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 JUNE 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 July 31, 1999, 137,801,376 Common Shares were outstanding.
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)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Local Communications Services ......................................... $ 186.1 178.1 $ 367.7 $ 353.4
Directory Services .................................................... 18.3 18.3 36.4 36.8
Wireless Services ..................................................... 20.7 -- 35.9 --
Other Communications Services ......................................... 31.8 25.8 62.4 51.0
Intersegment .......................................................... (3.3) (2.7) (6.6) (5.2)
--------- --------- --------- ---------
Total Revenues ..................................................... $ 253.6 $ 219.5 $ 495.8 $ 436.0
--------- --------- --------- ---------
Costs and Expenses
Cost of providing services and products sold .......................... 109.8 93.4 216.9 182.2
Selling, general and administrative ................................... 58.1 51.7 113.2 104.1
Depreciation and amortization ......................................... 32.6 27.2 64.9 54.0
Year 2000 programming costs ........................................... 1.3 2.3 3.7 5.2
Mandated telecommunications costs ..................................... -- 5.4 -- 9.8
--------- --------- --------- ---------
Total Costs and Expenses ............................................ 201.8 180.0 398.7 355.3
--------- --------- --------- ---------
Operating Income ........................................................ 51.8 39.5 97.1 80.7
Wireless Venture Loss ................................................... -- 7.0 -- 8.7
Minority Interest ....................................................... (1.8) -- (4.1) --
Other Expense, Net ...................................................... -- 1.3 -- 2.0
Interest Expense ........................................................ 9.3 6.4 18.0 10.8
--------- --------- --------- ---------
Income From Continuing Operations Before Income Taxes ................... 44.3 24.8 83.2 59.2
Income Taxes ............................................................ 16.0 8.7 30.2 20.6
--------- --------- --------- ---------
Income From Continuing Operations ....................................... 28.3 16.1 53.0 38.6
Discontinued Operations, Net of Taxes ................................... -- 26.4 -- 26.7
--------- --------- --------- ---------
Net Income .............................................................. $ 28.3 $ 42.5 $ 53.0 $ 65.3
--------- --------- --------- ---------
Other comprehensive income, net of tax:
Foreign currency translation adjustments ............................... -- (1.6) -- (1.7)
--------- --------- --------- ---------
Total other comprehensive income ..................................... -- (1.6) -- (1.7)
--------- --------- --------- ---------
Comprehensive income .................................................... $ 28.3 $ 40.9 $ 53.0 $ 63.6
--------- --------- --------- ---------
Basic Earnings Per Common Share:
Income from Continuing Operations ..................................... $ .21 $ .12 $ .39 $ .29
Income from Discontinued Operations, Net of Taxes ..................... $ -- $ .19 $ -- $ .19
--------- --------- --------- ---------
Net Income ............................................................ $ .21 $ .31 $ .39 $ .48
Diluted Earnings Per Common Share:
Income from Continuing Operations ..................................... $ .20 $ .12 $ .38 $ .28
Income from Discontinued Operations, Net of Taxes ..................... $ -- $ .19 $ -- $ .19
--------- --------- --------- ---------
Net Income ............................................................ $ .20 $ .31 $ .38 $ .47
Dividends Declared Per Common Share ..................................... $ .10 $ .10 $ .20 $ .20
Average Common Shares Used for Earnings Per Share Calculations
(millions)
Basic ................................................................. 136.9 136.0 136.7 135.9
Diluted ............................................................... 141.0 138.6 140.7 138.5
Retained Earnings
Beginning of Period ................................................... $ 11.2 $ 231.1 $ -- $ 221.9
Net Income ............................................................ 28.3 42.5 53.0 65.3
Common Share Dividends Declared ....................................... (13.7) (13.7) (27.2) (27.3)
--------- --------- --------- ---------
End of Period ......................................................... $ 25.8 $ 259.9 $ 25.8 $ 259.9
--------- --------- --------- ---------
Accumulated Other Comprehensive Income:
Beginning of Period ................................................... $ (6.7) $ (8.2) $ (6.7) $ (8.1)
Foreign currency translation adjustments .............................. -- (1.6) -- (1.7)
--------- --------- --------- ---------
End of period ......................................................... $ (6.7) $ (9.8) $ (6.7) $ (9.8)
--------- --------- --------- ---------
See Notes to Financial Statements.
2
Form 10-Q Part I Cincinnati Bell Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
June 30, December 31,
1999 1998
--------------- --------
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 4.1 $ 10.1
Receivables, less allowances of $19.1 and $12.0................................... 149.0 138.0
Material and supplies............................................................. 17.8 16.9
Deferred income taxes............................................................. 18.9 13.8
Prepaid expenses and other current assets......................................... 27.0 18.6
------------ ------------
Total current assets...................................................... 216.8 197.4
Property, plant and equipment - net................................................. 727.4 698.2
Goodwill and other intangibles...................................................... 113.7 103.3
Deferred charges and other assets................................................... 77.2 42.1
------------ ------------
Total Assets........................................................................ $ 1,135.1 $ 1,041.0
------------ ------------
------------ ------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year......................................................... $ 250.3 $ 186.2
Accounts payable and accrued liabilities.......................................... 116.2 133.5
Accrued taxes..................................................................... 28.1 40.6
Advance billing and customers' deposits........................................... 32.9 26.8
Other current liabilities......................................................... 17.8 18.2
------------ ------------
Total current liabilities................................................. 445.3 405.3
Long-term debt...................................................................... 366.3 366.8
Deferred income taxes............................................................... 47.8 15.3
Other postretirement benefits....................................................... 46.1 47.5
Other long-term liabilities......................................................... 53.1 64.0
------------ ------------
Total liabilities......................................................... 958.6 898.9
------------ ------------
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;
137,750,114 and 136,452,719 shares issued and outstanding...................... 1.4 1.4
Additional paid-in capital........................................................ 156.0 147.4
Retained earnings................................................................. 25.8 ---
Accumulated other comprehensive income (loss)..................................... (6.7) (6.7)
------------- ------------
Total shareowners' equity................................................. 176.5 142.1
------------ ------------
Total Liabilities and Shareowners' Equity........................................... $ 1,135.1 $ 1,041.0
------------ ------------
------------ ------------
See Notes to Financial Statements.
3
Form 10-Q Part I Cincinnati Bell Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Six Months
Ended June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 53.0 $ 65.3
Less: income from discontinued operations, net of taxes .............. -- 26.7
-------- -------
Net income from continuing operations ................................ 53.0 38.6
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 64.9 54.0
Provision for loss on receivables ................................. 7.8 5.6
Changes in assets and liabilities net of effects from acquisitions and
disposals:
Decrease (increase) in receivables ................................ (18.9) (27.3)
Decrease (increase) in other current assets ....................... (9.3) (5.9)
Increase (decrease) in accounts payable and accrued liabilities ... (17.2) 21.5
Increase (decrease) in other current liabilities .................. (7.0) (10.9)
Increase (decrease) in deferred income taxes and unamortized
investment tax credits - net ..................................... .1 (3.8)
Decrease (increase) in other assets and liabilities-net ........... (12.9) 13.2
-------- -------
Net cash provided by operating activities ....................... 60.5 85.0
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant .............................. (69.0) (82.2)
Capital expenditures-other (including acquisitions) ............... (39.2) (3.2)
-------- -------
Net cash used in investing activities ........................... (108.2) (85.4)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term debt ........................ 64.1 19.6
Repayment of long-term debt ....................................... (.5) (.4)
Issuance of common shares ......................................... 5.3 1.4
Dividends paid .................................................... (27.2) (27.3)
-------- -------
Net cash provided by (used in) financing activities ............. 41.7 (6.7)
-------- -------
Net cash provided by (used in) discontinued operations .......... -- (.6)
-------- -------
Net increase in cash and cash equivalents ............................ (6.0) (7.7)
Cash and cash equivalents at beginning of period ..................... 10.1 7.8
-------- -------
Cash and cash equivalents at end of period ........................... $ 4.1 $ .1
-------- -------
-------- -------
Cash paid for:
Interest (net of amount capitalized) ............................... $ 13.5 $ 10.2
Income taxes ....................................................... $ 34.8 $ 34.3
See Notes to Financial Statements.
4
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 service,
network access (including high-speed data transport), sales and
installation of 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 holds the Company's Cincinnati Bell
Wireless subsidiary (an 80%-owned venture with AT&T Wireless PCS, Inc.)
which provides advanced digital personal communications services and
sales of related communications equipment to both business and
residential customers in its Greater Cincinnati and Dayton, Ohio
operating areas.
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 and Internet access services and provides data
services and products to small-and medium-sized business customers, CBS
sells new computers and resells telecommunications equipment in the
secondary market, and EnterpriseWise provides network integration and
consulting services.
The Company has effected a change to the par value of common stock and
the stated capital in accordance with the amendment of the Articles of
Incorporation. Accordingly, amounts for common stock and additional
paid in capital have been restated for all periods covered by this
Quarterly Report.
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.
(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".
(3) ACQUISITIONS - On July 20, 1999, the Company entered into a definitive
merger agreement with IXC Communications, Inc., a telecommunications
company headquartered in Austin, Texas. This merger is expected to be
consummated late in the fourth quarter of 1999, or early in 2000. For
further discussion of this matter, see Note 9 of the Notes to Financial
Statements.
On January 1, 1999, the Company began to include the results of its
Cincinnati Bell Wireless subsidiary in its operating results, based
upon the acquisition of an 80% interest in a PCS wireless business that
was consummated on December 31, 1998. 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 $92 million of goodwill and other
intangibles that will be amortized over a
5
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
period ranging from 20 to 40 years. Since the independent valuation
being performed to assess the value of assets purchased is not yet
complete, a further adjustment (which is not expected to be material)
will be required in 1999 to reflect the fair value of these assets.
On April 30, 1999, the Company acquired the assets of Discounted Long
Distance (DLD), a long distance reseller in Knoxville, Tennessee. DLD
sells long distance services primarily to businesses in the Knoxville
and Chattanooga, Tennessee areas. The purchase price for this
acquisition was $2.1 million; $2.0 million of which was paid in May
1999. The goodwill recorded for this transaction was approximately $2.0
million, and will be amortized over a five-year period.
In May 1999, the Company invested $2.0 million in the convertible
preferred stock of Purchase Pro International, Inc. (Purchase Pro).
Purchase Pro, based in Las Vegas, Nevada, is a leading provider of
online business-to-business procurement solutions. As a result of this
investment, the Company's ZoomTown.com subsidiary will be the exclusive
sales channel for PurchasePro.com's eCommerce services in Ohio, one of
two exclusive sales channels in Kentucky, and has the potential for
future sales exclusivity in several other mid-western states.
(4) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information is for the Company's consolidated wholly owned subsidiary,
Cincinnati Bell Telephone Company:
Three Months Six Months
Ended June 30, Ended June 30,
MILLIONS OF DOLLARS 1999 1998 1999 1998
Revenues $ 186.1 $ 178.1 $ 367.7 $ 353.4
Costs and Expenses:
Costs of providing services and products sold 70.8 73.5 142.6 143.0
Selling, general and administrative 35.5 39.1 69.4 78.0
Depreciation and amortization 27.7 26.3 55.3 52.0
Year 2000 programming costs 1.3 2.3 3.7 5.2
Mandated telecommunications costs --- 5.4 --- 9.8
----- ----- ----- -----
Total Costs and Expenses 135.3 146.6 271.0 288.0
----- ----- ----- -----
Operating Income $ 50.8 $ 31.5 $ 96.7 $ 65.4
Net Income $ 29.5 $ 17.9 $ 56.1 $ 36.9
"Year 2000 programming costs" refer 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"
refer 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. On February 1, 1999, CBT began to recover these mandated
telecommunications costs through an FCC-authorized surcharge imposed on
end-user customers. Year 2000 and mandated telecommunications costs
decreased net income by $2.4 million and $9.6 million for the six
months ended June 30, 1999 and 1998, respectively.
June 30, December 31,
MILLIONS OF DOLLARS 1999 1998
---- ----
Current Assets............................................................ $ 145.0 $ 151.6
Telephone Plant-Net....................................................... 588.7 580.8
Other Noncurrent Assets................................................... 32.2 17.1
---------- ----------
Total Assets.............................................................. $ 765.9 $ 749.5
---------- ----------
---------- ----------
Current Liabilities....................................................... $ 146.3 $ 144.2
Noncurrent Liabilities.................................................... 49.6 38.7
Long-Term Debt............................................................ 316.7 317.1
Shareowner's Equity....................................................... 253.3 249.5
---------- ----------
Total Liabilities and Shareowner's Equity................................. $ 765.9 $ 749.5
---------- ----------
---------- ----------
6
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(5) CONTINGENCIES - The Company is from time to time subject to routine
complaints incidental to the business. The Company believes that the
results of any complaints and proceedings will not have a materially
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 PUCO has not yet issued its order on this matter.
On July 23, 1999, the Company was named as a defendant in a lawsuit
filed against IXC Communications, Inc., the Company's proposed merger
partner. A further discussion of this and other matters follows in Note
9 of the Notes to Financial Statements, and in Item 1, Part II of this
Quarterly Report on Form 10-Q.
(6) 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:
Three Months Six Months
Dollars and Shares in Millions Ended June 30, Ended June 30,
(except per share amounts) 1999 1998 1999 1998
Basic earnings per share:
Income from continuing operations $28.3 $16.1 $53.0 $38.6
Average common shares outstanding 136.9 136.0 136.7 135.9
----- ----- ----- -----
Basic earnings per share from continuing operations $.21 $.12 $ .39 $ .29
----- ----- ----- -----
Fully diluted earnings per share:
Income from continuing operations $28.3 $16.1 $53.0 $38.6
Effect of dilutive securities:
Average common shares, basic earnings per share calculation 136.9 136.0 136.7 135.9
Stock options 3.3 2.0 3.2 2.0
Stock-based compensation arrangements .8 .6 .8 .6
----- ----- ----- -----
Average common shares, fully diluted 141.0 138.6 140.7 138.5
----- ----- ----- -----
Fully diluted earnings per share from continuing operations $.20 $.12 $ .38 $ .28
----- ----- ----- -----
Options totaling 117,590 and 12,615 shares were outstanding during the
six-month period and three-month periods ended June 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 $22.46
and $24.36 for these options being greater than the average market
price of the common shares for the period.
(7) 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 six months of 1999, the Company
capitalized $3.0 million of software development costs, resulting in a
$1.9 million increase to net income in comparison to prior period
results.
7
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(8) 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:
Three Months Six Months
MILLIONS OF DOLLARS Ended June 30, Ended June 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Local Communications Services $186.1 $178.1 $367.7 $ 353.4
Directory Services 18.3 18.3 36.4 36.8
Wireless Services 20.7 --- 35.9 ---
Other Communications Services 31.8 25.8 62.4 51.0
Intersegment (3.3) (2.7) (6.6) (5.2)
------------- ------------ ------------- ------------
$253.6 $219.5 $495.8 $436.0
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
INTERSEGMENT REVENUES
Local Communications Services $ 1.8 $ 1.1 $ 3.3 $ 2.0
Directory Services 0.4 0.7 0.8 1.3
Wireless Services 0.2 --- 0.5 ---
Other Communications Services 0.9 0.9 2.0 1.9
------------- ------------ ------------- ------------
$ 3.3 $ 2.7 $ 6.6 $ 5.2
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
OPERATING INCOME (LOSS)
Local Communications Services $ 50.8 $ 31.5 $ 96.7 $ 65.4
Directory Services 6.7 6.3 13.1 12.7
Wireless Services (8.5) --- (17.9) (0.6)
Other Communications Services 0.9 2.3 2.2 5.5
Corporate and Eliminations 1.9 (.6) 3.0 (2.3)
------------- ------------ ------------- ------------
$ 51.8 $ 39.5 $ 97.1 $ 80.7
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
ASSETS
Local Communications Services 765.9 $ 752.6
Directory Services 35.3 34.0
Wireless Services 236.8 15.4
Other Communications Services 52.2 32.8
Net Assets of Discontinued Operations --- 451.0
Corporate and Eliminations 44.9 51.1
------------- ------------
------------- ------------
$ 1,135.1 $ 1,336.9
------------- ------------
------------- ------------
CAPITAL ADDITIONS (including acquisitions)
Local Communications Services $ 40.9 $ 43.1 $ 69.0 $ 82.2
Directory Services --- --- --- ---
Wireless Services 12.3 0.5 30.8 0.8
Other Communications Services 4.1 0.9 6.4 1.9
Corporate 2.0 0.1 2.0 0.5
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
$ 59.3 $ 44.6 $ 108.2 $ 85.4
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
DEPRECIATION AND AMORTIZATION
Local Communications Services $ 27.7 $ 26.3 $ 55.3 $ 52.0
Directory Services --- --- --- ---
Wireless Services 3.4 --- 6.7 ---
Other Communications Services 1.5 0.6 2.9 1.5
Corporate --- 0.3 --- 0.5
------------- ------------ ------------- ------------
$ 32.6 $ 27.2 $ 64.9 $ 54.0
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Since the close of the last fiscal year on December 31, 1998, the
Company has added a new 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.
8
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(9) MERGER WITH IXC COMMUNICATIONS - On July 20, 1999, the Company entered
into a definitive merger agreement with IXC Communications, Inc.
("IXC"), a leading provider of data and voice telecommunications
transmission services. IXC owns and operates an advanced coast-to-coast
fiber optic network that includes approximately 13,000 route miles of
fiber optic transmission facilities.
Under the terms of the agreement, which was approved by the boards of
directors of both companies, each share of IXC common stock will be
converted into 2.0976 shares of Cincinnati Bell common stock. The
Company has separately agreed to purchase from the General Electric
Pension Trust approximately 5 million shares of IXC common stock at $50
per share, in cash, prior to the completion of the merger (this
purchase was completed on August 16, 1999). As part of
the agreement, shareholders representing approximately 40% of the
voting shares have agreed to vote in favor of the acquisition.
Based on a $22.86 per common share weighted average of Cincinnati
Bell's closing stock price on the three days before and after the
merger announcement, the transaction would be valued at approximately
$3.0 billion (including approximately $1.0 billion of IXC's net debt
that will be assumed by the Company).
Concurrent with the announcement of the merger agreement, Oak Hill
Capital Partners, L.P. agreed to purchase $400 million of convertible
subordinated debentures of Cincinnati Bell. The debentures have a
coupon of 6.75% per annum and are initially convertible at a price of
$29.89 per share of Cincinnati Bell common stock. Cincinnati Bell's
board of directors has authorized using up to $200 million of the
proceeds from the Oak Hill investment to repurchase shares of
Cincinnati Bell common stock in the open market in accordance with a
share repurchase program. As of the date of this filing,
the Company has purchased Cincinnati Bell common shares at an
aggregate purchase price of approximately $52 million.
The agreement also specifies that a "break up fee" of $105 million is
to be paid to the Company, or to IXC, in the event that:
(a) either party were to terminate the agreement without cause,
(b) or upon receipt of a takeover proposal,
(c) or such takeover proposal otherwise becomes publicly known,
and certain other considerations are satisfied.
As of the date of this filing, five purported 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 announcement of the proposed merger between the
Company and IXC. The Company was 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 seek, among other things,
a court order enjoining completion of the merger. The Company believes
that the complaints are without merit and intend to defend vigorously
against the complaints.
The completion of the merger is subject to customary conditions and
regulatory approvals and the approvals of the shareholders of
Cincinnati Bell and IXC. The merger will be accounted for under the
purchase method of accounting, and is expected to be completed late in
the fourth quarter of 1999, or early in 2000. Further discussion of
this matter can be found in the Company's Form 8-Ks, filed with the
Securities and Exchange Commission on July 21, 1999 and July 23, 1999.
9
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 years.
CONSOLIDATED OVERVIEW
Revenues were $253.6 million for the quarter, up 16%. Year-to-date revenues of
$495.8 million represent a $59.8 million increase, or 14% growth year-over-year.
Modest growth in the Company's core telephone business was bolstered by new
businesses such as Cincinnati Bell Wireless and EnterpriseWise IT Consulting
which, in the aggregate, contributed nearly 70% of the revenue increase during
both periods.
The Local Communications Services segment contributed an additional $8.0 million
of revenue for the quarter ($14.3 million year-to-date) as a result of growth in
several areas. Broadband and other high-speed services increased 22% over the
prior-year quarter, while value-added voice services such as Caller ID and new
product bundling solutions such as Complete ConnectionsSM, increased 28% over
second quarter 1998 results. Since its introduction in March 1999, nearly 50,000
households have signed up for Complete Connections; representing 7.9% of CBT's
residential customer base and contributing $2.2 million in additional revenues.
Access minutes of use increased 6.3% from the second quarter of 1998, while
access lines grew 3% (largely due to business access line growth). The Wireless
Services segment added revenues of $20.7 million for the quarter and $35.9
million year-to-date on the strength of one of the nation's most successful
wireless service introductions. The Other Communications Services segment
produced $6.0 million in new revenues for the quarter, and $11.4 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 six-month period
ended June 30, 1999, operating margins were 20.4% and 19.6%, respectively. This
improvement occurred despite the $17.9 million operating loss of the Wireless
Services segment (which is still in the start-up phase of its development)
during the first six months of 1999. Without this operating loss, the Company's
operating margin improved from 18.6% for the first six months of 1998 to 25.0%
for the first six months of 1999. This improvement was largely attributable to
the operations of the Local Communications Services segment.
Costs and expenses were $201.8 million for the quarter and $398.7 million
year-to-date; representing 12% increases over the respective periods in 1998.
Although these expenses increased in total during the two periods ($21.8 million
for the quarter and $43.4 million year-to-date), more than 100% of this increase
was incurred by the Company's wireless business.
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 $4.9 million for the quarter and $5.7 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 was increased from 342 to 362 during this period; a 6% improvement.
The Company incurred lower costs for Year-2000 programming during the second
quarter of 1999. These costs totaled $1.3 million for the three months ended
June 30, 1999, and $3.7 million year-to-date. In comparison to the same periods
in the prior year, these costs decreased by 43% and 29%, respectively.
Additional details regarding the Company's Year-2000 readiness appear later in
this report.
Mandated telecommunications costs in 1998 were incurred by CBT 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 six-month period ended June 30, 1998, CBT incurred costs of $9.8
million. The program was
10
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
completed during 1998. On February 1, 1999, CBT began to recover costs
associated with this initiative through an FCC-authorized surcharge imposed on
end-user customers.
Operating income was $51.8 million for the quarter, up 31% from $39.5 million in
the second quarter of 1998. For the six-month period, operating income was $97.1
million; a 20% increase over the same period in the prior year. Excluding the
operating loss of the wireless business, operating income increased 53% for the
quarter and 43% year-to-date.
Interest and other expenses increased $1.6 million, or 21%, for the quarter, due
largely to higher average debt levels associated with the acquisition of the
wireless business. For the six-month period, interest and other expenses
increased $5.2 million, or 41%.
Income taxes increased $7.3 million over the prior-year quarter, or 84%, as a
function of higher pre-tax income. Year-to-date income tax expense increased
$9.6 million, or 47%, versus the same period in 1998.
Income from continuing operations was $28.3 million, or $.20 per common share
for the quarter; $53.0 million, or $.38 per common share year-to-date. These
results reflect a 76% and 37% improvement versus the same periods
in 1998. Excluding the $12.8 million year-to-date loss for the wireless
business, income from continuing operations was $65.8 million, or $.47 per
common share.
11
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOCAL COMMUNICATIONS SERVICES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
($ Millions) 1999 1998 CHANGE % 1999 1998 CHANGE %
---- ---- ------ - ---- ---- ------ -
Revenues
Local service $104.9 $100.9 $4.0 4 $208.8 $201.5 $7.3 4
Network access 46.8 45.7 1.1 2 92.6 90.3 2.3 3
Other services 34.4 31.5 2.9 9 66.3 61.6 4.7 8
------ ------ ------ ------ ------ ------
Total 186.1 178.1 8.0 4 367.7 353.4 14.3 4
Costs and expenses:
Costs of providing services 70.8 73.5 (2.7) (4) 142.6 143.0 (.4) ---
Selling, general and administrative 35.5 39.1 (3.6) (9) 69.4 78.0 (8.6) (11)
Depreciation and amortization 27.7 26.3 1.4 5 55.3 52.0 3.3 6
Year 2000 programming costs 1.3 2.3 (1.0) (43) 3.7 5.2 (1.5) (29)
Mandated telecommunications costs --- 5.4 (5.4) --- --- 9.8 (9.8) ---
------ ------ ------ ------ ------ ------
Total Costs and Expenses 135.3 146.6 (11.3) (8) 271.0 288.0 (17.0) (6)
Operating income $50.8 $31.5 $ 19.3 61 $96.7 $65.4 $ 31.3 48
Operating margin 27.3% 17.7% 26.3% 18.5%
Access lines (In thousands) 1,051 1,025 26 3 1,051 1,025 26 3
Minutes of use (In millions) 1,111 1,046 65 6 2,253 2,099 154 7
The Local Communications Services segment provides local service, network access
(including high-speed data transport), sales and installation of 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.
Revenues were $186.1 million and $367.7 million for the second quarter and six
months of 1999, respectively, compared to $178.1 million and $353.4 million for
the same periods in 1998. For the three months and six months ended June 30,
1999, revenues increased $8.0 million and $14.3 million, respectively,
representing a 4% increase over both periods in 1998.
For the second quarter, local service revenues increased by $4.0 million over
the prior year to $104.9 million, a 4% increase. Similarly, year-to-date local
service revenues of $208.8 million were $7.3 million higher than the prior year,
also a 4% increase. Local service revenues are increasing primarily due to
increased usage of the Company's suite of custom calling services, new product
bundling offers, access line growth, and data transport.
For the second quarter, network access revenues increased $1.1 million, or 2%,
to $46.8 million. For the six-month period, network access revenues increased
$2.3 million to $92.6 million, representing a 3% increase over the prior year.
This increase was primarily due to growth in high-capacity digital services, and
revenues associated with the recovery of mandated telecommunications costs (CBT
began a recovery of these costs through a surcharge that began in February,
1999). Access minutes-of-use increased 6% for the quarter and 7% year-to-date;
however, this was offset by a reduction in per-minute rates. These reductions
took place pursuant to the price-cap rules of the Federal Communications
Commission, and as part of the "Commitment 2000" plan approved by the Public
Utilities Commission of Ohio (see further discussion in the "Regulatory Matters
and Competitive Trends" section of Management Discussion and Analysis).
12
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues from other services increased $2.9 million for the quarter to $34.4
million, or 9%. For the six-month period, other services revenue increased $4.7
million to $66.3 million; 8% higher than in the prior year. Revenues from the
Company's FUSE Internet access service increased 42% for the quarter and 58%
year-to-date. Additional increases in the category are attributable to equipment
sales, wiring installation and maintenance contracts, rent revenue, and the
implementation of a late payment charge on delinquent customer accounts.
Offsetting these revenue increases was an increase to the provision for loss on
receivables of $0.6 million for the quarter, and $1.3 million year-to-date.
Total operating expenses of $135.3 million for the quarter were $11.3 million
less than the same period last year, representing an 8% decrease. For the
six-month period, operating expenses decreased 6% ($17.0 million) from $288.0
million to $271.0 million.
Costs of providing services decreased by approximately $2.7 million for the
quarter, and $0.4 million year-to-date. This is primarily due to $2.3 million
lower expenditures for payroll and temporary labor sources in the quarter and
year-to-date that result from CBT's continuing efforts at increasing
productivity. These efforts have resulted in a 5% increase in access lines per
employee since the beginning of 1999.
Selling, general and administrative expenses decreased by approximately $3.6
million for the current quarter, with an $8.6 million decrease in this category
year-to-date. Advertising expense increased approximately $1.5 million for the
quarter, and $2.5 million year-to-date, in support of new calling services and
the Company's ZoomTown.com Internet presence. Consulting and contract services
were $3.1 million and $4.2 million lower for the quarter and six months,
respectively, as CBT seeks to increase productivity through lower usage of
external labor sources. Computer programming expenses and right-to-use fees
decreased by $3.1 million for the quarter and $7.9 million year-to-date. This is
due to a reduction in projects initiated, and the capitalization of
approximately $3.0 million in internal use software as required by AICPA
Statement of Position 98-1; $1.7 million of which was incurred in the second
quarter (similar costs were expensed in prior year; see Note 7 of Notes to
Financial Statements). Depreciation expense increased $1.4 million for the
quarter and $3.3 million year-to-date as a function of higher telephone plant
balances.
Year-2000 programming expenses were slightly lower than in the prior year,
reflecting the progress previously made on critical systems. Current quarter
expenditures of $1.3 million were $1.0 million less than in the prior year, with
a similar reduction in year-to-date spending ($3.7 million versus $5.2 million
in prior year). Mandated telecommunications costs decreased by $5.4 million for
the quarter and $9.8 million for the six-month period, reflecting the completion
of the local number portability initiative and initial interconnection expenses
in 1998.
For the quarter, operating income improved by $19.3 million, or 61%, over the
same period in the prior year. Similarly, year-to-date operating income
increased $31.3 million, or 48%, over the first six months of 1998. This led to
substantial gains in operating margin for the quarter and for the year,
improving 54% and 42%, respectively, over the same periods in the prior year.
DIRECTORY SERVICES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
($ Millions) 1999 1998 CHANGE % 1999 1998 CHANGE %
Revenues $18.3 $18.3 $--- --- $36.4 $36.8 $(.4) (1)
Costs and Expenses:
Costs of providing services 6.8 7.1 (.3) (4) 13.5 14.2 (.7) (5)
Selling, general and administrative 4.8 4.9 (.1) (2) 9.8 9.9 (.1) (1)
-------- --------- ---------- --------- --------- ----------
Total Costs and Expenses 11.6 12.0 ( .4) (3) 23.3 24.1 (.8) (3)
-------- --------- ---------- --------- --------- ----------
Operating income $ 6.7 $ 6.3 $ .4 6 $13.1 $12.7 $ .4 3
Operating margin 36.6% 34.4% 36.0% 34.5%
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
13
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Internet-based service known as "Cincinnati Exchange," or on CD-Rom.
Second quarter revenues of $18.3 million were equal to the prior year.
Year-to-date revenues decreased $0.4 million, or 1%, reflecting the competitive
environment that was in effect during the June 1998 sales campaign (directory
services revenues are deferred and recognized over a twelve-month period).
Operating expenses decreased $0.4 million for the second quarter and $0.8
million year-to-date; a 3% decrease from the same periods in the prior year.
These decreases are largely attributable to a more favorable sales commission
rate, and lower costs of procuring business listings.
Operating income and operating margin were improved for both periods. Operating
income improved by $.4 million for the quarter and year-to-date, representing a
6% and 3% improvement, respectively. Operating margins were improved in both
periods, with the previously mentioned cost savings offsetting the lower
revenues from the prior year sales campaign.
WIRELESS SERVICES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
($ Millions) 1999 1998 CHANGE % 1999 1998 CHANGE %
---- ---- ------ - ---- ---- ------ -
Revenues $20.7 --- $20.7 --- $35.9 --- $35.9 ---
Costs and Expenses:
Costs of providing services 14.7 --- 14.7 --- 26.0 --- 26.0 ---
Selling, general and administrative 11.0 .1 10.9 --- 21.1 .6 20.5 ---
Depreciation and amortization 3.5 --- 3.5 --- 6.7 --- 6.7 ---
--------- -------- ----------- ---------- -------- ----------
Total Costs and Expenses 29.2 .1 29.1 --- 53.8 .6 53.2 ---
--------- -------- ----------- ---------- -------- ----------
Operating income (loss) $(8.5) (.1) $ (8.4) --- $ (17.9) $ (.6) $ (17.3) ---
Operating margin (41.0)% --- (49.9)% ---
The Wireless Services segment holds the Company's Cincinnati Bell Wireless
subsidiary (an 80%-owned venture with AT&T Wireless PCS, Inc.) which provides
advanced digital personal communications services and sales of related
communications equipment to both business and residential customers in its
Greater Cincinnati and Dayton, Ohio operating areas. On January 1, 1999, the
Company began including the results of its Cincinnati Bell Wireless subsidiary
in its operating results, based on the acquisition that was consummated on
December 31, 1998 (see Note 3). Accordingly, comparisons to the prior year do
not yield meaningful results.
Revenues for the quarter were $20.7 million, up 36% from the $15.2 million
reported for the first three months of 1999. Revenues grew faster than the
Company's expectations, resulting in a commensurate increase in expenses, or
$29.2 million for the quarter (a 19% increase over the $24.6 million reported in
the first quarter). The operating loss of $8.5 million was within the Company's
expectations for this period, and increased the operating loss for the year to
$17.9 million. The net loss (which includes interest and income tax expense,
offset by minority interest income) of $6.6 million for the quarter and $12.8
million year-to-date, is dilutive to the Company's earnings in the amount of
$.05 and $.09 per common share, respectively.
The Company is in the start-up phase of this business. After the first six
months of 1999, customer churn remains 1.37%, average revenue per user is $72,
and cumulative subscribership stands at more than 88,000.
14
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER COMMUNICATIONS SERVICES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
($ Millions) 1999 1998 CHANGE % 1999 1998 CHANGE %
---- ---- ------ - ---- ---- ------ -
Revenues $31.8 $25.8 $6.0 23 $62.4 $51.0 $11.4 22
Costs and Expenses:
Costs of providing services 20.5 16.8 3.7 22 40.9 32.3 8.6 27
Selling, general and administrative 8.9 6.1 2.8 46 16.5 11.7 4.8 41
Depreciation and amortization 1.5 .6 .9 150 2.8 1.5 1.3 87
--------- --------- ------ -------- ------- -------
Total Costs and Expenses 30.9 23.5 7.4 31 60.2 45.5 14.7 32
--------- --------- ------ -------- ------- -------
Operating income $ 0.9 $ 2.3 $ (1.4) (61) $ 2.2 $ 5.5 $ (3.3) (60)
Operating margin 2.8% 8.9% 3.5% 10.8%
The Other Communications Services segment comprises the operations of the
Company's Cincinnati Bell Long Distance (CBLD), Cincinnati Bell Supply (CBS),
and EnterpriseWise IT Consulting (EnterpriseWise) subsidiaries. CBLD resells
long distance, voice, data, frame relay, and Internet access services to small-
and medium-sized business customers mainly in six states. CBS sells new
computers and resells telecommunications equipment in the secondary market, and
EnterpriseWise provides network integration and consulting services.
For the quarter, revenues increased to $31.8 million; a $6.0 million, or 23%,
increase versus the same period in the prior year. Year-to-date revenues of
$62.4 million are $11.4 million higher than in the prior year; a 22% increase.
The long distance operations contributed an increase of $0.9 million for the
quarter and $1.9 million year-to-date, as an increase in billed minutes and
revenues from the introduction of the new services described below, offset by
lower rates necessitated by increasing competition. The equipment reseller
benefited from new services and sales contracts, contributing an additional $1.9
million for the quarter and $4.3 million year-to-date. The network integration
and consulting business provided additional revenue of $3.1 million for the
quarter and $5.2 million year-to-date through its original sales channels and
its acquisition of KSM Consulting (subsequently referred to as "EnterpriseWise")
in October 1998.
Operating expenses increased $7.4 million for the quarter and $14.7 million
year-to-date; 31% and 32% increases, respectively. Costs of providing services
were approximately $4 million higher for the quarter and $9 million for the
six-month period, with all subsidiaries experiencing increases due to higher
sales volumes. Selling, general and administrative costs (SG&A) were $2.8
million higher for the quarter and $4.8 million year-to-date. However, the
increase in SG&A expenses can be largely attributed to entry into new businesses
by all subsidiaries within this segment. CBLD experienced a $1.4 million
increase in SG&A for the quarter and $2.5 million year-to-date in support of its
introduction of data transport, high-speed Internet, and local exchange
services. An additional $.8 million for the quarter and $1.7 million
year-to-date in SG&A expense is attributable to EnterpriseWise; a business that
reported no SG&A costs for the first six 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 was $1.4 million less than in
the prior year. Similarly, operating income of $2.2 million year-to-date is $3.3
million less than in the prior year. Operating income was 61% lower for the
quarter and 60% year-to-date, and is the result of the items discussed above.
15
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME STATEMENT ITEMS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
($ Millions) 1999 1998 CHANGE % 1999 1998 CHANGE %
---- ---- ------ - ---- ---- ------ -
Wireless Venture Loss $ -- $7.0 $(7.0) -- $ --- $ 8.7 $(8.7) ---
Minority Interest $(1.8) $ -- $(1.8) -- $(4.1) $ -- $(4.1) ---
Other Expense, Net $ --- $1.3 $(1.3) -- $ --- $ 2.0 $(2.0) ---
Interest Expense $ 9.3 $6.4 $ 2.9 45 $ 18.0 $ 10.8 $ 7.2 67
Income Taxes $ 16.0 $8.7 $ 7.3 84 $ 30.2 $ 20.6 $ 9.6 47
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, an $8.7 million loss was recorded and shown in the
Consolidated Statements of Income and Retained Earnings under the caption
"Wireless Venture Loss"; $7.0 million of which was reflected in the second
quarter of 1998. With the Company's acquisition of the 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 $4.1 million in minority interest income in order to
recognize AT&T PCS' 20% ownership interest in the operating loss of the wireless
business; $1.8 million of which was reflected in the second 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 $1.6 million
for the quarter, or 21%, and $5.2 million year-to-date, or 41%. These increases
are largely attributable to higher average debt levels associated with the
acquisition of the wireless business.
INCOME TAXES - Income taxes of $16.0 million for the quarter increased by $7.3
million over the same period in 1998, representing an 84% increase. For the
six-month period, income taxes of $30.2 million are $9.6 million higher than in
the prior year; a 47% increase. The effective composite tax rate for both
quarters was 36.3%, as compared to approximately 35% in the prior year. The
Company believes that the effective tax rate is a sustainable rate for 1999. The
Company monitors this rate and adjusts it periodically as conditions warrant. In
1999, income tax expense reflects a $7.2 million tax benefit associated with the
net loss of the Company's wireless business.
16
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
The proposed merger with IXC will significantly alter the Company's capital
structure and capital requirements. Effective with the closing of the merger,
the Company will assume approximately $1 billion in IXC's net debt and preferred
stock. Furthermore, the completion of IXC's Gemini 2000 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.
The sale of $400 million of the Company's convertible subordinated debentures
to Oak Hill Capital Partners, L.P. has provided additional working capital to
the Company. 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. As of the date of this filing, approximately $231 million of
the proceeds of this sale have been used by the Company to liquidate all of
its outstanding commercial paper. The Company is also currently engaging in a
stock repurchase program that has resulted in the purchase of the Company's
common stock, requiring approximately $52 million of the $200 million
authorized for this program. Although $200 million has been authorized for
the buyback of the Company's common shares (see Note 9 of Notes to Financial
Statements), the Company may purchase considerably less than that based on
market conditions. Furthermore, the Company has purchased 4,999,345 IXC
common shares held by General Electric Pension Trust, requiring $250 million
of the proceeds. The excess of these cash requirements over the cash provided
by sale of the debentures was provided by an interim banking facility
established by the Company.
Pending the results of a current review of the Company's credit ratings, it is
unlikely that the Company will be able to utilize the $200 million remaining
from the shelf registration filed with the Securities and Exchange Commission in
October 1998. In response to that probability, the Company has established
interim financing until a permanent credit facility is established.
Regarding future cash requirements, it should also be noted that the
aforementioned $400 million in convertible subordinated debentures could be
exchanged for stock of the combined company at a future date. This is discussed
further in Note 9 of the Notes to Financial Statements and Item 2, Part II of
this Report on Form 10-Q.
CASH FLOW
Income from continuing operations, adjusted for non-cash expenses, was $126
million for the first six months of 1999 compared to $98 million in 1998; a $28
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 decreased approximately $39 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 $26 million. As a result of the above, cash provided by operating
activities equaled $61 million; $24 million less than the $85 million during the
same period in 1998.
The Company's significant investing activities were capital expenditures and
acquisitions. Through the first six months of 1999, capital expenditures were
approximately $92 million (less acquisitions); a $7 million increase versus the
prior year. This net increase resulted from increased investment in the
infrastructure of the Company's wireless business. In the current year,
acquisitions totaled $16 million due to the Company's purchase of a long
distance reseller, the investment in an eCommerce vendor, and additional
investment in the wireless business (see Note 2 of Notes to Financial
Statements). No such acquisitions took place in the first six months of 1998.
Capital expenditures for 1999, including capitalization of software as required
by AICPA Statement of Position 98-1, are estimated to be $190 million, excluding
acquisitions.
In order to fund the items noted above and make dividend payments to its
shareholders, the Company incurred an additional $64 million in short-term debt
in 1999. Dividends paid to shareholders were $27 million for the first six
months of 1999 and 1998. As part of its proposed merger with IXC Communications,
Inc., the Company has announced that it will discontinue dividend payments after
the dividend payment on August 3, 1999. At current levels, this will provide
approximately $14 million per quarter in reduced cash requirements.
BALANCE SHEET
The $6 million decrease in cash and cash equivalents is attributable to the
items discussed above. Although the Company increased its provision for doubtful
accounts, net receivables increased $11 million as a function of higher
revenues. Inventory levels increased by $1 million primarily due to the
increased requirement for handsets sold by the
17
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company's wireless business. Goodwill and other intangibles increased as a
result of the acquisition of a long-distance reseller and the adjustment to the
purchase price for the wireless business (see Note 3). The $29 million increase
in property, plant and equipment and the $64 million increase in short-term debt
are discussed in more detail above. The $9 million increase to common stock
outstanding and additional paid in capital is the result of stock option
exercises which resulted in $5 million in incremental cash flow to the Company.
CAPITALIZATION
As of the date of this filing, the Company maintains the following debt and
corporate credit ratings:
Duff & Phelps
Standard and Credit Rating Moody's Investor
Entity Description Poor's Service Service
- ------ ----------- ------ ------- -------
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
Each of the aforementioned ratings services have placed the Company's ratings
under review for a possible downgrade in response to the July 21, 1999
announcement of a definitive merger agreement between the Company and IXC
Communications, Inc. As of the date of this filing, the Company is not aware of
any changes to these ratings.
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. At this time, the
full impact of the 1996 Act and any associated FCC regulations cannot readily be
determined.
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. A hearing on this portion of the
case was conducted in March 1999. The PUCO has not yet issued a 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 which 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.
18
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other industries
with the telecommunications industry are causes for increasing competition
throughout the telecommunications 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 5,700 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. 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 proposed 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 would benefit from this business combination
through the addition of new potential customers, sales channels, and markets.
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 six months of 1999 and 1998, the Company incurred Y2K expenses of
$3.7 million and $5.2 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.
19
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CBT will also be testing and refining its contingency plans working with the
U.S. Government's National Communications System, National Telecommunications
Alliance (NTA), and Telco Year 2000 Forum 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.
20
Form 10-Q Part II Cincinnati Bell Inc.
ITEM 1. LEGAL PROCEEDINGS
As of the date of this filing, five purported 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
announcement of the proposed merger between the Company and IXC. The Company
was also 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 seek, among other
things, a court order enjoining completion of the merger. The Company
believes that the complaints are without merit and intends to defend
vigorously against the complaints.
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 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. Conversion can take place after
the waiting period under the Hart-Scott-Rodino Act has been terminated or
expired, or the consummation of the merger with IXC, whichever occurs later.
Conversion can also take place upon a change of corporate control or pursuant
to certain "prepayment events".
As of the date of this filing, approximately $231 million of the proceeds of
the sale of the subordinated debentures to Oak Hill have been used by the
Company to liquidate all of its outstanding commercial paper. The Company is
also currently engaging in a stock repurchase program that has resulted in
the purchase of the Company's common stock. Additionally, the Company has
purchased the 4,999,345 IXC common shares held by General Electric Pension
Trust. The combination of these two stock purchase initiatives has required
approximately $302 million of the proceeds. The excess of these cash
requirements over the cash provided by sale of the debentures was provided by
an interim banking facility established by the Company.
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 securities. The Company claims exemption from
registration of these securities pursuant to Regulation D of the Securities
and Exchange Commission's Rule 501.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was conducted on April 26, 1999. At
this meeting, shareholders voted on:
(i) Election of three directors for terms expiring in 2002,
(ii) Amendment of the Company's Articles of Incorporation to reduce the
par value of common shares and the stated capital of the Company,
(iii) Appointment of PricewaterhouseCoopers LLP as independent accountants
for audit of the Company's financial statements, and
(iv) A shareholder proposal requiring the annual election of all directors.
James D. Kiggen was elected as a director with 117,360,058 common shares voting
for election and 1,492,100 shares voting against election. Daniel J. Meyer was
elected as a director with 117,479,960 common shares voting for election and
1,372,198 shares voting against election. Mary D. Nelson was elected as a
director with 117,517,617 common shares voting for election and 1,334,541 shares
voting against election.
The proposal to amend the Company's Articles of Incorporation to reduce the par
value of common shares to $.01 and the stated capital of the Company was
approved with 115,003,724 common shares voting for the proposal, 2,387,617
common shares voting against the proposal, and 1,460,817 common shares which
were abstentions or broker non-votes.
PricewaterhouseCoopers LLP was ratified as the Company's independent accountants
with 117,511,018 common shares voting for ratification, 629,555 common shares
voting against ratification, and 711,585 common shares which were abstentions or
broker non-votes.
The shareholder proposal to declassify the Board of Directors and require annual
election of all directors was not adopted, with 39,370,023 common shares voting
for the proposal, 61,207,741 common shares voting against the proposal, and
18,274,394 common shares which were abstentions or broker non-votes.
Regarding (ii) above, the Company has effected a change to the par value of
common stock and the stated capital in accordance with the amendment of the
Articles of Incorporation. Accordingly, amounts for common stock and additional
paid in capital have been restated for all periods covered by this Quarterly
Report.
21
Form 10-Q Part II Cincinnati Bell Inc.
ITEM 5. OTHER INFORMATION
Other information pertaining to the Company, and its proposed merger with IXC,
can be found on the Company's Forms 8-K described in Item 6(b).
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
(10)(iii)(A)(1) Employment Agreement effective April 9, 1999,
between the Company and Richard S. Pontin.
27 Financial Data Schedule
(b) Reports on Form 8-K.
(i) Form 8-K, date of report April 9, 1999, reporting that Richard S.
Pontin became President and Chief Operating Officer of Cincinnati
Bell Telephone Company, a wholly owned subsidiary of Cincinnati Bell
Inc.
(ii) Form 8-K, date of report July 21, 1999, reporting that
Cincinnati Bell Inc. had reached a definitive merger agreement with
IXC Communications, Inc.
(iii) Form 8-K, date of report July 23, 1999, supplying various
agreements relating to the proposed merger between Cincinnati Bell
Inc. and IXC Communications, Inc.
22
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: August 16, 1999 /s/ Kevin W. Mooney
----------------- ---------------------------
Kevin W. Mooney
Chief Financial Officer
23