<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
__ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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 29, 1994, 65,414,543 Common Shares were outstanding
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- ------------------
1994 1993 1994 1993
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Telephone operations
Local service . . . . . . . . . . $ 81,134 $ 75,011 $158,345 $149,016
Network access . . . . . . . . . 33,986 34,848 70,339 68,037
Long distance . . . . . . . . . . 9,115 9,337 18,787 20,896
Other . . . . . . . . . . . . . . 17,615 18,851 34,810 39,940
-------- --------- -------- --------
141,850 138,047 282,281 277,889
Information systems . . . . . . . 73,126 71,950 143,804 140,315
Marketing services . . . . . . . . 54,002 23,139 104,607 47,893
Other telecommunications . . . . . 30,866 29,466 61,221 58,972
-------- --------- -------- --------
Total Revenues . . . . . . . . . 299,844 262,602 591,913 525,069
-------- --------- -------- --------
Costs and Expenses
Operating expenses . . . . . . . . 154,745 140,090 308,171 274,129
Plant and building services . . . 42,538 36,803 82,619 75,754
Depreciation and amortization . . 36,879 34,640 74,044 69,348
Taxes other than income taxes . . 23,202 22,829 47,886 46,401
-------- --------- -------- --------
Total Costs and Expenses . . . . 257,364 234,362 512,720 465,632
-------- --------- -------- --------
Operating Income . . . . . . . . 42,480 28,240 79,193 59,437
Other Income (Expense) - Net . . . (192) 1,190 410 11,848
Interest Expense . . . . . . . . . 12,498 9,854 24,892 20,229
-------- --------- -------- --------
Income Before Income Taxes and
Cumulative Effect of Accounting
Change . . . . . . . . . . . . . 29,790 19,576 54,711 51,056
Income Taxes . . . . . . . . . . . . 11,070 6,076 20,345 16,729
-------- --------- -------- --------
Income Before Cumulative Effect of
Accounting Change . . . . . . . . 18,720 13,500 34,366 34,327
Cumulative Effect of Accounting
Change . . . . . . . . . . . . . . - - (2,925) -
-------- --------- -------- --------
Net Income . . . . . . . . . . . . 18,720 13,500 31,441 34,327
Preferred Dividend Requirements . . - 1,088 - 2,175
-------- --------- -------- --------
Income Applicable to Common Shares. $ 18,720 $ 12,412 $ 31,441 $ 32,152
-------- --------- -------- --------
-------- --------- -------- --------
Earnings Per Common Share
Income Before Cumulative Effect of
Accounting Change . . . . . . . $ .28 $ .20 $ .52 $ .52
Cumulative Effect of Accounting
Change . . . . . . . . . . . . . - - (.04) -
-------- --------- -------- --------
Net Income . . . . . . . . . . . . .28 .20 .48 .52
-------- --------- -------- --------
-------- --------- -------- --------
Dividends Declared per Common
Share . . . . . . . . . . . . . . $ .20 $ .20 $ .40 $ .40
-------- --------- -------- --------
-------- --------- -------- --------
Weighted Average Number of Common
Shares Outstanding (000) . . . . 65,311 61,711 65,197 61,776
</TABLE>
2
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (Cont'd)
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Retained Earnings at Beginning of Period . . $226,050 $345,518 $227,392 $342,483
Add: Net Income . . . . . . . . . . . . . 18,720 13,500 31,441 34,327
Deduct: Common Dividends . . . . . . . . . 13,074 12,347 26,116 24,789
Pension Liability Adjustment . . . - - 1,021 -
Preferred Dividends . . . . . . . . - 1,088 - 2,175
Acquisition of Common Shares . . . - 426 - 4,453
Issuance of Common Shares Under
Employee Plans . . . . . . . . . - - - 236
-------- -------- -------- --------
Retained Earnings at End of Period . . . . . $231,696 $345,157 $231,696 $345,157
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . $ 15,843 $ 8,668
Receivables less allowances of $11,251
and $14,031 . . . . . . . . . . . . . . . . . 250,948 241,669
Material and supplies . . . . . . . . . . . . 17,987 21,627
Prepaid expenses . . . . . . . . . . . . . . . 28,621 30,391
Other current assets . . . . . . . . . . . . . 20,868 22,471
---------- ----------
334,267 324,826
---------- ----------
Property, Plant and Equipment
Telephone plant . . . . . . . . . . . . . . . 1,473,368 1,430,822
Less accumulated depreciation . . . . . . . . (570,112) (541,690)
---------- ----------
903,256 889,132
---------- ----------
Other property . . . . . . . . . . . . . . . . 316,068 303,917
Less accumulated depreciation . . . . . . . . (157,585) (145,480)
---------- ----------
158,483 158,437
---------- ----------
1,061,739 1,047,569
---------- ----------
Other Assets
Intangibles, primarily goodwill - net . . . . 192,265 192,341
Deferred and other assets . . . . . . . . . . 44,996 56,324
Other investments . . . . . . . . . . . . . . 40,728 43,030
---------- ----------
277,989 291,695
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . $1,673,995 $1,664,090
---------- ----------
---------- ----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . $ 140,036 $ 132,648
Debt maturing in one year . . . . . . . . . 103,709 112,029
Accrued disposal and restructuring costs . . 19,899 35,385
Accrued taxes . . . . . . . . . . . . . . . 31,724 38,135
Advanced billing and customers' deposits . . 33,487 31,553
Other . . . . . . . . . . . . . . . . . . . 25,335 24,587
---------- ----------
354,190 374,337
---------- ----------
Long-Term Debt . . . . . . . . . . . . . . . 528,789 522,888
---------- ----------
Deferred Credits and Other Long-Term Liabilities
Deferred income taxes . . . . . . . . . . . 166,439 158,438
Unamortized investment tax credits . . . . . 18,122 19,371
Other long-term liabilities . . . . . . . . 80,000 73,441
---------- ----------
264,561 251,250
---------- ----------
Shareowners' Equity
Common shares - $1.00 par value . . . . . . 65,368 64,982
Authorized shares: 240,000,000
Outstanding shares: at June 30, 1994,
65,368,142;
at December 31, 1993,
64,982,178
Additional paid-in capital . . . . . . . . . 229,366 223,257
Reinvested earnings . . . . . . . . . . . . 231,696 227,392
Foreign currency translation adjustment . . 25 (16)
---------- ----------
526,455 515,615
---------- ----------
Total Liabilities and Shareowners' Equity . . $1,673,995 $1,664,090
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1994 1993
--------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . $ 31,441 $ 34,327
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization . . . . . . . . . . 74,044 69,348
Cumulative effect of accounting change . . . . . 2,925 -
Provision for loss on receivables . . . . . . . . 2,871 2,998
Other-net . . . . . . . . . . . . . . . . . . . . 7,026 (3,873)
Changes in assets and liabilities
Decrease (increase) in receivables . . . . . . . (14,833) 7,434
Decrease (increase) in other current assets . . . 5,410 (158)
Increase (decrease) in accounts payable . . . . . 3,656 (26,940)
Decrease in accrued disposal and restructuring . (15,486) -
Decrease in other current liabilities . . . . . . (2,299) (6,609)
Increase in deferred income taxes and unamortized
investment tax credits . . . . . . . . . . . . . 8,436 4,819
Decrease (increase) in other assets and liabilities 8,177 (3,575)
-------- --------
Net cash provided by operating activities . . . 111,368 77,771
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant . . . . . . (66,605) (51,394)
Capital expenditures-other . . . . . . . . . . . (14,862) (24,544)
Other-net . . . . . . . . . . . . . . . . . . . . 9,593 7,616
-------- --------
Net cash used in investing activities . . . . . (71,874) (68,322)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (payments of) notes payable . (9,443) 37,388
Principal payments on long-term debt . . . . . . (2,073) (1,504)
Proceeds from issuance of common shares . . . . . 4,541 631
Dividends paid . . . . . . . . . . . . . . . . . (26,049) (26,912)
Payments made to acquire common shares . . . . . - (5,480)
-------- --------
Net cash used in financing activities . . . . . (33,024) 4,123
-------- --------
Effect of exchange rate changes on cash and cash equivalents 705 117
-------- --------
Net increase in cash and cash equivalents . . . . . 7,175 13,689
Cash and cash equivalents at beginning of period . 8,668 5,304
-------- --------
Cash and cash equivalents at end of period . . . . $ 15,843 $ 18,993
-------- --------
-------- --------
Cash paid for:
Interest (net of amount capitalized) . . . . . . $ 21,722 $ 17,687
Income taxes . . . . . . . . . . . . . . . . . . $ 11,681 $ 14,049
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - 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), (3) and (4). 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. Management believes
that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial
statements be read in conjunction with financial statements and
notes thereto included in the Company's 1993 Annual Report on
Form 10-K and the current year's previously issued Form 10-Q.
Certain reimbursable costs previously recorded as information
systems revenues in the 1993 Forms 10-Q have been reclassified
as a reduction of operating expenses. This reclassification
amounted to $10.2 million and $18.9 million for the quarter and
six months ended June 30, 1993, respectively. This
reclassification had no effect on operating income or net
income for all periods presented. In addition to the
information systems revenue, certain prior year amounts have
been reclassified to be consistent with the 1994 presentation.
The consolidated financial statements include the accounts of
Cincinnati Bell Inc. and its wholly owned subsidiaries (the
"Company"). The significant subsidiaries include: Cincinnati
Bell Telephone Company ("CBT"), Cincinnati Bell Information
Systems Inc. ("CBIS") and MATRIXX Marketing Inc. ("MATRIXX").
(2) DISPOSAL AND RESTRUCTURING OF CBIS OPERATIONS - In late 1993,
the Company determined the need to reorganize CBIS, its
information systems subsidiary. This reorganization focused on
two phases. The first phase was the elimination of non-
strategic and underperforming operations. This resulted in
CBIS taking action to divest its holdings in its federal
operation (CBIS Federal), consolidating its foreign data center
operations, and eliminating unprofitable domestic and
international activities. The second phase of the plan was to
reorganize the remaining operations into strategic business
units.
The operating results of the businesses to be sold or
discontinued are charged to the reserve for restructuring.
Revenues of $16.1 million and $29.5 million and operating
expenses of $21.7 and $41.0 million for the three and six
months ended June 30, 1994 were recorded against the
restructuring reserve. In addition, $4.2 million of other
expenses, primarily for employee severance costs, were charged
to the restructuring reserve during the first six months of
1994. The Company believes that the accrual for the disposal
and restructuring at June 30, 1994 is adequate.
The assets of the discontinued operations consist of net
current assets of $7.4 million and net noncurrent assets of
$9.3 million at June 30, 1994. These amounts consist primarily
of accounts receivable, property, plant and equipment and
related liabilities.
6
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(3) CINCINNATI BELL TELEPHONE COMPANY - The following summarized
financial information, in thousands of dollars, is for the
Company's consolidated wholly owned subsidiary, Cincinnati
Bell Telephone Company:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1994 1993 1994 1993
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues and Sales . . . . . . $147,616 $143,711 $293,884 $289,333
Costs and Expenses . . . . . . $121,643 $117,562 $244,341 $240,979
Income Before Cumulative Effect of
Accounting Change . . . . . $ 14,668 $ 15,945 $ 28,302 $ 35,787
Cumulative Effect of Accounting
Change . . . . . . . . . . . - - $ (2,405) -
Net Income . . . . . . . . . . $ 14,668 $ 15,945 $ 25,897 $ 35,787
</TABLE>
Results for the six months ended June 30, 1994, include two
significant nonrecurring charges. As more fully described in
Note (4) to the financial statements, effective January 1, 1994,
the Company, including CBT, adopted SFAS 112, "Employers
Accounting for Postemployment Benefits". The cumulative effect
of this accounting change was recognized in the first quarter
1994 as a change in accounting principle, thereby reducing CBT's
net income by $2.4 million ($.04 per common share), net of a
deferred tax benefit.
Also in the first quarter of 1994, CBT recognized $2.5 million in
incremental postretirement expenses resulting from adjusting
deferred amounts to a level that is expected to be recovered in
regulated rates. This adjustment reduced net income by $1.6
million ($.03 per common share). CBT had received approval from
the Public Utilities Commission of Ohio ("PUCO") in 1993 to defer
these incremental postretirement expenses while they were being
addressed in CBT's request for alternate regulation. CBT is no
longer deferring these costs in 1994.
Results for the six months ended June 30, 1993, include a gain
from the sale of the residential equipment leasing and
PhoneCenter Store businesses to AT&T Consumer Products. The sale
increased net income by approximately $6.5 million ($.10 per
common share). The gain is included in Other Income (Expense) -
net.
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
<S> <C> <C>
Current Assets . . . . . . . . . . . . . $ 153,137 $ 159,641
Telephone Plant-Net . . . . . . . . . . 913,863 900,141
Other Noncurrent Assets . . . . . . . . 21,186 32,161
---------- ----------
Total Assets . . . . . . . . . . . . . . $1,088,186 $1,091,943
---------- ----------
Current Liabilities . . . . . . . . . . $ 117,850 $ 139,438
Noncurrent Liabilities . . . . . . . . . 202,689 196,389
Long-Term Debt . . . . . . . . . . . . . 312,219 310,500
Common Shareowner's Equity . . . . . . . 455,428 445,616
---------- ----------
Total Liabilities and Invested Capital . $1,088,186 $1,091,943
---------- ----------
---------- ----------
</TABLE>
7
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(4) CHANGE IN ACCOUNTING PRINCIPLE - Effective January 1, 1994,
the Company adopted SFAS 112, "Employers' Accounting for
Postemployment Benefits". SFAS 112 requires the accrual of
the obligation for benefits provided to former or inactive
employees, their beneficiaries and covered dependents after
employment but before retirement. These benefits include
workers' compensation, disability benefits and health care
coverage for a limited time. SFAS 112 changed the Company's
method of accounting for postemployment benefits from
recognizing costs as benefits are paid, to accruing the
expected costs of providing these benefits. The cumulative
effect of this accounting change was recognized in the first
quarter 1994 as a change in accounting principle, thereby
reducing net income by $2.9 million, which is net of a
deferred tax benefit of $1.6 million. The on-going expense
recognized under SFAS 112 is not significantly different from
that recorded under prior methods.
8
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's consolidated net income for the quarter ended June 30,
1994 was $18.7 million or an increase of $5.2 million or 39%
compared to the same quarter in 1993. For the first six months of
1994 consolidated net income was $31.4 million or a decrease of $2.9
million or 8% compared to the same period in 1993.
Earnings per common share for the quarter ended June 30, 1994 was
$.28, an increase of $.08 or 40% over the same period in 1993.
Earnings per common share for the six months ended June 30, 1994 was
$.48, down $.04 or 8% when compared to the same period in 1993.
Earnings for 1994 were reduced by two nonrecurring charges recorded
in the first quarter of 1994. A required change in accounting for
postemployment benefits (SFAS 112) and an adjustment to expense
certain deferred postretirement costs at CBT reduced net income by
$.07 per common share.
Revenues increased 14% and 13% for the three and six months ended
June 30, 1994 while expenses increased 10% for both periods when
compared to 1993. The main cause of the increase in revenues and
expenses in 1994 over the prior year was the inclusion of the
results of WATS Marketing which was acquired in November 1993. CBIS
continued to sharpen its focus on billing and customer support for
the wireless communications market by experiencing a sharp increase
in revenues for the quarter and six months. Although MATRIXX
results benefited from the WATS Marketing acquisition, its
underlying business also grew rapidly in 1994.
CBIS Restructuring
The operating results of the businesses to be sold or discontinued
are charged to the reserve for restructuring. Revenues of $16.1
million and $29.5 million and operating expenses of $21.7 and $41.0
million for the three and six months ended June 30, 1994 were
recorded against the restructuring reserve. In addition, $4.2
million of other expenses, primarily for employee severance costs,
were charged to the restructuring reserve during the first six
months of 1994.
Efforts to sell CBIS Federal are continuing at present. In
connection with the restructuring of the remaining CBIS operations,
CBIS reduced its non-federal workforce by 220 employees or 9% in
April 1994. On July 25, 1994, CBIS announced the sale of the assets
of its CMS Division and a related reduction in workforce of 38
employees. The severance costs for these employees were included in
the restructuring charges in 1993.
Results for interim periods may not be indicative of the results for
the full year.
REVENUES
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $299.8 $262.6 $37.2 14%
Six months ended $591.9 $525.1 $66.8 13%
</TABLE>
9
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
The increases and decreases in revenues are comprised of the
following:
TELEPHONE OPERATIONS
Local service
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $ 81.2 $ 75.0 $6.2 8%
Six months ended $158.4 $149.0 $9.4 6%
</TABLE>
Local service revenues increased principally as a result of growth
in access lines and the effect of the new Ohio rate plan which was
effective May 6, 1994. Access lines have increased 3% from 838,000
at June 30, 1993 to 865,000 at June 30, 1994. The remaining
increase was caused by higher revenues from custom calling services
and other central office features.
Network access
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $34.0 $34.8 $(.8) (2)%
Six months ended $70.3 $68.0 $2.3 3 %
</TABLE>
Network access revenues decreased for the quarter primarily from a
reduction in intrastate access revenues and lower independent
company settlements. The reduction in intrastate revenues was the
result of a decrease in the carrier common line terminating rate in
Ohio approved by the PUCO in May 1994. Partially offsetting the
decreases was an increase in interstate revenues for higher end user
charges and increased minutes of use. For the six month period,
network access revenues increased primarily from an increase in
interstate revenues from increased minutes of use and higher end
user charges partially offset by lower independent company
settlements.
Long distance
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $ 9.1 $ 9.4 $ (.3) (3)%
Six months ended $18.8 $20.9 $(2.1) (10)%
</TABLE>
Long distance revenues decreased for the quarter and six months
because of a rate decrease in January 1994 for intraLATA message
tolls. Also included in the six months, is a decrease from the
effect of higher settlements recorded in the first quarter 1993.
10
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
Other
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $17.6 $18.9 $(1.3) (7)%
Six months ended $34.8 $40.0 $(5.2) (13)%
</TABLE>
The decrease for the quarter is primarily attributable to lower
revenues from leasing of business telecommunications equipment. The
decrease for the six month period was primarily caused by lower
revenues from sales and leasing of telecommunications equipment to
residential and business customers. CBT sold its residential
equipment leasing and PhoneCenter Store businesses in the first
quarter of 1993 and discontinued leasing business equipment in 1993.
Billing and collection revenues also decreased for the quarter and
six months as the result of a lower volume of business. The
declines for both periods were partially offset by increases in
sales and marketing commissions and a reduction in the provision for
uncollectible accounts.
INFORMATION SYSTEMS
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $ 73.1 $ 71.9 $1.2 2%
Six months ended $143.8 $140.3 $3.5 2%
</TABLE>
Information systems revenues in 1994 reflected a significant
increase over 1993 after excluding amounts related to operations to
be sold or discontinued. Revenues of these operations amounted to
$18.3 million and $39.9 million for the three and six months ended
June 30, 1993, respectively. The majority of the increase resulted
from higher data processing services provided to cellular industry
customers. In addition, revenues from international customers for
the development of telecommunication solutions were higher in 1994.
MARKETING SERVICES
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $ 54.0 $23.1 $30.9 134%
Six months ended $104.6 $47.9 $56.7 118%
</TABLE>
Although most of the revenue increase resulted from the WATS
Marketing acquisition in 1993, revenues from inbound and outbound
call processing, custom services and business to business operations
showed strong increases because of growth in business.
OTHER TELECOMMUNICATIONS
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $30.8 $29.5 $1.3 4%
Six months ended $61.2 $59.0 $2.2 4%
</TABLE>
Long distance revenues increased as a result of an increase in the
number of customers and higher 800-service revenues.
11
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
COSTS AND EXPENSES
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $257.3 $234.3 $ 23.0 10%
Six months ended $512.7 $465.6 $ 47.1 10%
</TABLE>
In summary, the primary causes for the increase in costs and
expenses were added expenses of the acquired WATS Marketing,
increased costs for providing data processing services to cellular
industry customers, and increased depreciation expense as the result
of changes in regulatory prescribed rates. Chief causes of
reductions in expenses were the exclusion of costs and expenses of
operations discontinued or sold at CBIS and CBT.
Telephone operations costs and expenses increased for the three and
six months primarily because of higher depreciation and amortization
expense, postretirement benefit costs and the effect of a change in
the vacation policy in 1993. Depreciation and amortization expense
increased from Federal and Kentucky approved depreciation rate
represcriptions that were effective January 1, 1994. On June 2,
1994 the Public Utilities Commission of Ohio approved new
depreciation rates effective July 1, 1994. It is estimated that
CBT's 1994 depreciation expense will be approximately $10 million
more than in 1993 because of the change in prescribed rates.
Postretirement costs are higher in 1994 than in 1993 because of
CBT's deferral of approximately $1 million of costs per quarter in
1993 (See note 3 to the financial statements). The deferral was
discontinued in the first quarter of 1994 and $2.5 million of the
deferred amount was expensed. Effective in January 1993, CBT
revised its vacation policy for the period in which management and
non-management employees earned vacation in order to be on an
equivalent basis with the Company's other subsidiaries. The
vacation policy change decreased expenses in 1993. Partially
offsetting the six months increase were the results of cost
containment efforts and the effect of CBT's sale of its residential
equipment leasing and PhoneCenter Store businesses in the first
quarter 1993.
Costs and expenses of the Information Systems segment increased in
1994 when compared to 1993 after adjusting 1993 amounts for the
operations to be sold or discontinued. Costs and expenses for these
operations amounted to $21.7 million and $45.2 million for the three
and six months ended June 30, 1994. Data center expenses increased
because of a higher volume of data processing services and higher
costs for providing those services. Costs for the development of
telecommunications solutions for international customers increased
because of a higher volume of business. In addition, expenses
related to upgrading computer workstations increased costs and
expenses for the quarter. Staff reductions, attrition and a lower
contractor base will result in a substantial reduction in personnel
and related costs in the future.
Marketing services costs and expenses increased primarily from the
WATS acquisition mentioned previously and higher direct costs as a
result of increased revenues in the inbound and outbound call
processing operations and business to business operations.
Other telecommunications services costs and expenses included a $3.0
million provision for inventory loss during the second quarter 1993.
The long distance business experienced an increase in direct costs
associated with the increased revenues and higher Ohio property
taxes resulting from a change in tax classification of the property
used in the business.
12
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
OTHER INCOME (EXPENSE) - NET
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months ended $(.2) $ 1.1 $ (1.3) (118)%
Six months ended $ .4 $11.8 $(11.4) (97)%
</TABLE>
The most important reason for the decrease for the six months is the
inclusion of a $9.8 million gain from the sale of CBT's residential
equipment leasing and PhoneCenter Store businesses in the first
quarter of 1993. In addition, the quarter and six months of 1993
include income from the Cincinnati-Anixter joint venture which was
terminated at the end of 1993.
INTEREST EXPENSE
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months $12.5 $ 9.8 $2.7 28%
Six months $24.9 $20.2 $4.7 23%
</TABLE>
A higher average interest rate on total debt outstanding caused the
increase in interest expense. This was the result of refinancing
short-term debt with long-term debt with higher interest rates
during the last six months of 1993 and higher average balances of
debt outstanding from the WATS acquisition.
INCOME TAXES
<TABLE>
<CAPTION>
June 30 Increase
(In millions) 1994 1993 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Three months $11.0 $ 6.0 $5.0 83%
Six months $20.3 $16.7 $3.6 22%
</TABLE>
Higher income before taxes was the principal reason for the increase
in income taxes. The Company's effective tax rate was 37.2% for the
three months and six months ended June 30, 1994 compared to 31.0%
and 32.8% for the same periods last year, respectively. The reasons
for the higher annual effective tax rate were principally due to the
new tax law which increased rates and non-deductible expenses along
with changes in the expectation of taxable income in 1994 versus
1993.
FINANCIAL CONDITION
Cash provided by operating activities for the six months ended June
30, 1994 was $111.4 million, an increase of $33.6 million. The
excess of cash from operations over the amounts of cash flows
invested and dividend payments was used to reduce short-term
borrowings.
The primary use of capital resources continued to be capital
expenditures. Capital expenditures were $81.5 million for the first
six months in 1994 compared to the $75.9 million for the same period
in 1993. Included in the capital expenditures were capitalized
software development costs of $4.5 million and $13.5 million,
respectively. Capital expenditures for telephone plant were higher
from an increase in access lines and modernization of equipment.
Capital expenditures for 1994 are expected to be approximately $160
million of which $95 million is for additions to property, plant and
equipment of CBT.
13
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
The Company's debt to capitalization ratio at June 30, 1994 was
54.6% compared to 47.8% at June 30, 1993. The increase is due
primarily to the impact of the special charges in late 1993 and the
acquisition of WATS Marketing in November, 1993.
In May 1994, Moody's placed under review the Company's commercial
paper rated P-1 and senior unsecured debt rated A2, and CBT's
unsecured debt rated Aa2. The reason given to the Company was that
it derives the bulk of its credit support from CBT. For CBT,
Moody's stated that the review is necessary in order to further
assess the implications of the introduction of new incentive
regulatory framework in Ohio on CBT's ability to generate adequate
levels of return to sustain its cash flow.
Management believes that the Company has adequate internal and
external resources available to finance its business development,
construction and dividend programs. The Company maintains adequate
lines of credit with several institutions to provide support for
borrowings and general
corporate purposes.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 112, "Employers' Accounting
for Postemployment Benefits". The cumulative effect of this
accounting change was recognized as a change in accounting
principle, thereby reducing net income for the year by $2.9 million,
which is net of a deferred tax benefit of $1.6 million.
REGULATORY MATTERS
ALTERNATIVE REGULATION
Pursuant to procedures established by the PUCO, local exchange
companies are permitted to file plans proposing alternative forms of
regulation for competitive services and basic service rates. CBT
filed for a threshold increase in rates with an alternative
regulation proposal in 1993. Thereafter, CBT and the intervenors
signed a settlement agreement which was approved by the PUCO on May
5, 1994 increasing revenues by $11.9 million annually or 3.75% on
Ohio regulated services. The alternative regulation commitments and
new rates became effective May 6, 1994. CBT's authorized rate of
return on capital will be 11.18%, but CBT can earn up to 11.93% in a
monitoring period without any retargeting of rates. Earnings higher
than 11.93% result in retargeting of rates in the next monitoring
period. This alternative regulation plan provides increased pricing
flexibility in some areas, which allows CBT to be more responsive to
customers and more competitive.
OPTIONAL INCENTIVE REGULATION
For interstate services, CBT began to operate under an Optional
Incentive Regulation (OIR) plan in January 1994. This is an
alternative form of regulation for small and midsized companies with
more emphasis on price regulation similar to price caps. The plan
involves the following:
- - OIR does not impose a productivity offset.
- - CBT can retain higher levels of profit if it improves its
productivity/efficiency up to a maximum of 12.75% under
OIR versus 11.50% under rate of return regulation.
- - Ratepayers benefit from efficiency gains because the gains
are flowed through in the form of lower rates in the next
tariff period when rates are retargeted to the authorized
rate of return.
- - CBT need not be permanently committed to OIR in contrast
with price cap regulation.
14
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
In addition, CBT has more pricing flexibility. Rate changes and new
services can be made on a 14 day notice without cost support if CBT
sets rates no higher than a geographically adjacent price cap local
exchange carrier. This allows CBT to be more responsive to
customers and more competitive. Historical revenue requirements and
demand are used instead of forecasts.
DEPRECIATION REPRESCRIPTION
In January 1994, CBT completed a successful triennial depreciation
represcription with regulators from the Federal Communications
Commission, the PUCO and the Public Service Commission of Kentucky.
The new depreciation rates were effective January 1, 1994 in the
interstate and Kentucky jurisdictions. CBT has obtained permission
to use new rates in Ohio effective July 1, 1994.
EFFECTS OF REGULATORY ACCOUNTING
CBT presently gives accounting recognition to the actions of
regulators where appropriate, as prescribed by SFAS 71, "Accounting
for the Effects of Certain Types of Regulation". Under SFAS 71, CBT
records certain assets and liabilities because of the actions of
regulators. Amounts charged to operations for depreciation expense
reflect estimated useful lives and methods prescribed by regulators
rather than those that might otherwise apply to unregulated
enterprises. In the event CBT determines that it no longer meets
the criteria for following SFAS 71, the accounting impact to CBT
would be an extraordinary non-cash charge to operations of an amount
which would be material. Criteria that give rise to the
discontinuance of SFAS 71 include increasing competition, which
restricts CBT's ability to establish prices to recover specific
costs, and a significant change in the manner in which rates are set
by regulators from cost-based regulation to another form of
regulation. CBT periodically reviews these criteria to ensure that
continuing application of SFAS 71 is appropriate.
BUSINESS OUTLOOK
Cincinnati Bell operates businesses in several different markets.
Each of the businesses has fluctuations in revenues and operating
earnings as the result of the overall level, timing and terms of
many contracts. These circumstances may increase the variability of
financial results on a quarter-to-quarter basis.
Customer demands, technology, the preferences of policy makers and
the convergence of other industries with the telecommunications
industry are causes of increasing competition in the
telecommunications industry for CBT. 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. Federal and state regulators are encouraging
changes that promote competition in the industry. These impacts are
expected to make it very challenging to maintain and grow telephone
revenues.
CBT is evaluating the way it conducts business in order to further
improve customer responsiveness and quality. CBT is evaluating
regulatory changes that will be needed. Also, CBT is evaluating
productivity improvement programs that could involve retraining of
employees, re-engineering of systems, restructure of its
organization, resource levels and other operating costs.
15
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
On August 2, 1994, the Company announced that CBIS signed a major
contract renewal through 1999 with McCaw Cellular Communications
Inc., the largest cellular service provider in the United States.
CBIS currently provides billing for McCaw's cellular properties.
Given the continuing growth of the cellular market, the contract is
expected to generate revenues for CBIS in excess of $600 million.
MATRIXX has taken aggressive steps to capture efficiencies by
integrating the WATS acquisition. The continued trend in the
outsourcing of telemarketing is important for MATRIXX'S continued
growth.
The success of the other businesses will be determined by how well
they meet the changing needs of their customers.
16
<PAGE>
Form 10-Q Part II Cincinnati Bell Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
Exhibit
Number
-------
11 Computation of Earnings per Common Share
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
17
<PAGE>
SIGNATURES
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 12, 1994 /s/ Brian C. Henry
------------------ ----------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
18
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 1994
----------------------------------
CINCINNATI BELL INC.
(Exact Name of Registrant as specified in its charter)
----------------------------------
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
Filed Pursuant to Item 601 of Regulation S-K
Exhibit
No. Title of Exhibit Page
------- ---------------------------------------- ----
(11) Computation of Earnings per Common Share *
<PAGE>
Exhibit 11
to
Form 10-Q for the Quarterly
Period Ended June 30, 1994
CINCINNATI BELL INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(Dollars in thousands, except per share amounts; shares in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1994 1993 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
Income before cumulative effect of accounting change $18,720 $13,500 $34,366 $34,327
Cumulative effect of accounting change . . . . . . . - - (2,925) -
Net Income . . . . . . . . . . . . . . . . . . . . . 18,720 13,500 31,441 34,327
Preferred dividend requirements . . . . . . . . . . - 1,088 - 2,175
------- ------- ------- -------
Income applicable to common shares . . . . . . . . . $18,720 $12,412 $31,441 $32,152
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . . . . 65,311 61,711 65,197 61,776
Common share conversions applicable to common
share options . . . . . . . . . . . . . . . . . . . . 8 148 8 148
------- ------- ------- -------
Total number of shares for computing primary
earnings per common share . . . . . . . . . . . . . 65,319 61,859 65,205 61,924
Average contingent issues of common shares from
convertible preferred shares . . . . . . . . . . . . - 3,158 - 3,158
------- ------- ------- -------
Total number of shares for computing fully diluted
earnings per common share . . . . . . . . . . . . . 65,319 65,017 65,205 65,082
------- ------- ------- -------
------- ------- ------- -------
EARNINGS PER COMMON SHARE
As reported
Income before accounting change . . . . . . . . . . $ .28 $ .20 $ .52 $ .52
Cumulative effect of accounting change - - (.04) -
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . $ .28 $ .20 $ .48 $ .52
------- ------- ------- -------
------- ------- ------- -------
Primary
Income before accounting change . . . . . . . . . . $ .28 $ .20 $ .52 $ .52
Cumulative effect of accounting change . . . . . . . - - (.04) -
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . $ .28 $ .20 $ .48 $ .52
------- ------- ------- -------
------- ------- ------- -------
Fully Diluted
Income before accounting change . . . . . . . . . . $ .28 $ .20 $ .52 $ .53
Cumulative effect of accounting change . . . . . . . - - (.04) -
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . $ .28 $ .20 $ .48 $ .53
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Earnings per common share for the six months ended June 30, 1994 and 1993
as reported in the Consolidated Statements of Income were based on the
weighted average number of common shares outstanding for the respective
periods. Primary and fully diluted earnings per common share were not
shown in the Consolidated Statements of Income as they differ from the
reported earnings per common share by less than three percent or are anti-
dilutive.
