expenses after
giving effect to the Transtech Acquisition. For purposes of this
adjustment, general overhead expenses incurred by Cincinnati Bell,
which had been charged to Convergys as a management fee, remain a part
of the expenses of Cincinnati Bell and have not been eliminated by the
Convergys Distribution adjustments.
(6) Adjustment eliminates other income (expense), net related to Convergys.
Adjustment includes the elimination of equity earnings from Cincinnati
SMSA Limited Partnership which operates a cellular telecommunications
business in southwestern Ohio and northern Kentucky.
(7) Adjustment eliminates Convergys' pro forma interest expense after
giving effect to the Transtech Acquisition. Interest expense for
Convergys is determined based upon the weighted average interest rate
for Cincinnati Bell's short-term and long-term interest rates for the
respective period for Cincinnati Bell debt allocated to Convergys and
the interest rate associated with any direct indebtedness of Convergys.
(8) Adjustment reflects the provision for income taxes for the pre-tax
adjustments at Convergys' statutory tax rate for the respective period.
25
26
CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
-------------------------------------------
CONVERGYS
HISTORICAL DISTRIBUTION
CINCINNATI ADJUSTMENTS
BELL (1) PRO FORMA
------------ ------------- -------------
(IN MILLIONS)
Cash and cash equivalents $ 1.6 $ (1.5) $ 0.1
Receivables 481.4 (325.0) 156.4
Materials and supplies 15.7 --- 15.7
Deferred income taxes 17.6 (6.3) 11.3
Prepaid expenses and other current assets 57.8 (30.2) 27.6
-------- --------- --------
Total current assets $ 574.1 $ (363.0) $ 211.1
-------- --------- --------
Property, plant and equipment 819.8 (215.3) 604.5
Goodwill and other intangibles, net 726.0 (708.8) 17.2
Investments in unconsolidated entities 87.5 (83.6) 3.9
Deferred charges and other current assets 87.7 (81.7) 6.0
-------- --------- --------
Total assets $2,295.1 $(1,452.4) $ 842.7
======== ========= ========
Debt maturing within one year 905.9 (754.8) (2) 151.1
Accounts payable and other current
liabilities 391.8 (177.6) 214.2
-------- --------- --------
Total current liabilities 1,297.7 (932.4) 365.3
Long-term debt 268.5 (0.9) (2) 267.6
Other long-term liabilities 106.6 (25.6) 81.0
-------- --------- --------
Total liabilities 1,672.8 (958.9) 713.9
-------- --------- --------
Shareowners' equity 622.3 (493.5) (3) 128.8
-------- --------- --------
Total liabilities and
shareowners' equity $2,295.1 $(1,452.4) $ 842.7
======== ========= ========
26
27
NOTES TO CONSOLIDATED PRO FORMA BALANCE SHEET
(1) Adjustments in this column reflect the elimination of assets and
liabilities that will be transferred from Cincinnati Bell to Convergys
based on the June 30, 1998 consolidated balance sheet of Cincinnati Bell.
(2) Adjustments to debt maturing within one year and long-term debt represent
the amount of direct outstanding indebtedness of Convergys and its
subsidiaries and approximately $752 million in intercompany debt that
Convergys owes to Cincinnati Bell. Pursuant to the terms of the
Distribution Agreement, Convergys will repay this intercompany
indebtedness at or before the date of the Convergys Distribution date. The
actual amount of the intercompany indebtedness repayment will be
determined based on Convergys' cash flow activity from July 1, 1998 to the
date of the repayment and the resultant intercompany balances. The
proceeds from the intercompany indebtedness repayment from Convergys will
be used by Cincinnati Bell to repay outstanding short-term variable rate
debt.
(3) Pro forma shareowners' equity reflects the elimination of Convergys'
shareowners' equity from Cincinnati Bell's historical amounts and the
incurrence of approximately $10 million in nonrecurring costs (net of tax
benefit) related to the Convergys Distribution. Included in the
elimination of Convergys' shareowners' equity is an estimated amount of
approximately $33 million (net of deferred tax benefit) resulting from the
allocation of Cincinnati Bell pension trust assets and obligations to
Convergys. The actual amount of shareowners' equity transferred to
Convergys as a result of the allocation of the Cincinnati Bell pension
trust assets will be determined by calculations performed as of the date
of the Convergys Distributions, using a methodology that has been agreed
to by the management of Cincinnati Bell and Convergys, and may differ from
the amount reflected. The final allocation may differ due to the discount
rates and other assumptions used in the final calculation at the time of
the Convergys Distribution. In addition, the final pension asset
allocation will be subject to regulatory approval.
27