Edgar Filing: CINCINNATI BELL INC

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Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2010

¨	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.


Ohio		31-1056105
(State of Incorporation)		(I.R.S. Employer Identification No.)

221 East Fourth Street, Cincinnati, Ohio 45202

(Address of principal executive offices) (Zip Code)

(513) 397-9900

(Registrant’s telephone number, including area code)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At October 31, 2010, there were 201,781,187 common shares outstanding.


Form 10-Q Part I		Cincinnati Bell Inc.

TABLE OF CONTENTS


Description		Page

	PART I. Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Operations (Unaudited) Three Months and Nine Months Ended September 30, 2010 and 2009		1

	Condensed Consolidated Balance Sheets (Unaudited) September 30, 2010 and December 31, 2009		2

	Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2010 and 2009		3

	Notes to Condensed Consolidated Financial Statements (Unaudited)		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33

Item 4.	Controls and Procedures		33

	PART II. Other Information

Item 1a.	Risk Factors		35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 6.	Exhibits		35

	Signatures		36


Form 10-Q Part I		Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions, except per share amounts)

(Unaudited)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010		2009			2010		2009
Revenue
Services	$	308.4	$	291.3		$	892.3	$	878.7
Products		43.5		46.4			121.9		112.1

Total revenue		351.9		337.7			1,014.2		990.8


Costs and expenses
Cost of services, excluding items below		107.8		102.0			304.7		304.9
Cost of products sold, excluding items below		45.0		50.9			128.0		126.1
Selling, general and administrative		68.3		64.7			202.7		209.4
Depreciation and amortization		48.2		41.2			129.7		122.0
Restructuring charges (gains), net		—		0.9			5.2		(5.5	)
Loss on sale of asset		—		4.8			—		4.8
Acquisition costs		—		—			9.1		—

Total operating costs and expenses		269.3		264.5			779.4		761.7

Operating income		82.6		73.2			234.8		229.1
Interest expense		52.0		31.5			131.5		94.6
Loss (gain) on extinguishment of debt		—		(7.6	)		10.4		(7.4	)
Other expense (income), net		—		(0.1	)		0.1		—

Income before income taxes		30.6		49.4			92.8		141.9
Income tax expense		16.1		21.7			45.9		59.1

Net income		14.5		27.7			46.9		82.8
Preferred stock dividends		2.6		2.6			7.8		7.8

Net income applicable to common shareowners	$	11.9	$	25.1		$	39.1	$	75.0


Basic earnings per common share	$	0.06	$	0.12		$	0.19	$	0.35

Diluted earnings per common share	$	0.06	$	0.12		$	0.19	$	0.34


Weighted average common shares outstanding (in millions)
Basic		201.2		209.0			201.0		215.7
Diluted		204.2		213.2			204.9		218.1

The accompanying notes are an integral part of the condensed consolidated financial statements.


Form 10-Q Part I		Cincinnati Bell Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except share amounts)

(Unaudited)


	September 30,			December 31,
	2010			2009
Assets
Current assets
Cash and cash equivalents	$	34.2		$	23.0
Receivables, less allowances of $15.0 and $17.2		170.5			159.9
Inventory, materials and supplies		25.7			23.7
Deferred income taxes, net		52.3			83.9
Prepaid expenses		11.9			29.0
Other current assets		2.2			1.5

Total current assets		296.8			321.0

Property, plant and equipment, net		1,261.8			1,123.3
Goodwill		343.0			71.9
Intangible assets, net		238.9			110.1
Deferred income taxes, net		382.2			393.6
Other noncurrent assets		70.3			44.4

Total assets	$	2,593.0		$	2,064.3


Liabilities and Shareowners’ Deficit

Current liabilities
Current portion of long-term debt	$	21.6		$	15.8
Accounts payable		88.1			106.2
Unearned revenue and customer deposits		49.0			46.6
Accrued taxes		15.9			14.8
Accrued interest		34.0			40.2
Accrued payroll and benefits		43.0			39.2
Deposit received for sale of wireless towers		4.7			25.6
Other current liabilities		31.4			35.4

Total current liabilities		287.7			323.8

Long-term debt, less current portion		2,458.0			1,963.3
Pension and postretirement benefit obligations		307.3			314.9
Other noncurrent liabilities		151.4			116.9

Total liabilities		3,204.4			2,718.9


Shareowners’ deficit
Preferred stock, 2,357,299 shares authorized, 155,250 shares (3,105,000 depositary shares) of 6³/4% Cumulative Convertible Preferred Stock issued and outstanding at September 30, 2010 and December 31, 2009; liquidation preference $1,000 per share ($50 per depositary share)		129.4			129.4
Common shares, $.01 par value; 480,000,000 shares authorized; 202,331,684 and 201,039,764 shares issued; 201,772,574 and 200,383,886 outstanding at September 30, 2010 and December 31, 2009		2.0			2.0
Additional paid-in capital		2,614.7			2,619.7
Accumulated deficit		(3,220.0	)		(3,266.9	)
Accumulated other comprehensive loss		(135.2	)		(136.1	)
Common shares in treasury, at cost: 559,110 and 655,878 shares at September 30, 2010 and December 31, 2009		(2.3	)		(2.7	)


Total shareowners’ deficit		(611.4	)		(654.6	)


Total liabilities and shareowners’ deficit	$	2,593.0		$	2,064.3

The accompanying notes are an integral part of the condensed consolidated financial statements.


Form 10-Q Part I		Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)


	Nine Months Ended
	September 30,
	2010			2009
Cash flows from operating activities
Net income	$	46.9		$	82.8
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		122.6			118.9
Amortization		7.1			3.1
Loss (gain) on extinguishment of debt		10.4			(7.4	)
Loss on sale of asset		—			4.8
Provision for loss on receivables		10.8			16.7
Noncash interest expense		5.8			3.0
Deferred income tax expense, including valuation allowance change		42.4			56.2
Payments in excess of pension and other postretirement expense		(6.1	)		(4.8	)
Other, net		1.4			4.4

Changes in operating assets and liabilities, net of effects of acquisitions
Increase in receivables		(11.8	)		(5.0	)
Decrease in inventory, materials, supplies, prepaid expenses and other current assets		14.8			10.1
Decrease in accounts payable		(19.5	)		(3.0	)
Decrease in accrued and other current liabilities		(13.8	)		(37.1	)
(Increase) decrease in other noncurrent assets		(2.4	)		7.4
(Decrease) increase in other noncurrent liabilities		(4.0	)		0.2

Net cash provided by operating activities		204.6			250.3


Cash flows from investing activities
Capital expenditures		(101.2	)		(141.7	)
Acquisitions of businesses, net of cash acquired		(526.7	)		(3.4	)
Proceeds from sale of wireless spectrum		—			5.8
Other, net		0.5			0.8

Net cash used in investing activities		(627.4	)		(138.5	)


Cash flows from financing activities
Issuance of long-term debt		1,353.4			—
Increase (decrease) in corporate credit and receivables facilities, net		(85.9	)		23.6
Repayment of debt		(791.6	)		(32.4	)
Debt issuance costs		(32.9	)		(4.4	)
Preferred stock dividends		(7.8	)		(7.8	)
Common stock repurchase		—			(59.4	)
Other, net		(1.2	)		(0.6	)

Net cash provided by (used in) financing activities		434.0			(81.0	)

Net increase in cash and cash equivalents		11.2			30.8
Cash and cash equivalents at beginning of year		23.0			6.7

Cash and cash equivalents at end of period	$	34.2		$	37.5

The accompanying notes are an integral part of the condensed consolidated financial statements.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Description of Business and Accounting Policies

The following represents a summary of the business and accounting policies of Cincinnati Bell Inc. and its consolidated subsidiaries (the “Company”). A more detailed presentation can be found in the Company’s 2009 Annual Report on Form 10-K.

Description of Business — The Company provides diversified telecommunications and technology services through businesses in three segments: Wireline, Wireless and Technology Solutions. On June 11, 2010, the Company purchased Cyrus Networks, LLC (“CyrusOne”), a data center operator based in Texas, for approximately $526 million. The CyrusOne financial results are included in the Technology Solutions segment. Refer to Note 2 for further discussion concerning the CyrusOne acquisition.

Beginning in 2010, the Company realigned its reportable business segments to be consistent with changes to its management reporting. Certain data center operations that were historically included in the Wireline segment have been reclassified to the Technology Solutions segment. Prior year amounts have been reclassified to conform to the current segment reporting. Refer to Note 9 for further discussion concerning the Company’s segments.

Basis of Presentation — The Condensed Consolidated Financial Statements of the Company 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 presented.

The adjustments referred to above are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations.

The Condensed Consolidated Balance Sheet as of December 31, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results expected in the subsequent quarter or for the year ending December 31, 2010.

Recently Issued Accounting Standards — In September 2009, new accounting guidance under Accounting Standards Codification (“ASC”) Topic 605 related to revenue arrangements with multiple deliverables was issued. The guidance addresses the unit of accounting for arrangements involving multiple deliverables, how arrangement consideration should be allocated to the separate units of accounting and eliminates the criterion that objective and reliable evidence of fair value of any undelivered items must exist for the delivered item to be considered a separate unit of accounting. Such guidance is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not yet assessed the impact of this guidance on the Company’s financial statements.

In September 2009, new accounting guidance under ASC 605 was issued regarding tangible products containing both software and non-software components that function together to deliver the product’s essential functionality. Such guidance is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not yet assessed the impact of this guidance on the Company’s financial statements.

Income Taxes — The Company’s income tax effective rate for the nine months ended September 30, 2010 was affected by several discrete items. In the nine months ended September 30, 2010, the Company recognized a $7 million tax benefit associated with a change in the valuation allowance on state deferred tax assets that are expected to be utilized as a result of the CyrusOne acquisition. This tax benefit was more than offset by a $6 million charge related to tax matters associated with the refinancing of the 8³/8% Senior Subordinated Notes due 2014 and a $4 million charge related to a tax law change in the first quarter of 2010 that now requires the application of federal income taxes against the retiree Medicare drug subsidy received by the Company.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

2.	Acquisition of Cyrus Networks, LLC

On June 11, 2010 (the “Acquisition Date”), the Company purchased Cyrus Networks, LLC, a data center operator based in Texas, for approximately $526 million, net of cash acquired. CyrusOne is the largest data center colocation provider in Texas, servicing primarily large businesses. CyrusOne is now a wholly-owned subsidiary of the Company. The purchase of CyrusOne has been accounted for as a business combination under the acquisition method.

The following table summarizes the allocation of the assets acquired and liabilities assumed at the Acquisition Date:


(dollars in millions)
Assets acquired
Receivables	$	10.4
Other current assets		0.4
Property, plant and equipment		153.6
Goodwill		270.9
Intangible assets		136.3
Other noncurrent assets		0.1

Total assets acquired		571.7


Liabilities assumed
Accounts payable		3.1
Unearned revenue and customer deposits		7.7
Accrued taxes		1.0
Accrued payroll and benefits		0.7
Other current liabilities		0.8
Noncurrent liabilities		32.1

Total liabilities assumed		45.4


Net assets acquired	$	526.3

As required under ASC 805, the Company has valued the assets acquired and liabilities assumed at fair value. The Company has determined the fair value of property, plant and equipment, identifiable intangible assets and noncurrent liabilities with the assistance of an independent valuation firm. All other fair value determinations were made solely by the Company. The preliminary purchase price allocation for this transaction may be adjusted upon completion of the Company’s valuation of the related assets and liabilities of the business. During the quarter ended September 30, 2010, goodwill decreased by approximately $1.9 million due to changes in the preliminary purchase price allocation, including finalization of the post-closing working capital adjustment.

The following table presents detail of the purchase price allocated to intangible assets of CyrusOne at the Acquisition Date:


(dollars in millions)	Fair Value		Weighted Average Amortization Period in Years
Intangible assets subject to amortization:
Customer relationships	$	125.0		15 years
Trademark		7.4		15 years
Favorable leasehold interest		3.9		56 years

Total intangible assets	$	136.3		16 years

The customer relationships and trademark assets are being amortized relative to the estimated economic value generated by these assets in future years. The favorable leasehold interest is being amortized on a straight-line basis. The Company anticipates both the goodwill and intangible assets to be fully deductible for tax purposes.

CyrusOne is party to three agreements to lease operations facility space. CyrusOne made structural changes to this leased space in excess of normal tenant improvements in order to equip the space for data center operations. For accounting purposes, in accordance with ASC 840, CyrusOne is considered to be the owner of these facilities as the tenant improvements are considered


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

structural in nature. In the CyrusOne opening balance sheet, these leased facilities have been presented at fair value in property, plant and equipment with a corresponding credit to noncurrent liabilities for amounts totaling $32.1 million. Due to CyrusOne’s continuing involvement, the obligation for leased facilities will remain until the end of the lease term for each facility.

The results of operations of CyrusOne are included in the consolidated results of operations beginning June 11, 2010, and are included in the Technology Solutions segment. For the three and nine months ended September 30, 2010, $20.0 million and $24.2 million of revenue, respectively, and $4.9 million and $6.2 million of operating income, respectively, are included in the consolidated results of operations. The Company incurred approximately $9.1 million of acquisition-related costs.

The following unaudited pro forma consolidated results of operations assume the acquisition of CyrusOne was completed as of the beginning of the annual reporting periods presented:


	Nine Months Ended
	September 30,
(dollars in millions, except per share amounts)	2010		2009
Revenue	$	1,045.8	$	1,030.9
Net income		41.9		63.6
Earnings per share:
Basic and diluted earnings per common share		0.17		0.26

These results include adjustments related to the purchase price allocation and financing of the acquisition, primarily to reduce revenue for the elimination of the unearned revenue liability in the opening balance sheet, to increase depreciation and amortization associated with the higher values of property, plant and equipment and identifiable intangible assets, to increase interest expense for the additional debt incurred to complete the acquisition, and to reflect the related income tax effect and change in tax status. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the annual reporting period indicated nor is it necessarily indicative of future operating results. The pro forma information does not include any (i) potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition or (ii) transaction or integration costs relating to the acquisition.

Estimated amortization expense for 2010 through 2014, including the CyrusOne acquisition, is as follows:


(dollars in millions)
2010	$	11.5
2011		17.5
2012		18.2
2013		18.5
2014		18.3


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

3.	Earnings Per Common Share

Basic earnings per common share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if potential common shares were exercised or converted to common stock but only to the extent that they are considered dilutive to the Company’s earnings. The following table is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the following periods:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions, except per share amounts)	2010		2009		2010		2009
Numerator:
Net income	$	14.5	$	27.7	$	46.9	$	82.8
Preferred stock dividends		2.6		2.6		7.8		7.8

Numerator for basic and diluted EPS	$	11.9	$	25.1	$	39.1	$	75.0


Denominator:
Denominator for basic EPS - weighted average common shares outstanding		201.2		209.0		201.0		215.7
Warrants		—		1.2		0.9		0.4
Stock-based compensation arrangements		3.0		3.0		3.0		2.0

Denominator for diluted EPS		204.2		213.2		204.9		218.1


Basic earnings per common share	$	0.06	$	0.12	$	0.19	$	0.35

Diluted earnings per common share	$	0.06	$	0.12	$	0.19	$	0.34


Potentially issuable common shares excluded from denominator for diluted EPS due to anti-dilutive effect		40.6		41.0		40.0		43.1

4.	Comprehensive Income


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in millions)	2010		2009		2010		2009
Net income	$	14.5	$	27.7	$	46.9	$	82.8
Amortization and remeasurement of pension and postretirement liabilities, net of taxes		0.3		7.2		0.9		74.6

Comprehensive income	$	14.8	$	34.9	$	47.8	$	157.4


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Debt

The Company’s debt consists of the following:


	September 30,			December 31,
(dollars in millions)	2010			2009

Current portion of long-term debt:
Credit facility, Tranche B Term Loan	$	7.6		$	2.1
Capital lease obligations and other debt		14.0			13.7

Current portion of long-term debt		21.6			15.8


Long-term debt, less current portion:
Credit facility, Tranche B Term Loan		748.6			202.8
8³/8% Senior Subordinated Notes due 2014*		—			569.8
7% Senior Notes due 2015*		251.6			252.3
8¹/4% Senior Notes due 2017		500.0			500.0
8³/4% Senior Subordinated Notes due 2018		625.0			—
7¹/4% Senior Notes due 2023		40.0			40.0
Receivables Facility		—			85.9
Various Cincinnati Bell Telephone notes		207.5			207.5
Capital lease obligations and other debt		122.2			111.8

		2,494.9			1,970.1
Net unamortized discount		(36.9	)		(6.8	)

Long-term debt, less current portion		2,458.0			1,963.3

Total debt	$	2,479.6		$	1,979.1

*	The face amount of these notes has been adjusted for the unamortized called amounts received on terminated interest rate swaps.

On June 11, 2010, the Company entered into a new Credit Agreement, which includes a new Corporate revolving credit facility and a $760 million secured term loan credit facility (“Tranche B Term Loan”).

The new Corporate revolving credit facility replaced the existing Corporate revolving credit facility, which would have expired in August 2012. The new Corporate revolving credit facility has a $210 million revolving line of credit and terminates in June 2014. The new revolving credit facility is funded by 11 different financial institutions, with no financial institution having more than 15% of the total facility. Borrowings under the new Corporate revolving credit facility bear interest, at the Company’s election, at a rate per annum equal to (i) LIBOR plus an applicable margin, or (ii) the base rate plus an applicable margin. The applicable margin is based on certain Company financial ratios and ranges between 4.25% and 5.00% for LIBOR rate advances and 3.25% and 4.00% for base rate advances. Base rate is the highest of the bank prime rate, the one-month LIBOR rate plus one percent or the federal funds rate plus one-half of one percent. Commitment fees for the unused capacity on the Corporate revolving credit facility range from 0.50% to 0.75%, and letter of credit fees on outstanding letters of credit range from 4.25% to 5.00%, respectively, based on certain financial ratios.

As of September 30, 2010, the Company did not have any outstanding borrowings under its revolving credit facility, but had outstanding letters of credit totaling $24.6 million, leaving $185.4 million in additional borrowing availability under its revolving credit facility.

The Tranche B Term Loan matures at the earlier of (i) November 18, 2014, if the Company’s 7% Senior Notes due 2015 have not been redeemed and repaid in full on or prior to such date, or (ii) June 11, 2017. The net proceeds of $737 million from the Tranche B Term Loan were used to repay the Company’s previous term loan facility totaling $204.3 million, to fund the acquisition of CyrusOne, and to pay related fees and expenses. Borrowings under the Tranche B Term Loan bear interest, at the Company’s election, at a rate per annum equal to (i) LIBOR plus 5.00%, or (ii) the base rate plus 4.00%. Base rate is the highest of the bank prime rate, the one-month LIBOR rate plus one percent or the federal funds rate plus one-half of one percent. The LIBOR rate used to calculate the interest rate under the Tranche B Term Loan is subject to a 1.50% floor. The Tranche B Term Loan quarterly repayments are $1.9 million with the remaining principal due at the maturity date. In the event the Company prepays the loan balance, the remaining quarterly repayments and maturity date payment would be reduced on a prorated basis for the prepayment amount. The Company made the first principal payment on June 30, 2010.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

The Company and all its future or existing subsidiaries (other than Cincinnati Bell Telephone Company LLC (“CBT”), Cincinnati Bell Extended Territories LLC (“CBET”), Cincinnati Bell Funding LLC (“CBF”), its foreign subsidiaries and certain immaterial subsidiaries) guarantee borrowings of the Company under the Credit Agreement. Each of the Company’s current subsidiaries that is a guarantor of the Credit Agreement is also a guarantor of the 7% Senior Notes due 2015, 8¹/4% Senior Notes due 2017, and 8³/4% Senior Subordinated Notes due 2018, with certain immaterial exceptions. The Company’s obligations under the Credit Agreement are also collateralized by perfected first priority pledges and security interests in the following:

•

substantially all of the equity interests of the Company’s U.S. subsidiaries (other than CBF and subsidiaries of CBT, CBET, and certain immaterial subsidiaries) and 66% of its equity interests in its foreign subsidiaries; and

•

certain personal property and intellectual property of the Company and its subsidiaries (other than that of CBT, CBET, CBF, its foreign subsidiaries and certain immaterial subsidiaries).

The Credit Agreement financial covenants require that the Company maintain certain leverage, interest coverage and fixed charge ratios. The Credit Agreement also contains certain covenants which, among other things, restrict the Company’s ability to incur additional debt or liens, pay dividends, repurchase Company common stock, sell, transfer, lease, or dispose of assets and make investments or merge with another company. If the Company were to violate any of its covenants and were unable to obtain a waiver, it would be considered a default. If the Company were in default under the Credit Agreement, no additional borrowings under this facility would be available until the default was waived or cured. The Credit Agreement provides for customary events of default, including a cross-default provision for failure to make any payment when due or permitted acceleration due to a default, both in respect to any other existing debt instrument having an aggregate principal amount that exceeds $35 million. The Company believes it is in compliance with its Credit Agreement covenants.

The Tranche B Term Loan also has an excess cash flow provision beginning with the fiscal year ended December 31, 2011, which requires 50% of excess cash flow, as defined by the Credit Agreement, to be used to prepay the term loan. In addition, any voluntary prepayments of the Tranche B Term Loan using proceeds from a substantially equivalent syndicated term loan bearing a lower interest rate before June 11, 2011 will incur a 1% prepayment premium.

In June 2010, the Company amended its accounts receivable securitization facility (“Receivables Facility”) and reduced the total borrowing capacity from $115 million to $100 million. The Receivables Facility is subject to bank renewals in the second quarter of each year, and in any event expires in March 2012. In the event the Receivables Facility is not renewed, the Company believes it would be able to refinance the borrowings under the Corporate revolving credit facility. The permitted borrowings vary depending on the level of eligible receivables and other factors. Under the Receivables Facility, certain subsidiaries sell their respective trade receivables on a continuous basis to CBF. Although CBF is a wholly-owned consolidated subsidiary of the Company, CBF is legally separate from the Company and each of the Company’s other subsidiaries. Upon and after the sale or contribution of the accounts receivable to CBF, such accounts receivable are legally assets of CBF, and as such are not available to creditors of other subsidiaries or the parent company. At September 30, 2010, the Company had no borrowings outstanding under the Receivables Facility and had $82.1 million in borrowing availability.

In March 2010, the Company issued $625 million of 8³/₄% Senior Subordinated Notes due 2018 (“8³/₄% Notes”), which are fixed rate bonds to maturity. The net proceeds of $616 million were used to call and redeem the $560 million of 8³/₈% Senior Subordinated Notes due 2014 (“8³/₈% Subordinated Notes”) plus accrued and unpaid interest and related call premium. As a result of the redemption of the 8³/ ₈% Subordinated Notes in April 2010, the Company incurred a pre-tax loss on extinguishment of debt of $10.3 million, which consists of the call premium and write-off of debt issuance costs offset by the unamortized called amounts received on terminated interest rate swaps and the debt issuance premium.

Interest on the 8³/₄% Notes is payable semi-annually in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2010. The 8³/₄% Notes are unsecured senior subordinated obligations ranking junior to all existing and future senior debt, ranking equally to all existing and future senior subordinated indebtedness, and ranking senior to all existing and future subordinated indebtedness. Each of the Company’s current and future restricted subsidiaries (as defined in the Indenture) that is a guarantor under the Corporate credit facility is also a guarantor of the 8³/₄% Notes on an unsecured senior subordinated basis, with certain immaterial exceptions. The indenture governing the 8³/₄% Notes contains covenants including but not limited to the following: limitations on dividends to shareowners and other restricted payments; dividend and other payment restrictions affecting the Company’s subsidiaries such that the subsidiaries are generally not permitted to enter into an agreement that would limit their ability to make dividend payments to the parent; issuance of indebtedness; asset dispositions; transactions with affiliates; liens; investments; issuances and sales of capital stock of subsidiaries; and redemption of debt that is junior in right of payment. The indenture governing the 8³/ ₄% Notes provides for customary events of default, including a cross-default provision for both nonpayment at final maturity or acceleration due to a default of any other existing debt instrument that exceeds $35 million.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

The Company may redeem the 8³/₄% Notes for a redemption price of 104.375%, 102.188%, and 100.000% on or after March 15, 2014, 2015, and 2016, respectively. At any time prior to March 15, 2014, the Company may redeem all or part of the 8³/₄% Notes at a redemption price equal to the sum of (1) 100% of the principal, plus (2) the greater of (a) 1% of the face value of the 8³/₄% Notes or (b) the excess over the principal amount of the sum of the present values of (i) 104.375% of the face value of the 8³/₄% Notes, and (ii) interest payments due from the date of redemption to March 15, 2014, in each case discounted to the redemption date on a semi-annual basis at the applicable U.S. Treasury rates plus one-half percent, plus (3) accrued and unpaid interest, if any, to the date of redemption. Prior to March 15, 2013, the Company may redeem up to a maximum of 35% of the aggregate principal amount of the 8³/₄% Notes with the net cash proceeds of one or more equity offerings by the Company, at a redemption price equal to 108.750% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date.

Subsequent Event

In October 2010, the Company issued $500 million of 8³/₈% Senior Notes due 2020 (“8³/₈% Senior Notes”). The net proceeds of approximately $490 million after debt issuance costs will be used to redeem $490 million of the Company’s Tranche B Term Loan. The 8³/ ₈% Senior Notes are fixed rate bonds to maturity. As a result of redeeming a portion of the Tranche B Term Loan, the Company expects to incur a loss on debt extinguishment in the fourth quarter of 2010 of approximately $24 million, which consists of the write-off of unamortized discount and debt issuance costs.

Interest on the 8³/₈% Senior Notes is payable semi-annually in cash in arrears on April 15 and October 15 of each year, commencing April 15, 2011. The 8³/₈% Senior Notes are unsecured senior obligations ranking equally with all existing and future senior debt and ranking senior to all existing and future subordinated indebtedness. Each of the Company’s current and future subsidiaries that is a guarantor under the Corporate credit facility is also a guarantor of the 8³/ ₈% Senior Notes on an unsecured senior basis, with certain immaterial exceptions. The indenture governing the 8³/₈% Senior Notes contains covenants including but not limited to the following: limitations on dividends to shareowners and other restricted payments; dividend and other payment restrictions affecting the Company’s subsidiaries such that the subsidiaries are not permitted to enter into an agreement that would limit their ability to make dividend payments to the parent; issuance of indebtedness; asset dispositions; transactions with affiliates; liens; investments; issuances and sales of capital stock of subsidiaries; and redemption of debt that is junior in right of payment. The indenture governing the 8³/ ₈% Senior Notes provides for customary events of default, including a cross-default provision for nonpayment at final maturity or acceleration due to a default of any other existing debt instrument that exceeds $35 million.

The Company may redeem the 8³/₈% Senior Notes for a redemption price of 104.188%, 102.792%, 101.396%, and 100.000% after October 15, 2015, 2016, 2017, and 2018, respectively. At any time prior to October 15, 2015, the Company may redeem all or part of the 8³/₈% Senior Notes at a redemption price equal to the sum of (1) 100% of the principal, plus (2) the greater of (a) 1% of the face value of the 8³/₈% Senior Notes or (b) the excess over the principal amount of the sum of the present values of (i) 104.188% of the face value of the 8³/₈% Senior Notes, and (ii) interest payments due from the date of redemption to October 15, 2015, in each case discounted to the redemption date on a semi-annual basis at the applicable U.S. Treasury rates plus one-half percent, plus (3) accrued and unpaid interest, if any, to the date of redemption. Prior to October 15, 2013, the Company may redeem up to a maximum of 35% of the aggregate principal amount of the 8³/₈% Senior Notes with the net cash proceeds of one or more equity offerings by the Company, at a redemption price equal to 108.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date.

Sale of Wireless Towers

In December 2009, the Company sold 196 wireless towers for $99.9 million in cash and leased back a portion of the space on these towers for a term of 20 years. As of December 31, 2009, 48 of the 196 wireless towers sold were subject to purchase price contingencies and were accounted for in accordance with the deposit method. As of September 30, 2010, contingencies on 39 of the sites were resolved with no change to the purchase price, and the Company recognized these sites as sold for accounting purposes. As a result, the Condensed Consolidated Balance Sheets reflect a reduction at September 30, 2010 compared to December 31, 2009 in the “Deposit received for sale of wireless towers” of approximately $21 million for the purchase price associated with these sites and a reduction in “Property, plant and equipment, net” of $10 million and “Other current assets” for $1 million for the net book value of these sites. The Company also recognized an increase in “Other noncurrent liabilities” of $9 million resulting from the deferred gain on the sale, which will be amortized on a straight-line basis over the 20-year term of the leaseback of the space on the towers. In addition, the Company recorded a capital lease asset and liability of approximately $12 million in 2010 related to these sites.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

6.	Financial Instruments and Fair Value Measurements

At September 30, 2010 and December 31, 2009, the Company’s financial instruments that are required to be measured at fair value were inconsequential.

The carrying values of the Company’s financial instruments do not materially differ from the estimated fair values as of September 30, 2010 and December 31, 2009, except for the Company’s debt. The carrying amounts of debt, excluding capital leases and unamortized discount, at September 30, 2010 and December 31, 2009 were $2,380.3 million and $1,860.8 million, respectively. The estimated fair values at September 30, 2010 and December 31, 2009 were $2,306.0 million and $1,792.2 million, respectively. These fair values were estimated based on closing market prices of the Company’s debt and of similar liabilities.

7.	Restructuring Charges

Lease Abandonment


Restructuring reserve (dollars in millions):	Balance June 30, 2010		Utilizations			Balance September 30, 2010

Lease abandonment obligations	$	4.2	$	(0.5	)	$	3.7

A $3.3 million lease abandonment charge was incurred in the second quarter of 2010 representing future lease costs, net of sublease income, on office space abandoned by the Company primarily resulting from the decrease in Wireline headcount over the past several years. In addition, existing liabilities for the abandoned space were transferred to the restructuring reserve resulting in a total lease abandonment obligation of $4.2 million at June 30, 2010. The lease obligations are expected to continue through 2015. At September 30, 2010, $1.7 million of the restructuring reserve was included in “Other current liabilities” and $2.0 million was included in “Other noncurrent liabilities,” respectively, in the Condensed Consolidated Balance Sheets.

Employee Separation


Restructuring reserve (dollars in millions):	Balance December 31, 2009		Utilizations			Balance March 31, 2010		Charge		Utilizations			Balance June 30, 2010		Utilizations			Balance September 30, 2010

Employee separation obligations	$	14.4	$	(5.1	)	$	9.3	$	1.8	$	(1.2	)	$	9.9	$	(1.7	)	$	8.2

The Technology Solutions segment incurred employee separation obligations in the second quarter of 2010 primarily associated with reductions in headcount for managed service and professional service employees. Employee separation obligations incurred in the Wireline segment prior to the second quarter of 2010 resulted from the Company’s need to reduce its headcount over the next five years to conform its Wireline operations to the decreased access lines being served by the Company.

At September 30, 2010 and December 31, 2009, $2.3 million and $6.4 million of the restructuring reserve was included in “Other current liabilities” and $5.9 million and $8.0 million was included in “Other noncurrent liabilities,” respectively, in the Condensed Consolidated Balance Sheets.

In 2009, the Company announced significant changes to its pension and postretirement plans, which resulted in a curtailment gain of $7.6 million and is included in “Restructuring charges (gains), net” in the Condensed Consolidated Statements of Operations. This caption also includes amortization of special termination benefits in 2009. See Note 8 for further information.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

8.	Pension and Postretirement Plans

In the first quarter 2010, the Company recorded a charge of $3.9 million due to a law change that now requires application of federal income taxes against the retiree Medicare drug subsidies received by the Company. Previously, any Medicare drug subsidy received by the Company was not taxable. This charge is included in “Income tax expense” on the Condensed Consolidated Statements of Operations.

In 2009, the Company announced significant changes to its management pension plan and its postretirement plans. The Company announced that it would freeze pension benefits for certain management employees below 50 years of age and provide a 10-year transition period for those employees over the age of 50 after which the pension benefits will be frozen. Additionally, the Company announced it would phase out the retiree healthcare plans for all management employees and certain retirees in 10 years.

The significant changes announced caused a 90% decrease in the expected future service years for active participants in the management pension plan, which triggered a plan curtailment. The curtailment gain of $7.6 million consisted of the acceleration of unrecognized prior service benefits. In addition, the Company determined that the significant changes to the postretirement plan benefits required remeasurement of these plans in 2009. The Company remeasured its management pension plan and its postretirement plans, using revised assumptions, including modified retiree benefit payment assumptions, revised discount rates and updated plan asset information.

Pension and postretirement benefit costs are as follows:


	Pension Benefits						Postretirement and Other Benefits
	Three Months Ended September 30,
(dollars in millions)	2010			2009			2010			2009
Service cost	$	1.3		$	1.4		$	—		$	—
Interest cost on projected benefit obligation		6.7			7.2			2.0			2.4
Expected return on plan assets		(7.7	)		(6.5	)		—			(0.3	)
Amortization of:
Prior service cost (benefit)		0.2			0.2			(3.2	)		(3.8	)
Actuarial loss		2.4			2.1			1.3			1.3
Special termination benefit		—			0.9			—			0.1

Benefit costs	$	2.9		$	5.3		$	0.1		$	(0.3	)


	Pension Benefits						Postretirement and Other Benefits
	Nine Months Ended September 30,
(dollars in millions)	2010			2009			2010			2009
Service cost	$	3.9		$	4.4		$	0.2		$	0.3
Interest cost on projected benefit obligation		20.1			21.7			6.0			8.2
Expected return on plan assets		(22.7	)		(19.5	)		—			(0.7	)
Amortization of:
Transition obligation		—			—			—			0.1
Prior service cost (benefit)		0.4			0.5			(9.8	)		(8.8	)
Actuarial loss		7.0			6.5			3.9			3.4
Special termination benefit		—			1.7			—			0.3
Curtailment gain		—			(7.6	)		—			—

Benefit costs	$	8.7		$	7.7		$	0.3		$	2.8


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

9.	Business Segment Information

The Company operates in three segments: Wireline, Wireless and Technology Solutions. The Wireline segment provides local voice, data, long-distance and other services to customers primarily in southwestern Ohio, northern Kentucky, and southeastern Indiana. The Wireless segment provides advanced, digital voice and data communications services and sales of related communications equipment to customers in the Greater Cincinnati and Dayton, Ohio operating areas. The Technology Solutions segment provides a range of fully managed and outsourced IT and telecommunications services and offers solutions that combine data center colocation services along with the sale, installation, and maintenance of major branded IT and telephony equipment.

Beginning in 2010, the Company realigned its reportable business segments to be consistent with changes to its management reporting. Certain data center operations that have been historically included in the Wireline segment have been reclassified to the Technology Solutions segment. Prior year amounts have been reclassified to conform to the current segment reporting.

On June 11, 2010, the Company purchased CyrusOne, a data center operator based in Texas, for approximately $526 million, net of cash acquired. The CyrusOne financial results are included in the Technology Solutions segment.

Certain corporate administrative expenses have been allocated to segments based upon the nature of the expense and the relative size of the segment.

The Company’s business segment information is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2010			2009			2010			2009

Revenue
Wireline	$	185.2		$	188.7		$	559.6		$	573.7
Wireless		72.8			77.7			219.7			230.5
Technology Solutions		102.6			80.6			261.2			214.4
Intersegment		(8.7	)		(9.3	)		(26.3	)		(27.8	)

Total revenue	$	351.9		$	337.7		$	1,014.2		$	990.8


Intersegment revenue
Wireline	$	5.9		$	6.4		$	18.4		$	19.0
Wireless		0.7			0.8			2.1			2.5
Technology Solutions		2.1			2.1			5.8			6.3

Total intersegment revenue	$	8.7		$	9.3		$	26.3		$	27.8


Operating income
Wireline	$	58.9		$	64.4		$	181.0		$	204.4
Wireless		15.7			4.4			52.2			23.7
Technology Solutions		12.8			7.8			25.3			17.7
Corporate		(4.8	)		(3.4	)		(23.7	)		(16.7	)

Total operating income	$	82.6		$	73.2		$	234.8		$	229.1


	September 30, 2010			December 31, 2009
Assets
Wireline	$	682.0		$	704.9
Wireless		363.5			383.4
Technology Solutions		899.3			302.8
Corporate and eliminations		648.2			673.2

Total assets	$	2,593.0		$	2,064.3


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

10.

Stock-Based Compensation Plans

Stock Options and Stock Appreciation Rights Awards

The following table summarizes stock option and stock appreciation right activity for the nine months ended September 30, 2010:


(in thousands, except per share amounts)	Shares			Weighted- Average Exercise Price Per Share
Outstanding at January 1, 2010		20,172		$	7.15
Granted		1,374			2.99
Exercised		(329	)		1.60
Forfeited/Expired		(1,961	)		20.95

Outstanding at September 30, 2010		19,256		$	5.54


Vested and expected to vest at September 30, 2010		19,188		$	5.56


Exercisable at September 30, 2010		15,274		$	6.33

The Company recognized compensation expense of $0.4 million related to stock options and stock appreciation rights awards for the three months ended September 30, 2010, $1.6 million for the nine months ended September 30, 2010, $0.7 million for the three months ended September 30, 2009 and $3.3 million for the nine months ended September 30, 2009. As of September 30, 2010, there was $1.9 million of unrecognized compensation expense related to these awards, which is expected to be recognized over a weighted-average period of approximately two years. At September 30, 2010, the aggregate intrinsic value of these outstanding awards was approximately $4.1 million.

For options granted in 2010, the weighted-average fair value of $1.21 at the date of grant was estimated using the Black-Scholes pricing model with the following assumptions:


Expected volatility	43.0	%
Risk-free interest rate	2.3	%
Expected holding period - years	5
Expected dividends	0.0	%

The expected volatility assumption used in the Black-Scholes pricing model was based on historical volatility. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected holding period was estimated using the historical exercise behavior of employees and adjusted for abnormal activity. Expected dividends are based on the Company’s history of paying dividends.

Performance-based restricted awards

The following table summarizes performance-based restricted award activity for the nine months ended September 30, 2010:


(in thousands, except per share amounts)	Shares			Weighted- Average Grant Date Fair Value Per Share
Non-vested as of January 1, 2010		4,218		$	3.39
Granted*		736			2.92
Vested		(1,146	)		3.58
Forfeited		(167	)		2.80

Non-vested at September 30, 2010		3,641		$	3.26

*	Assumes the maximum number of awards that can be earned if the performance conditions are achieved.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Awards granted generally vest over three years and upon the achievement of certain performance-based objectives. The Company recognized expense for performance-based awards of $0.4 million for the three months ended September 30, 2010, $1.6 million for the nine months ended September 30, 2010, $0.7 million for the three months ended September 30, 2009 and $2.4 million for the nine months ended September 30, 2009. As of September 30, 2010, there was $1.5 million of unrecognized compensation expense related to performance-based awards, which is expected to be recognized over a weighted-average period of approximately one year.

The Company has also granted cash-payment performance awards in 2010 and 2009 with a base award of $0.9 million and $1.3 million, respectively, with the final payments indexed to the percentage change in the Company’s stock price from the date of grant. For the nine months ended September 30, 2010, the Company recorded a gain of $0.1 million. For the three months and nine months ended September 30, 2009, the Company recorded an expense of $0.6 million and $3.3 million, respectively. At September 30, 2010, there was $0.2 million of unrecognized compensation, which is expected to be recognized within one year.

Time-based restricted awards

The following table summarizes time-based restricted award activity for the nine months ended September 30, 2010:


(in thousands, except per share amounts)	Shares			Weighted- Average Grant Date Fair Value Per Share
Non-vested as of January 1, 2010		213		$	3.85
Granted		84			3.35
Vested		(3	)		4.91
Forfeited		(3	)		4.91

Non-vested at September 30, 2010		291		$	3.69

Awards granted generally vest in one-third increments over a period of three years. The Company recognized expense related to time-based restricted awards of $0.1 million for the three months ended September 30, 2010, $0.3 million for the nine months ended September 30, 2010, $0.2 million for the three months ended September 30, 2009 and $0.6 million for the nine months ended September 30, 2009. As of September 30, 2010, there was $0.5 million of unrecognized compensation expense related to these shares, which is expected to be recognized over a weighted-average period of approximately two years.

In addition to time-based restricted awards, the Company granted an award of 300,000 common shares in the third quarter of 2010 to the newly-hired president of Cincinnati Bell Communications, which encompasses the operations of the Wireline and Wireless segments. This award vested immediately. The Company recognized expense of $0.8 million for the three months ended September 30, 2010 associated with this award, which was recorded in the Corporate segment.

Deferred Compensation Plans

The Company currently has deferred compensation plans for both the Board of Directors and certain executives of the Company. At September 30, 2010 and 2009, there were 0.8 and 0.9 million common shares deferred in these plans, respectively. As these awards can be settled in cash, the Company records compensation costs each period based on the change in the Company’s stock price. The Company recognized a gain of $0.3 million and $0.2 million for the three and nine months ended September 30, 2010, respectively, and expense of $0.6 million and $1.6 million for the three and nine months ended September 30, 2009, respectively.


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

11. Supplemental Guarantor Information

Cincinnati Bell Telephone Notes

Cincinnati Bell Telephone Company LLC (“CBT”), a wholly-owned subsidiary of Cincinnati Bell Inc. (the “Parent Company” or “CBI”), had $207.5 million in notes outstanding at September 30, 2010 that are guaranteed by the Parent Company and no other subsidiaries of the Parent Company. The guarantee is full and unconditional. The Parent Company’s subsidiaries generate substantially all of its income and cash flow and generally distribute or advance the funds necessary to meet the Parent Company’s debt service obligations.

The following information sets forth the Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2010 and 2009, Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2010 and 2009, and Condensed Consolidating Balance Sheets as of September 30, 2010 and December 31, 2009 of (1) the Parent Company, as the guarantor, (2) Cincinnati Bell Telephone Company LLC, as the issuer, and (3) the non-guarantor subsidiaries on a combined basis:

Condensed Consolidating Statements of Operations


	Three Months Ended September 30, 2010
	Parent					Other
(dollars in millions)	(Guarantor)			CBT		(Non-guarantors)			Eliminations			Total
Revenue	$	—		$	166.0	$	200.6		$	(14.7	)	$	351.9
Operating costs and expenses		4.8			107.7		171.5			(14.7	)		269.3

Operating income (loss)		(4.8	)		58.3		29.1			—			82.6
Interest expense		45.4			1.8		13.2			(8.4	)		52.0
Other expense (income), net		(8.9	)		2.4		(1.9	)		8.4			—

Income (loss) before equity in earnings of subsidiaries and income taxes		(41.3	)		54.1		17.8			—			30.6
Income tax expense (benefit)		(10.9	)		18.5		8.5			—			16.1
Equity in earnings of subsidiaries, net of tax		44.9			—		—			(44.9	)		—

Net income		14.5			35.6		9.3			(44.9	)		14.5
Preferred stock dividends		2.6			—		—			—			2.6

Net income applicable to common shareowners	$	11.9		$	35.6	$	9.3		$	(44.9	)	$	11.9


	Three Months Ended September 30, 2009
	Parent (Guarantor)			CBT			Other (Non-guarantors)			Eliminations			Total
	Parent (Guarantor)			CBT			Other (Non-guarantors)			Eliminations			Total
Revenue	$	—		$	169.9		$	182.0		$	(14.2	)	$	337.7
Operating costs and expenses		3.5			107.4			167.8			(14.2	)		264.5

Operating income (loss)		(3.5	)		62.5			14.2			—			73.2
Interest expense		26.7			3.5			3.7			(2.4	)		31.5
Other income, net		(4.9	)		(3.9	)		(1.3	)		2.4			(7.7	)

Income (loss) before equity in earnings of subsidiaries and income taxes		(25.3	)		62.9			11.8			—			49.4
Income tax expense (benefit)		(2.2	)		21.2			2.7			—			21.7
Equity in earnings of subsidiaries, net of tax		50.8			—			—			(50.8	)		—

Net income		27.7			41.7			9.1			(50.8	)		27.7
Preferred stock dividends		2.6			—			—			—			2.6

Net income applicable to common shareowners	$	25.1		$	41.7		$	9.1		$	(50.8	)	$	25.1


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Condensed Consolidating Statements of Operations


	Nine Months Ended September 30, 2010
(dollars in millions)	Parent (Guarantor)			CBT			Other (Non-guarantors)			Eliminations			Total
Revenue	$	—		$	503.6		$	554.2		$	(43.6	)	$	1,014.2
Operating costs and expenses		23.9			323.2			475.9			(43.6	)		779.4

Operating income (loss)		(23.9	)		180.4			78.3			—			234.8
Interest expense		113.1			8.1			22.7			(12.4	)		131.5
Other expense (income), net		(3.2	)		6.0			(4.7	)		12.4			10.5

Income (loss) before equity in earnings of subsidiaries and income taxes		(133.8	)		166.3			60.3			—			92.8
Income tax expense (benefit)		(35.6	)		65.1			16.4			—			45.9
Equity in earnings of subsidiaries, net of tax		145.1			—			—			(145.1	)		—

Net income		46.9			101.2			43.9			(145.1	)		46.9
Preferred stock dividends		7.8			—			—			—			7.8

Net income applicable to common shareowners	$	39.1		$	101.2		$	43.9		$	(145.1	)	$	39.1


	Nine Months Ended September 30, 2009
	Parent (Guarantor)			CBT			Other (Non-guarantors)			Eliminations			Total
Revenue	$	—		$	517.4		$	515.6		$	(42.2	)	$	990.8
Operating costs and expenses		16.2			321.1			466.6			(42.2	)		761.7

Operating income (loss)		(16.2	)		196.3			49.0			—			229.1
Interest expense		79.4			10.8			13.3			(8.9	)		94.6
Other income, net		(11.7	)		(1.5	)		(3.1	)		8.9			(7.4	)

Income (loss) before equity in earnings of subsidiaries and income taxes		(83.9	)		187.0			38.8			—			141.9
Income tax expense (benefit)		(22.1	)		64.2			17.0			—			59.1
Equity in earnings of subsidiaries, net of tax		144.6			—			—			(144.6	)		—

Net income		82.8			122.8			21.8			(144.6	)		82.8
Preferred stock dividends		7.8			—			—			—			7.8

Net income applicable to common shareowners	$	75.0		$	122.8		$	21.8		$	(144.6	)	$	75.0


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Condensed Consolidating Balance Sheets


	As of September 30, 2010
(dollars in millions)	Parent (Guarantor)			CBT		Other (Non-guarantors)		Eliminations			Total
Cash and cash equivalents	$	20.0		$	1.4	$	12.8	$	—		$	34.2
Receivables, net		—			—		170.5		—			170.5
Other current assets		18.6			19.6		54.3		(0.4	)		92.1

Total current assets		38.6			21.0		237.6		(0.4	)		296.8
Property, plant and equipment, net		0.6			617.0		644.2		—			1,261.8
Goodwill and intangibles, net		—			2.6		579.3		—			581.9
Investments in and advances to subsidiaries		1,648.1			118.2		—		(1,766.3	)		—
Other noncurrent assets		354.4			8.3		190.7		(100.9	)		452.5

Total assets	$	2,041.7		$	767.1	$	1,651.8	$	(1,867.6	)	$	2,593.0

Current portion of long-term debt	$	7.6		$	1.4	$	12.6	$	—		$	21.6
Accounts payable		0.6			37.4		50.1		—			88.1
Other current liabilities		66.3			57.2		61.5		(7.0	)		178.0

Total current liabilities		74.5			96.0		124.2		(7.0	)		287.7
Long-term debt, less current portion		2,128.6			213.5		115.9		—			2,458.0
Other noncurrent liabilities		319.2			85.6		148.2		(94.3	)		458.7
Intercompany payables		130.8			—		858.1		(988.9	)		—

Total liabilities		2,653.1			395.1		1,246.4		(1,090.2	)		3,204.4
Shareowners’ equity (deficit)		(611.4	)		372.0		405.4		(777.4	)		(611.4	)

Total liabilities and shareowners’ equity (deficit)	$	2,041.7		$	767.1	$	1,651.8	$	(1,867.6	)	$	2,593.0


	As of December 31, 2009
	Parent (Guarantor)			CBT		Other (Non-guarantors)		Eliminations			Total
Cash and cash equivalents	$	20.1		$	2.1	$	0.8	$	—		$	23.0
Receivables, net		—			—		159.9		—			159.9
Other current assets		47.8			22.0		69.0		(0.7	)		138.1

Total current assets		67.9			24.1		229.7		(0.7	)		321.0
Property, plant and equipment, net		0.8			629.6		492.9		—			1,123.3
Goodwill and intangibles, net		—			2.8		179.2		—			182.0
Investments in and advances to subsidiaries		912.4			10.1		—		(922.5	)		—
Other noncurrent assets		329.7			10.9		186.8		(89.4	)		438.0

Total assets	$	1,310.8		$	677.5	$	1,088.6	$	(1,012.6	)	$	2,064.3

Current portion of long-term debt	$	2.1		$	1.3	$	12.4	$	—		$	15.8
Accounts payable		0.4			44.8		61.0		—			106.2
Other current liabilities		67.8			56.0		78.1		(0.1	)		201.8

Total current liabilities		70.3			102.1		151.5		(0.1	)		323.8
Long-term debt, less current portion		1,558.4			214.5		190.4		—			1,963.3
Other noncurrent liabilities		328.5			90.2		103.1		(90.0	)		431.8
Intercompany payables		8.2			—		298.9		(307.1	)		—

Total liabilities		1,965.4			406.8		743.9		(397.2	)		2,718.9
Shareowners’ equity (deficit)		(654.6	)		270.7		344.7		(615.4	)		(654.6	)

Total liabilities and shareowners’ equity (deficit)	$	1,310.8		$	677.5	$	1,088.6	$	(1,012.6	)	$	2,064.3


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Condensed Consolidating Statements of Cash Flows


	Nine Months Ended September 30, 2010
(dollars in millions)	Parent (Guarantor)			CBT			Other (Non-guarantors)			Eliminations		Total
Cash flows provided by (used in) operating activities	$	(60.2	)	$	167.8		$	97.0		$	—	$	204.6

Capital expenditures		—			(59.0	)		(42.2	)		—		(101.2	)
Acquisitions of businesses, net of cash acquired		—			(0.1	)		(526.6	)		—		(526.7	)
Other investing activities		—			0.3			0.2			—		0.5

Cash flows used in investing activities		—			(58.8	)		(568.6	)		—		(627.4	)

Funding between Parent and subsidiaries, net		(467.1	)		(108.6	)		575.7			—		—
Issuance of long-term debt		1,353.4			—			—			—		1,353.4
Decrease in corporate credit and receivables facilities, net		—			—			(85.9	)		—		(85.9	)
Repayment of debt		(784.3	)		(1.1	)		(6.2	)		—		(791.6	)
Debt issuance costs		(32.9	)		—			—			—		(32.9	)
Other financing activities		(9.0	)		—			—			—		(9.0	)

Cash flows provided by (used in) financing activities		60.1			(109.7	)		483.6			—		434.0

Increase (decrease) in cash and cash equivalents		(0.1	)		(0.7	)		12.0			—		11.2
Beginning cash and cash equivalents		20.1			2.1			0.8			—		23.0

Ending cash and cash equivalents	$	20.0		$	1.4		$	12.8		$	—	$	34.2


	Nine Months Ended September 30, 2009
	Parent (Guarantor)			CBT			Other (Non-guarantors)			Eliminations		Total
Cash flows provided by (used in) operating activities	$	(72.5	)	$	206.3		$	116.5		$	—	$	250.3

Capital expenditures		(0.4	)		(96.4	)		(44.9	)		—		(141.7	)
Acquisitions of businesses, net of cash acquired		—			(0.5	)		(2.9	)		—		(3.4	)
Other investing activities		0.4			0.3			5.9			—		6.6

Cash flows used in investing activities		—			(96.6	)		(41.9	)		—		(138.5	)

Funding between Parent and subsidiaries, net		171.4			(92.3	)		(79.1	)		—		—
Increase in corporate credit and receivables facilities, net		12.7			—			10.9			—		23.6
Repayment of debt		(9.4	)		(17.2	)		(5.8	)		—		(32.4	)
Common stock repurchase		(59.4	)		—			—			—		(59.4	)
Other financing activities		(12.8	)		—			—			—		(12.8	)

Cash flows provided by (used in) financing activities		102.5			(109.5	)		(74.0	)		—		(81.0	)

Increase in cash and cash equivalents		30.0			0.2			0.6			—		30.8
Beginning cash and cash equivalents		4.5			1.8			0.4			—		6.7

Ending cash and cash equivalents	$	34.5		$	2.0		$	1.0		$	—	$	37.5


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

8³/4% Senior Subordinated Notes due 2018, 8¹/4% Senior Notes due 2017, and 7% Senior Notes Due 2015

The Parent Company’s 8³/4% Senior Subordinated Notes due 2018, 8¹/4% Senior Notes due 2017, and 7% Senior Notes due 2015 are guaranteed by the following subsidiaries: Cincinnati Bell Entertainment Inc., Cincinnati Bell Complete Protection Inc., Cincinnati Bell Any Distance Inc., Cincinnati Bell Telecommunication Services LLC, Cincinnati Bell Wireless Company, Cincinnati Bell Wireless LLC, GramTel Inc., BRCOM Inc., CBTS Software LLC, Cyrus Networks LLC, IXC Internet Services Inc., Cincinnati Bell Shared Services LLC, Cincinnati Bell Technology Solutions Inc., Cincinnati Bell Any Distance of Virginia LLC, and eVolve Business Solutions LLC. The Parent Company owns directly or indirectly 100% of each guarantor and each guarantee is full and unconditional and joint and several. The Parent Company’s subsidiaries generate substantially all of its income and cash flow and generally distribute or advance the funds necessary to meet the Parent Company’s debt service obligations.

The following information sets forth the Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2010 and 2009, Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2010 and 2009, and the Condensed Consolidating Balance Sheets as of September 30, 2010 and December 31, 2009 of (1) the Parent Company, as the issuer, (2) the guarantor subsidiaries on a combined basis, and (3) the non-guarantor subsidiaries on a combined basis:

Condensed Consolidating Statements of Operations


	Three Months Ended September 30, 2010
(dollars in millions)	Parent (Issuer)			Guarantors		Non-guarantors			Eliminations			Total
Revenue	$	—		$	214.7	$	151.9		$	(14.7	)	$	351.9
Operating costs and expenses		4.8			184.3		94.9			(14.7	)		269.3

Operating income (loss)		(4.8	)		30.4		57.0			—			82.6
Interest expense		45.4			11.9		3.1			(8.4	)		52.0
Other expense (income), net		(8.9	)		2.7		(2.2	)		8.4			—

Income (loss) before equity in earnings of subsidiaries and income taxes		(41.3	)		15.8		56.1			—			30.6
Income tax expense (benefit)		(10.9	)		6.7		20.3			—			16.1
Equity in earnings of subsidiaries, net of tax		44.9			—		—			(44.9	)		—

Net income		14.5			9.1		35.8			(44.9	)		14.5
Preferred stock dividends		2.6			—		—			—			2.6

Net income applicable to common shareowners	$	11.9		$	9.1	$	35.8		$	(44.9	)	$	11.9


	Three Months Ended September 30, 2009
	Parent (Issuer)			Guarantors		Non-guarantors			Eliminations			Total
Revenue	$	—		$	194.4	$	157.5		$	(14.2	)	$	337.7
Operating costs and expenses		3.5			180.9		94.3			(14.2	)		264.5

Operating income (loss)		(3.5	)		13.5		63.2			—			73.2
Interest expense		26.7			2.4		4.8			(2.4	)		31.5
Other expense (income), net		(4.9	)		1.5		(6.7	)		2.4			(7.7	)

Income (loss) before equity in earnings of subsidiaries and income taxes		(25.3	)		9.6		65.1			—			49.4
Income tax expense (benefit)		(2.2	)		1.9		22.0			—			21.7
Equity in earnings of subsidiaries, net of tax		50.8			—		—			(50.8	)		—

Net income		27.7			7.7		43.1			(50.8	)		27.7
Preferred stock dividends		2.6			—		—			—			2.6

Net income applicable to common shareowners	$	25.1		$	7.7	$	43.1		$	(50.8	)	$	25.1


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Condensed Consolidating Statements of Operations


	Nine Months Ended September 30, 2010
(dollars in millions)	Parent (Issuer)			Guarantors		Non-guarantors			Eliminations			Total
Revenue	$	—		$	596.7	$	461.1		$	(43.6	)	$	1,014.2
Operating costs and expenses		23.9			516.1		283.0			(43.6	)		779.4

Operating income (loss)		(23.9	)		80.6		178.1			—			234.8
Interest expense		113.1			18.7		12.1			(12.4	)		131.5
Other expense (income), net		(3.2	)		6.8		(5.5	)		12.4			10.5

Income (loss) before equity in earnings of subsidiaries and income taxes		(133.8	)		55.1		171.5			—			92.8
Income tax expense (benefit)		(35.6	)		13.9		67.6			—			45.9
Equity in earnings of subsidiaries, net of tax		145.1			—		—			(145.1	)		—

Net income		46.9			41.2		103.9			(145.1	)		46.9
Preferred stock dividends		7.8			—		—			—			7.8

Net income applicable to common shareowners	$	39.1		$	41.2	$	103.9		$	(145.1	)	$	39.1


	Nine Months Ended September 30, 2009
	Parent (Issuer)			Guarantors		Non-guarantors			Eliminations			Total
Revenue	$	—		$	553.1	$	479.9		$	(42.2	)	$	990.8
Operating costs and expenses		16.2			507.6		280.1			(42.2	)		761.7

Operating income (loss)		(16.2	)		45.5		199.8			—			229.1
Interest expense		79.4			8.9		15.2			(8.9	)		94.6
Other expense (income), net		(11.7	)		1.4		(6.0	)		8.9			(7.4	)

Income (loss) before equity in earnings of subsidiaries and income taxes		(83.9	)		35.2		190.6			—			141.9
Income tax expense (benefit)		(22.1	)		15.1		66.1			—			59.1
Equity in earnings of subsidiaries, net of tax		144.6			—		—			(144.6	)		—

Net income		82.8			20.1		124.5			(144.6	)		82.8
Preferred stock dividends		7.8			—		—			—			7.8

Net income applicable to common shareowners	$	75.0		$	20.1	$	124.5		$	(144.6	)	$	75.0


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Condensed Consolidating Balance Sheets


	As of September 30, 2010
(dollars in millions)	Parent (Issuer)			Guarantors		Non-guarantors		Eliminations			Total
Cash and cash equivalents	$	20.0		$	12.8	$	1.4	$	—		$	34.2
Receivables, net		—			10.0		160.5		—			170.5
Other current assets		18.6			48.6		25.3		(0.4	)		92.1

Total current assets		38.6			71.4		187.2		(0.4	)		296.8
Property, plant and equipment, net		0.6			644.2		617.0		—			1,261.8
Goodwill and intangibles, net		—			579.3		2.6		—			581.9
Investments in and advances to subsidiaries		1,648.1			—		130.5		(1,778.6	)		—
Other noncurrent assets		354.4			192.0		7.0		(100.9	)		452.5

Total assets	$	2,041.7		$	1,486.9	$	944.3	$	(1,879.9	)	$	2,593.0

Current portion of long-term debt	$	7.6		$	12.6	$	1.4	$	—		$	21.6
Accounts payable		0.6			57.5		30.0		—			88.1
Other current liabilities		66.3			65.2		53.5		(7.0	)		178.0

Total current liabilities		74.5			135.3		84.9		(7.0	)		287.7
Long-term debt, less current portion		2,128.6			115.9		213.5		—			2,458.0
Other noncurrent liabilities		319.2			148.7		85.1		(94.3	)		458.7
Intercompany payables		130.8			735.0		135.4		(1,001.2	)		—

Total liabilities		2,653.1			1,134.9		518.9		(1,102.5	)		3,204.4
Shareowners’ equity (deficit)		(611.4	)		352.0		425.4		(777.4	)		(611.4	)

Total liabilities and shareowners’ equity (deficit)	$	2,041.7		$	1,486.9	$	944.3	$	(1,879.9	)	$	2,593.0


	As of December 31, 2009
	Parent (Issuer)			Guarantors		Non-guarantors		Eliminations			Total
Cash and cash equivalents	$	20.1		$	0.8	$	2.1	$	—		$	23.0
Receivables, net		—			0.9		159.0		—			159.9
Other current assets		47.8			64.1		26.9		(0.7	)		138.1

Total current assets		67.9			65.8		188.0		(0.7	)		321.0
Property, plant and equipment, net		0.8			492.9		629.6		—			1,123.3
Goodwill and intangibles, net		—			179.2		2.8		—			182.0
Investments in and advances to subsidiaries		912.4			—		21.9		(934.3	)		—
Other noncurrent assets		329.7			188.6		9.1		(89.4	)		438.0

Total assets	$	1,310.8		$	926.5	$	851.4	$	(1,024.4	)	$	2,064.3

Current portion of long-term debt	$	2.1		$	12.4	$	1.3	$	—		$	15.8
Accounts payable		0.4			73.0		32.8		—			106.2
Other current liabilities		67.8			81.0		53.1		(0.1	)		201.8

Total current liabilities		70.3			166.4		87.2		(0.1	)		323.8
Long-term debt, less current portion		1,558.4			104.5		300.4		—			1,963.3
Other noncurrent liabilities		328.5			104.4		88.9		(90.0	)		431.8
Intercompany payables		8.2			241.3		69.4		(318.9	)		—

Total liabilities		1,965.4			616.6		545.9		(409.0	)		2,718.9
Shareowners’ equity (deficit)		(654.6	)		309.9		305.5		(615.4	)		(654.6	)

Total liabilities and shareowners’ equity (deficit)	$	1,310.8		$	926.5	$	851.4	$	(1,024.4	)	$	2,064.3


Form 10-Q Part I		Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Condensed Consolidating Statements of Cash Flows


	Nine Months Ended September 30, 2010
(dollars in millions)	Parent (Issuer)			Guarantors			Non-guarantors			Eliminations		Total
Cash flows provided by (used in) operating activities	$	(60.2	)	$	93.5		$	171.3		$	—	$	204.6

Capital expenditures		—			(42.2	)		(59.0	)		—		(101.2	)
Acquisitions of businesses, net of cash acquired		—			(526.6	)		(0.1	)		—		(526.7	)
Other investing activities		—			0.2			0.3			—		0.5

Cash flows used in investing activities		—			(568.6	)		(58.8	)		—		(627.4	)

Funding between Parent and subsidiaries, net		(467.1	)		493.3			(26.2	)		—		—
Issuance of long-term debt		1,353.4			—			—			—		1,353.4
Decrease in corporate credit and receivables facilities, net		—			—			(85.9	)		—		(85.9	)
Repayment of debt		(784.3	)		(6.2	)		(1.1	)		—		(791.6	)
Debt issuance costs		(32.9	)		—			—			—		(32.9	)
Other financing activities		(9.0	)		—			—			—		(9.0	)

Cash flows provided by (used in) financing activities		60.1			487.1			(113.2	)		—		434.0

Increase (decrease) in cash and cash equivalents		(0.1	)		12.0			(0.7	)		—		11.2
Beginning cash and cash equivalents		20.1			0.8			2.1			—		23.0

Ending cash and cash equivalents	$	20.0		$	12.8		$	1.4		$	—	$	34.2


	Nine Months Ended September 30, 2009
	Parent (Issuer)			Guarantors			Non-guarantors			Eliminations		Total
Cash flows provided by (used in) operating activities	$	(72.5	)	$	163.2		$	159.6		$	—	$	250.3

Capital expenditures		(0.4	)		(44.9	)		(96.4	)		—		(141.7	)
Acquisitions of businesses, net of cash acquired		—			(2.9	)		(0.5	)		—		(3.4	)
Other investing activities		0.4			5.9			0.3			—		6.6

Cash flows used in investing activities		—			(41.9	)		(96.6	)		—		(138.5	)

Funding between Parent and subsidiaries, net		171.4			(115.0	)		(56.4	)		—		—
Increase in corporate credit and receivables facilities, net		12.7			—			10.9			—		23.6
Repayment of debt		(9.4	)		(5.8	)		(17.2	)		—		(32.4	)
Common stock repurchase		(59.4	)		—			—			—		(59.4	)
Other financing activities		(12.8	)		—			—			—		(12.8	)

Cash flows provided by (used in) financing activities		102.5			(120.8	)		(62.7	)		—		(81.0	)

Increase in cash and cash equivalents		30.0			0.5			0.3			—		30.8
Beginning cash and cash equivalents		4.5			0.4			1.8			—		6.7

Ending cash and cash equivalents	$	34.5		$	0.9		$	2.1		$	—	$	37.5


Form 10-Q Part I		Cincinnati Bell Inc.

Item 2.

Management’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof.

The Company was initially incorporated under the laws of Ohio in 1983 and remains incorporated under the laws of Ohio. It has its principal executive offices at 221 East Fourth Street, Cincinnati, Ohio 45202 (telephone number (513) 397-9900 and website address http://www.cincinnatibell.com). The Company makes available its reports on Form 10-K, 10-Q, and 8-K (as well as all amendments to these reports) on its website, free of charge, at the Investor Relations section by the end of the calendar day in which they have been electronically filed.

The Company files annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. These reports and other information filed by the Company may be read and copied at the Public Reference Room of the SEC, 100 F Street N.E., Washington, D.C. 20549. Information may be obtained about the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy statements, and other information about issuers, like the Company, which file electronically with the SEC. The address of that site is http://www.sec.gov.

Critical Accounting Policies and Estimates

The preparation of Condensed Consolidated Financial Statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. In the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company identified critical accounting policies that affect its more significant estimates and assumptions used in preparing its Condensed Consolidated Financial Statements. These critical accounting policies include revenue recognition, accounting for allowances for uncollectible accounts receivable, reviewing the carrying values of goodwill and indefinite-lived intangible assets, reviewing the carrying values of property, plant and equipment, accounting for business combinations, accounting for taxes, accounting for pension and postretirement expenses, and accounting for termination benefits.

As it relates to the acquisition of CyrusOne, the Company applied the accounting requirements of Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations,” which requires the recording of net assets of acquired businesses at fair value. In developing estimates of fair value of acquired assets and assumed liabilities, the Company analyzed a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement cost for fixed assets, and market rate assumptions for contractual obligations. The Company engaged a third-party appraisal firm to assist management in determining the fair values of tangible and intangible assets and liabilities. Such a valuation requires management to make significant estimates and assumptions, especially with respect to the intangible assets.

In determining the fair value of the Company’s assets associated with the purchase of CyrusOne, the Company utilized several valuation methods:

•

Excess earnings method: This method was used to determine the fair value of the CyrusOne customer relationships. This method estimates the present value of future cash flows attributable to the customer base and requires estimates of the expected future earnings and remaining useful lives of the customer relationships.

•

Cost method: This method was used to determine the fair value of property, plant and equipment. This method indicates value based on the amount that currently would be required to replace the service capacity of the asset and considers the cost of a buyer to acquire or construct a substitute asset of comparable utility, adjusted for deterioration and obsolescence.

•

Relief-from-royalty: This method, used to determine the fair value of the CyrusOne trademark, estimates the present value of royalty expense that could be avoided in the operating business as a result of owning the respective asset or technology.

The Company has recorded its best estimate of the fair values of assets acquired and liabilities assumed in the CyrusOne acquisition, as presented in Note 2 to the Condensed Consolidated Financial Statements. However, the valuation is not yet finalized as of September 30, 2010, and additional information could come to light which could change the assumptions used in the valuation. Changes to the assumptions the Company used to estimate fair value could impact the recorded amounts for acquired assets and liabilities, including property, plant and equipment, intangible assets and goodwill. Significant changes to these balances could have a material impact on the Company’s future reported results.


Form 10-Q Part I		Cincinnati Bell Inc.

Results of Operations

The financial results for the three and nine months ended September 30, 2010 and 2009 referred to in this discussion should be read in conjunction with the Condensed Consolidated Statements of Operations in this Quarterly Report on Form 10-Q. Results for interim periods may not be indicative of the results for subsequent periods or the full year.

On June 11, 2010, the Company purchased CyrusOne, a data center operator based in Texas, for approximately $526 million. The CyrusOne financial results are included in the Technology Solutions segment. Refer to Note 2 in the Condensed Consolidated Financial Statements for further discussion concerning the CyrusOne acquisition.

Consolidated Overview

Consolidated revenue totaled $351.9 million for the third quarter of 2010, an increase of $14.2 million compared to the third quarter of 2009. The increase was primarily due to the following:

•

$22.0 million higher revenues in the Technology Solutions segment primarily due to increased data center and managed services revenue from the acquisition of CyrusOne in June 2010;

•

$4.9 million lower revenues in the Wireless segment primarily due to lower postpaid service revenue; and

•

$3.5 million lower revenues in the Wireline segment primarily due to lower voice revenue.

For the nine months ended September 30, 2010, consolidated revenue increased $23.4 million to $1,014.2 million in comparison to $990.8 million for the same period in 2009. The increase was primarily due to the following:

•

$46.8 million higher revenues in the Technology Solutions segment primarily due to higher telecom and IT equipment distribution revenue and increased data center and managed services revenue, including the acquisition of CyrusOne in June 2010;

•

$14.1 million lower revenues in the Wireline segment primarily due to lower voice revenue; and

•

$10.8 million lower revenues in the Wireless segment primarily due to lower postpaid service revenue.

Operating income for the third quarter of 2010 was $82.6 million, an increase of $9.4 million compared to the same period in 2009. This increase was primarily due to the following:

•

$11.3 million increase in Wireless segment operating income primarily due to lower expense for handset subsidies, roaming, and third party service provider costs in addition to a loss on the sale of spectrum licenses recognized in the third quarter of 2009;

•

$5.0 million increase in Technology Solutions operating income primarily due to the acquisition of CyrusOne; and

•

$5.5 million decrease in Wireline segment operating income primarily due to lower revenue.

Operating income for the nine months ended September 30, 2010 was $234.8 million, an increase of $5.7 million compared to the same period a year ago. The increase was primarily due to the following:

•

$28.5 million increase in Wireless segment operating income primarily due to lower expense for handset subsidies, roaming, and third party service provider costs in addition to a loss on the sale of spectrum licenses recognized in the third quarter of 2009;

•

$7.6 million increase in Technology Solutions operating income primarily due to increased revenue from data center and managed services, including revenue from CyrusOne operations since its acquisition, offset by $1.8 million of restructuring costs recorded in the second quarter of 2010;

•

$7.0 million increase in Corporate expenses due to $9.1 million of acquisition costs on the purchase of CyrusOne offset by lower mark-to-market expense adjustments on stock-based compensation; and

•

$23.4 million decrease in Wireline segment operating income primarily due to lower revenue and a restructuring gain recorded in the prior year.


Form 10-Q Part I		Cincinnati Bell Inc.

Interest expense was $52.0 million for the third quarter of 2010 and $131.5 million for the nine months ended September 30, 2010 as compared to $31.5 million for the third quarter of 2009 and $94.6 million for the nine months ended September 30, 2009. The increase compared to last year is primarily attributable to higher debt balances from financing required to fund the acquisition of CyrusOne and higher interest rates.

Income tax expense for the three months ended September 30, 2010 was $16.1 million compared to $21.7 million for the third quarter of 2009 due to lower pre-tax income offset by a higher effective tax rate. Income tax expense for the nine months ended September 30, 2010 was $45.9 million as compared to $59.1 million for the same period in 2009. This decrease is due to lower pretax income and a $7 million tax benefit associated with a change in valuation allowance on state deferred tax assets that are expected to be utilized as a result of the CyrusOne acquisition. These decreases were partially offset by a $6 million charge related to tax matters associated with the refinancing of the 8³/8% Subordinated Notes and a $4 million charge related to a tax law change that now requires the application of federal income taxes against the retiree Medicare drug subsidy received by the Company.

The Company expects its effective tax rate to exceed statutory rates primarily due to non-deductible expenses, including interest on securities originally issued to acquire its broadband business (the “Broadband Securities”) or securities that the Company has subsequently issued to refinance the Broadband Securities. The Company believes the full year 2010 effective tax rate will approximate the actual September 2010 year-to-date effective tax rate. The Company expects to use federal and state net operating loss carryforwards to substantially defray payment of federal and state tax liabilities in 2010. The Company expects income tax payments for the 2010 year to be approximately $4 million.


Form 10-Q Part I		Cincinnati Bell Inc.

Discussion of Operating Segment Results

WIRELINE


	Three Months Ended September 30,										Nine Months Ended September 30,
(dollars in millions)	2010		2009		Change			% Change			2010		2009		Change			% Change

Revenue:
Voice - local service	$	76.5	$	83.0	$	(6.5	)		(8	)%	$	236.9	$	260.8	$	(23.9	)		(9	)%
Data		68.4		69.5		(1.1	)		(2	)%		205.2		208.4		(3.2	)		(2	)%
Long distance and VoIP		26.8		24.0		2.8			12	%		78.5		72.0		6.5			9	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company