<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------- ---------
Commission File Number 1-8519
CINCINNATI BELL INC.
Incorporated under the laws of the State of Ohio
201 East Fourth Street, Cincinnati, Ohio 45202
I.R.S. Employer Identification Number 31-1056105
Telephone - Area Code 513 397-9900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes / X /. No / /.
----- -----
At October 31, 1995, 66,388,712 Common Shares were outstanding.
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $327,050 $312,911 $992,938 $904,824
-------- -------- -------- --------
Costs and Expenses
Operating expenses.............................. 162,078 158,120 496,103 466,291
Plant and building services..................... 45,829 49,806 141,194 132,425
Depreciation and amortization................... 40,479 40,343 119,744 114,387
Taxes other than income taxes................... 21,603 21,346 70,864 69,232
Special charges................................. - - 132,000 -
-------- -------- -------- --------
Total Costs and Expenses...................... 269,989 269,615 959,905 782,335
-------- -------- -------- --------
Operating Income.............................. 57,061 43,296 33,033 122,489
Other Income (Expense) - Net.................... 646 479 683 889
Interest Expense................................ 13,847 12,437 39,828 37,329
-------- -------- -------- --------
Income (Loss) Before Income Taxes and
Cumulative Effect of Accounting Change........... 43,860 31,338 (6,112) 86,049
Income Taxes...................................... 15,127 11,231 (2,264) 31,576
-------- -------- -------- --------
Income (Loss) Before Cumulative Effect of
Accounting Change................................ 28,733 20,107 (3,848) 54,473
Cumulative Effect of Accounting Change............ - - - (2,925)
-------- -------- -------- --------
Net Income (Loss)................................. $ 28,733 $ 20,107 $ (3,848) $ 51,548
======== ======== ======== ========
Earnings (Loss) Per Common Share
Income (Loss) Before Cumulative Effect of
Accounting Change.............................. $ .43 $ .31 $ (.06) $ .83
Cumulative Effect of Accounting Change.......... - - - (.04)
-------- -------- -------- --------
Net Income (Loss)............................... $ .43 $ .31 $ (.06) $ .79
======== ======== ======== ========
Dividends Declared per Common Share............... $ .20 $ .20 $ .60 $ .60
======== ======== ======== ========
Weighted Average Number of Common Shares
Outstanding (000)................................ 66,350 65,532 66,204 65,309
Retained Earnings at Beginning of Period.......... $187,456 $231,696 $246,568 $227,392
Add: Net Income (Loss).......................... 28,733 20,107 (3,848) 51,548
Deduct: Common Dividends........................ 13,276 13,129 39,754 39,245
Pension Liability Adjustment.................... - - - 1,021
Issuance of Common Shares Under Employee Plans.. - - 53 -
-------- -------- -------- --------
Retained Earnings at End of Period................ $202,913 $238,674 $202,913 $238,674
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................. $ 135,884 $ 78,368
Receivables less allowances of $14,417 and $14,056.... 234,022 246,122
Material and supplies................................. 15,498 15,988
Prepaid expenses...................................... 35,752 29,180
Other current assets.................................. 27,406 28,984
---------- ----------
448,562 398,642
---------- ----------
Property, Plant and Equipment
Telephone plant....................................... 1,494,280 1,447,411
Accumulated depreciation.............................. (618,198) (556,004)
---------- ----------
876,082 891,407
---------- ----------
Other property........................................ 280,443 279,355
Accumulated depreciation.............................. (150,632) (134,587)
---------- ----------
129,811 144,768
---------- ----------
1,005,893 1,036,175
---------- ----------
Other Assets
Goodwill and other intangibles........................ 199,147 197,425
Investments in unconsolidated entities................ 50,917 48,809
Deferred charges and other............................ 38,986 42,397
---------- ----------
289,050 288,631
---------- ----------
Total Assets............................................ $1,743,505 $1,723,448
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year............................. $ 114,092 $ 68,689
Accounts payable and accrued liabilities.............. 160,625 179,658
Accrued restructuring and disposal costs.............. 28,112 11,076
Accrued taxes......................................... 44,222 61,054
Advanced billing and customers' deposits.............. 31,032 38,793
Other current liabilities............................. 32,007 24,067
---------- ----------
410,090 383,337
---------- ----------
Long-Term Debt.......................................... 491,083 528,255
---------- ----------
Deferred Credits and Other Long-Term Liabilities
Deferred income taxes................................. 114,798 164,059
Unamortized investment tax credits.................... 14,966 16,191
Other long-term liabilities........................... 195,788 79,204
---------- ----------
325,552 259,454
---------- ----------
Shareowners' Equity
Common shares-$1 par value; authorized shares -
240,000,000.......................................... 66,381 65,948
Additional paid-in capital............................ 247,417 239,507
Retained earnings..................................... 202,913 246,568
Foreign currency translation adjustment............... 69 379
---------- ----------
516,780 552,402
---------- ----------
Total Liabilities and Shareowners' Equity............... $1,743,505 $1,723,448
========== ==========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................ $ (3,848) $ 51,548
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization.................. 119,744 114,387
Special charges................................ 132,000 -
Cumulative effect of accounting change......... - 2,925
Provision for loss on receivables.............. 6,625 5,236
Other-net...................................... 1,804 7,418
Changes in assets and liabilities:
Decrease (increase) in receivables............. 4,452 (26,600)
Decrease (increase) in other current assets.... (6,081) 4,436
Increase (decrease) in accounts payable and
accrued liabilities........................... (8,605) 15,556
Decrease in accrued restructuring and
disposal costs................................ (10,964) (20,284)
Increase (decrease) in other current
liabilities................................... (16,725) 16,154
Increase (decrease) in deferred income taxes
and unamortized investment tax credits........ (48,908) 4,029
Decrease in other assets and liabilities-net... 10,586 17,577
--------- --------
Net cash provided by operating activities.... 180,080 192,382
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant............. (65,826) (88,802)
Capital expenditures-other....................... (15,421) (27,968)
Acquisitions, net of cash acquired............... (18,137) -
Other-net........................................ 7,836 10,755
--------- --------
Net cash used in investing activities........ (91,548) (106,015)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in notes payable...................... 4,489 (48,643)
Principal payments on long-term debt............. (1,631) (3,151)
Proceeds from issuance of common shares.......... 6,441 9,816
Dividends paid................................... (39,685) (39,125)
--------- --------
Net cash used in financing activities........ (30,386) (81,103)
--------- --------
Effect of exchange rate changes on cash and
cash equivalents.................................. (630) 590
--------- --------
Net increase in cash and cash equivalents.......... 57,516 5,854
Cash and cash equivalents at beginning of period... 78,368 8,668
--------- --------
Cash and cash equivalents at end of period......... $ 135,884 $ 14,522
========= ========
Cash paid for:
Interest (net of amount capitalized)............. $ 27,951 $ 25,534
Income taxes..................................... $ 52,476 $ 21,794
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements
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), (4), (7) and (8).
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 1994 Annual Report on
Form 10-K and the current year's previously issued Forms 10-Q.
The consolidated financial statements include the accounts of
Cincinnati Bell Inc. ("CBI") and its wholly owned subsidiaries
(the "Company"). The Company operates in three industry
segments. The telephone operations segment includes Cincinnati
Bell Telephone Company ("CBT") which provides
telecommunications services and products. The information
systems segment includes Cincinnati Bell Information Systems
Inc. ("CBIS") which provides data processing services and
software development services. The marketing services segment
includes MATRIXX Marketing Inc. ("MATRIXX") which provides
telephone marketing, research, fulfillment and database
services.
(2) 1995 BUSINESS RESTRUCTURING - In the first quarter 1995, the
Company approved a restructuring plan for CBT and CBI. The
Company recorded $132 million of special charges in the first
quarter 1995 to reflect the cost of restructuring programs and
workforce reductions at CBT ($124 million) and CBI ($8
million).
Included in the $132 million were charges for pension
enhancements, curtailment losses for postretirement healthcare
costs, lease termination costs, vacation buyouts, and severance
payments. The pension and postretirement charges will require
minimal cash outflows in the near term. During the nine months
ended September 30, 1995, $6.6 million in cash charges were
applied against the 1995 restructuring reserve leaving a
balance of $125.4 million.
(3) RESTRUCTURING AND DISPOSAL OF CBIS OPERATIONS - In 1993 a
restructuring and disposal reserve was established at CBIS. At
the beginning of 1995 a balance of $11.0 million remained in
the reserve. For the nine months ended September 30, 1995
total net charges to the reserve amounted to $4.2 million of
which $3.5 million required cash outlays. The charges were
primarily for discontinued products and contingencies related
to businesses sold. The remaining reserve balance of $6.8
million at September 30, 1995 is for estimated future costs
associated with a lease termination, discontinued products and
contingencies related to businesses sold.
5
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(4) CINCINNATI BELL TELEPHONE COMPANY - The following summarized
financial information, in millions of dollars, is for the
Company's consolidated wholly owned subsidiary, Cincinnati Bell
Telephone Company:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
Income Statement 1995 1994 1995 1994
---------------- ------ ------ ------ ----
<S> <C> <C> <C> <C>
Revenues.................. $156.3 $151.0 $466.2 $444.9
Costs and Expenses........ $125.9 $127.3 $503.6 $371.6
Income (Loss) Before
Cumulative Effect of
Accounting Change........ $ 17.3 $ 13.6 $(29.9) $ 41.9
Cumulative Effect of
Accounting Change........ $ - $ - $ - $ (2.4)
Net Income (Loss)......... $ 17.3 $ 13.6 $(29.9) $ 39.5
</TABLE>
Results for the nine months ended September 30, 1995, include
special charges of $124 million recorded in the first quarter
for restructuring CBT's operations as described in note (2).
These charges reduced CBT's net income by $79.0 million.
Results for the nine months ended September 30, 1994, include
two other non-recurring charges. In 1994 the Company and its
subsidiaries, adopted SFAS 112, "Employers' Accounting for
Postemployment Benefits", thereby reducing CBT's net income by
$2.4 million (total $2.9 million across CBI), net of a deferred
tax benefit. In addition, 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. CBT had received approval from the Public Utilities
Commission of Ohio ("PUCO") in 1993 to defer these incremental
postretirement expenses.
<TABLE>
<CAPTION>
September 30, December 31,
Balance Sheet 1995 1994
------------- ------------- ------------
<S> <C> <C>
Current Assets.......................... $ 213.9 $ 187.9
Telephone Plant-Net..................... 883.7 901.6
Other Noncurrent Assets................. 19.1 21.0
-------- --------
Total Assets............................ $1,116.7 $1,110.5
======== ========
Current Liabilities..................... $ 164.2 $ 148.3
Noncurrent Liabilities.................. 258.5 195.0
Long-Term Debt.......................... 274.2 312.3
Common Shareowner's Equity.............. 419.8 454.9
-------- --------
Total Liabilities and Shareowner's
Equity................................. $1,116.7 $1,110.5
======== ========
</TABLE>
6
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(5) AT&T RELATIONSHIP - The Company derives significant revenues in
all three of its business segments from AT&T and its affiliates
by providing network services, information management systems,
and marketing services. As a result of the merger of AT&T and
McCaw Cellular Communications Inc. in the third quarter of
1994, the Company's revenues from AT&T as combined with McCaw
have increased when compared to prior periods. Revenues
(excluding network access charges) from AT&T accounted for 22%
of the Company's total consolidated revenues for the nine
months ended September 30, 1995.
(6) INTEREST RATE AND CURRENCY EXCHANGE SWAP - The Company has an
interest rate and foreign currency swap agreement in place to
reduce the impact of changes in interest rates and foreign
currency exchange rates. The Company accrues interest on a
notional amount of 225 million French francs. The approximate
effective rate is such that net interest expense is based on
the interest cost implicit in the contract measured in French
francs (approximately 11%). Net amounts due to or from the
counterparty are reflected in interest expense in the periods
in which they accrue. The net effect of the swap for the first
nine months of 1995 and 1994 was to increase interest expense
by $3.8 million and $3.3 million, respectively. For the first
nine months the swap also increased the Company's average
interest rate from 7.7% to 8.5% in 1995 and from 7.3% to 8.0%
in 1994.
(7) ACQUISITION - In March 1995, CBIS acquired X International of
Bristol, England for cash. The acquisition was accounted for
as a purchase. X International provides billing software
development services for telecommunications companies in
Europe.
Incident to this acquisition, CBIS acquired the on-going
software development projects of X International. Of the
purchase price, $2.5 million was allocated to in-process
research and development costs. Accordingly, these costs were
expensed in March of 1995 resulting in a non-recurring charge
which reduced net income by $1.5 million or $.02 per common
share.
(8) CONTINGENCIES - The Company, which has a 45% interest in a
cellular partnership, is seeking to dissolve the partnership
because of poor performance. The Company has pursued this
litigation to maximize the value of this asset for the benefit
of the shareholders. There are many possible outcomes of this
litigation. The potential impact of a settlement from the
lawsuit is an extremely broad range depending upon the form of
distribution and the amount of damages awarded. At this time,
the Company is unable to determine a range but the Company
believes it will recover its $46 million investment in the
partnership.
7
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(9) BUSINESS SEGMENT INFORMATION - The Company operates primarily
in three industry segments, Telephone Operations, Information
Systems and Marketing Services. The Company's business segment
information is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
Millions of Dollars 1995 1994 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Telephone Operations $156.3 $151.0 $ 466.2 $ 444.9
Information Systems 91.1 90.3 275.8 253.0
Marketing Services 63.7 57.4 200.8 162.0
Other 33.3 33.6 103.5 96.8
Intersegment Revenues (17.4) (19.4) (53.4) (51.9)
------ ------ -------- --------
Total $327.0 $312.9 $ 992.9 $ 904.8
-------------------------------------------------------------------
Intersegment Revenues
Telephone Operations $ 5.8 $ 5.9 $ 17.0 $ 17.5
Information Systems 9.5 10.7 31.0 29.6
Marketing Services .7 1.5 1.7 1.5
Other 1.4 1.3 3.7 3.3
------ ------ -------- --------
Total $ 17.4 $ 19.4 $ 53.4 $ 51.9
-------------------------------------------------------------------
Operating Income (Loss)
Telephone Operations $ 30.4 $ 23.7 $ (37.4) $ 73.3
Information Systems 11.0 8.2 31.2 19.0
Marketing Services 7.6 6.6 24.4 16.7
Other 8.0 4.8 14.8 13.5
------ ------ -------- --------
Total $ 57.0 $ 43.3 $ 33.0 $ 122.5
-------------------------------------------------------------------
Capital Additions and Acquisitions *
Telephone Operations $ 20.6 $ 22.2 $ 68.2 $ 90.8
Information Systems 4.5 2.8 13.9 17.8
Marketing Services 3.4 2.8 18.7 6.8
Other .7 7.5 1.9 10.4
------ ------ -------- --------
Total $ 29.2 $ 35.3 $ 102.7 $ 125.8
-------------------------------------------------------------------
Depreciation and Amortization
Telephone Operations $ 28.4 $ 28.6 $ 84.3 $ 82.3
Information Systems 7.4 7.3 21.7 19.4
Marketing Services 3.9 3.5 11.4 10.1
Other .7 1.0 2.3 2.6
------ ------ -------- --------
Total $ 40.4 $ 40.4 $ 119.7 $ 114.4
-------------------------------------------------------------------
Assets
Telephone Operations $1,116.7 $1,092.5
Information Systems 221.5 300.3
Marketing Services 263.1 240.9
Other 142.2 39.2
-------- --------
Total $1,743.5 $1,672.9
-------------------------------------------------------------------
</TABLE>
Certain corporate administrative expenses have been allocated to segments
based upon the nature of the expense. Assets are those assets used in the
operations of the segment.
*Includes acquisitions and acquisition costs of $18.1 million for the
nine months ended September 30, 1995.
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
CONSOLIDATED
The Company's consolidated net income and earnings per common share for the
quarter ended September 30, 1995 were $28.7 million and $.43 compared to
$20.1 million and $.31, respectively, for the same three month period 1994.
The results reflect increases of $8.6 million in net income and $.12 in
earnings per common share.
The Company's consolidated net loss and loss per common share for the first
nine months 1995 were $3.8 million and $.06 compared with net income of $51.5
million and earnings per common share of $.79, respectively, for the first
nine months 1994. The results for the nine months 1995 included $132 million
of special charges and a non-recurring charge of $2.5 million. The special
and non-recurring charges reduced net income by $85.6 million or $1.29 per
common share. The results for the nine months 1994 included a charge for the
cumulative effect of an accounting change for postemployment benefits. This
charge reduced net income by $2.9 million or $.04 per common share. Excluding
the special and non-recurring charges, net income and earnings per share for
the nine months ended September 30 would have been $81.8 million and $1.23
for 1995 compared to $54.4 million and $.83 for 1994, respectively.
The following discussion should be read in conjunction with the consolidated
financial statements and segment data. Results for interim periods may not be
indicative of the results for the full year.
1995 BUSINESS RESTRUCTURING
In the first quarter 1995, the Board of Directors approved a restructuring
plan for CBT and CBI. These actions resulted in the recording of $132 million
of pre-tax special charges in the first quarter 1995. The charges,
principally related to pension enhancements and associated postretirement
health costs, were based on retirements and other costs of employee
separations.
CBT announced in February 1995 that it would eliminate approximately 800
management and hourly employees by 1997 through early retirement incentives.
Over 1,300 employees accepted the early retirement offer including
approximately 1,000 hourly employees. As a result, CBT recorded restructuring
charges of $124 million. CBT has the option to delay the retirement date of
the hourly employees through March 1997 for a smooth transition. Through the
end of the third quarter approximately 210 management and 195 hourly
employees had left as a result of the offer. CBT's plan was developed by its
Business Transition Team and involves the re-engineering of the telephone
operations to streamline the fundamental processes and work activities at
CBT. Implementation of the plan is expected to position CBT to better respond
in an increasingly competitive business environment.
CBT has reorganized its functions into 12 processes designed to streamline
work. It has also put in place a management team responsible for the
processes. Other elements will be adopted over the next several years. CBT
will develop advanced information systems in response to increasing
expectations of its customers. The development costs for such systems will
increase 1995 expenses. These costs are expected to be incurred prior to the
release of many of the employees from the workforce. CBT estimates that the
restructuring, when fully implemented in 1997, should result in a net
reduction of its workforce by more than 800 employees and reduce operating
expenses in excess of $50 million from what they would have been. The
specific future financial impact of the cost savings on CBT's earnings is
uncertain as it will depend upon regulatory treatment and the competitive
market.
9
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Restructuring charges of $8 million were recorded by CBI. The restructuring
plan included early retirement incentives similar to CBT's as well as
voluntary separations.
TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Millions of Dollars) 1995 1994 Change 1995 1994 Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Local service $ 89.4 $ 84.3 $ 5.1 6% $262.6 $243.9 $ 18.7 8%
Network access 34.4 34.1 .3 1 106.6 105.6 1.0 1
Long distance 8.5 9.3 (.8) (9) 25.8 28.1 (2.3) (8)
Other 24.0 23.3 .7 3 71.2 67.3 3.9 6
------ ------ ------ ------ ------ ------
$156.3 $151.0 $ 5.3 4% $466.2 $444.9 $ 21.3 5%
Costs and expenses
Operating expenses $125.9 $127.3 $ (1.4) (1)% $379.6 $371.6 $ 8.0 2%
Special charges - - - - 124.0 - 124.0 -
------ ------ ------ ------ ------ ------
$125.9 $127.3 $ (1.4) (1)% $503.6 $371.6 $132.0 36%
Minutes of use (Millions)
Interstate 637 591 46 8% 1,889 1,742 147 8%
Intrastate 243 230 13 6 716 700 16 2
------ ------ ------ ------ ------ ------
880 821 59 7% 2,605 2,442 163 7%
Access lines (000) 900 871 29 3%
</TABLE>
The continued growth in access lines, along with new rates in Ohio effective
May 1994 and in Kentucky effective May 1995 increased local service revenues
by $3.2 million and $11.7 million for the three and nine months 1995 compared
to 1994. The remainder of the increases ($1.9 million and $7.0 million,
respectively) was primarily from increased customer usage of central office
features and directory assistance.
Network access revenues increased for both periods. The increases were from
greater sales of special access services, higher end user fees as a result of
access line growth and increased minutes of use. For the nine month period,
switched access net revenues increased from lower support payments to the
National Exchange Carrier Association, partially offset by decreases in Ohio
intrastate carrier common line revenues resulting from a rate decrease in May
1994.
Long distance revenues decreased because of lower settlements with
interexchange carriers and independent companies.
Other telephone operations revenues increased from growth in customer premise
equipment repairs, payphone agent services for interexchange carriers, wire
maintenance, voice mail, and billing and collection services. The increases
were partially offset by decreases from lower sales of merchandise and an
increased provision for uncollectibles.
10
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Operating expenses for telephone operations decreased by $1.4 million for the
third quarter and increased for the nine months by $8 million compared to the
same periods in 1994. Contract services for systems development and other
services increased $4.8 million and $10 million, respectively, primarily as a
result of the business restructuring. The nine months increase also includes
higher depreciation and amortization expenses of $2 million as a result of
rate represcriptions in Ohio which became effective in July 1994.
Right-to-use fees were lower by $5.9 million and $4.3 million for the three
and nine month periods of 1995 when compared to the same periods of 1994 from
fewer switch conversions and network software upgrades. The first quarter
1995 business restructuring caused pension costs and contract labor costs (as
mentioned above) to increase but this was offset somewhat by a decrease in
salaries and wages from a reduction in employees. This trend will continue
throughout the remainder of the year as the business restructuring is
implemented. First quarter 1994 expenses include a $2.5 million nonrecurring
charge for postretirement benefit costs.
<TABLE>
<CAPTION>
INFORMATION SYSTEMS
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Millions of Dollars) 1995 1994 Change 1995 1994 Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 91.1 $ 90.3 $ .8 1% $275.8 $253.0 $ 22.8 9%
Costs and expenses $ 80.1 $ 82.1 $(2.0) (2)% $244.6 $234.0 $ 10.6 5%
</TABLE>
Information Systems' revenues were up $.8 million during the three months
ended September 30, 1995, and $22.8 million during the nine months ended
September 30, 1995 compared to the same periods last year. Revenues from data
processing and professional services had outstanding growth with increases of
$9.7 million and $40.5 million for the three and nine months, respectively.
Data processing revenues increased because of strong subscriber growth in the
cellular industry somewhat offset by lower net prices. Professional services
revenues grew from increased development requests for product enhancements
from existing clients. Revenues from international clients for the
development of telecommunications solutions declined $8.9 million and $17.7
million for the same three and nine month periods when compared to 1994. This
decline was the result of the completion of one contract in early 1995 and
the delayed delivery of another contract in 1995.
Information Systems' costs and expenses were lower by $2.0 million during the
three months ended September 30, 1995 versus the previous year, and higher by
$10.6 million during the nine months ended September 30, 1995 versus the
prior year. Costs and expenses increased $3.7 million for the third quarter
and $8.8 million for the year to date primarily from increased costs related
to the data processing and professional services revenue growth. Sales and
marketing and general and administrative costs were lower by $3.7 million and
$7.7 million for the two periods, respectively, as the result of workforce
reductions and lower rent costs. Research and development costs increased
$3.9 million and $13.9 million for the quarter and nine months, respectively.
The increase for the nine month period includes $2.5 million of costs as the
result of expensing the in-process research and development projects of X
International (see Note 7 of Notes to Financial Statements). Research and
development expenses were also higher in 1995 because of increases in
development activity for billing systems solutions software. Depreciation and
amortization expenses increased $1.4 million for the nine months from
increased amortization of capitalized software. Costs associated with
international contracts declined $5.1 million for the quarter and $5.8
million for the nine months because of reduced activity in international
contracts.
11
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
<TABLE>
<CAPTION>
MARKETING SERVICES
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Millions of Dollars) 1995 1994 Change 1995 1994 Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 63.7 $ 57.4 $ 6.3 11% $200.8 $162.0 $ 38.8 24%
Costs and expenses $ 56.1 $ 50.8 $ 5.3 10% $176.4 $145.3 $ 31.1 21%
</TABLE>
Marketing Services revenues were up $6.3 million and $38.8 million during the
three months and nine months ended September 30, 1995, respectively. Revenues
from a major provider of satellite broadcast services accounted for a large
part of the increased revenues in the three and nine month periods. Other
revenue increases were recorded in outbound services and European operations.
Revenue growth was somewhat lower than it would have been in the third
quarter due to the reduced campaign activity of a major customer.
Costs and expenses increased at nearly the same rate as revenues for the
three months and at a lower rate for the nine months compared to last year
reflecting continuing cost control efforts.
<TABLE>
<CAPTION>
OTHER
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Millions of Dollars) 1995 1994 Change 1995 1994 Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 33.3 $ 33.6 $ (.3) (1)% $103.5 $ 96.8 $ 6.7 7%
Costs and expenses
Operating expenses $ 26.1 $ 29.9 $(3.8)(13)% $ 82.6 $ 86.6 $ (4.0)(5)%
Special charges - - - - 8.0 - 8.0 -
------ ------ ----- ------ ------ ------
$ 26.1 $ 29.9 $(3.8)(13)% $ 90.6 $ 86.6 $ 4.0 5%
</TABLE>
Higher sales of used telecommunications equipment and commodities scrap by
the Company's supply business and a successful sales campaign in the
directory business accounted for revenues increases of $3.8 million and $3.2
million, respectively, for the nine months in 1995 compared to the same nine
months in 1994. Decreases in operating expenses for the three and nine
months, respectively, were caused primarily from lower direct costs in the
long distance re-selling and supply businesses partially offset by increases
in costs associated with the sales revenues in the directory business.
12
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
<TABLE>
<CAPTION>
INTEREST EXPENSE
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Millions of Dollars) 1995 1994 Change 1995 1994 Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 13.8 $ 12.4 $ 1.4 11% $ 39.8 $ 37.3 $ 2.5 7%
</TABLE>
Interest expense increased primarily because of higher interest rates on
short-term borrowings. Interest expense for the Company's swap agreement was
$1.3 million and $3.8 million for the quarter and nine months ended September
30, 1995 compared to $1.1 million and $3.3 million for the quarter and nine
months ended September 30, 1994. The interest expense for the swap will
continue to increase as interest is accrued on the principal and unpaid
interest costs. The accrued interest on the French franc loan segment of the
swap is 158 million French francs or $32.0 million at September 30, 1995. The
Company has not hedged the currency risk associated with the accrued
interest. The swap agreement has increased the Company's weighted average
interest rate from 7.7% to 8.5% for the nine months 1995 as compared to an
increase from 7.3% to 8.0% for the nine month period in 1994.
<TABLE>
<CAPTION>
INCOME TAXES
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Millions of Dollars) 1995 1994 Change 1995 1994 Change
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15.1 $ 11.3 $ 3.8 34% $ (2.3) $ 31.6 $(33.9) -
</TABLE>
Higher income before taxes for the three months and lower income before taxes
for the nine months were the principal reasons for the changes in income tax
expense. The Company's effective tax rates for the three and nine months
ending September 30, 1995 were 34.5% and 37.0%, respectively, compared to
35.8% and 36.7% for the same two periods last year.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to finance its ongoing operating requirements, including
network expansion and modernization, business development and dividend
programs. The Company maintains adequate lines of credit with several
institutions to provide support for borrowings and general corporate purposes.
Cash provided by operating activities, which is the Company's primary source
of liquidity, was $180 million for the first nine months 1995. Cash from
operating activities was used to fund capital expenditures, acquisitions and
dividends.
The Company's most significant investing activity continued to be capital
expenditures which were $81 million for the nine months ended September 30,
1995, a decrease of $36 million from the same period in 1994. In 1995, CBT
spent less for digital switching equipment, electronic switching equipment
and buildings primarily because of the installation of the North American
Numbering Plan and increased switch activity in 1994. CBIS had reduced
capital expenditures for capitalized software, computers and office equipment
compared to 1994. Requirements for additional updating of facilities are
continuously evaluated based on customer and market demand and engineering
economics. The Company's expenditures for 1995 are expected to be
approximately $120 million with CBT's portion of the total to be about $90
million. Cash used for acquisitions of $18 million primarily included a
payment for an earn-out agreement of a 1993 acquisition and the purchase of X
International in 1995.
13
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
CBT could decide that in order to remain competitive in the future, it must
aggressively pursue a strategy of expanding its offerings beyond its
traditional business. Capital spending increases under this scenario might
not be incremental as reductions may be achieved in other areas. CBT may also
wish to enter other businesses through investments and strategic alliances
with established companies in such businesses and through the development of
such capabilities internally. Such transactions could require substantial
capital which could be generated internally and from external sources.
As of September 30, 1995, accounts payable and accrued liabilities decreased
$19 million from December 31, 1994. The balance was reduced by payments in
1995 related to an acquisition earn-out agreement, as well as
employee-related costs and software and hardware upgrades that were accrued
at December 31, 1994. The balance of accrued taxes was $17 million lower than
December 31, 1994 resulting from payments made in 1995 for federal income and
property taxes and changes in rates for property taxes. The balance of
non-current deferred income taxes was $49 million lower than at December 31,
1994, as a result of the tax benefit recorded for the special charges in the
first quarter 1995. The balance of other long-term liabilities increased $117
million principally from pension and postretirement liabilities as a result
of the business restructuring charges. During the second quarter 1995, $40
million of CBT's long-term debt due in April 1996 was reclassified to debt
maturing in one year.
REGULATORY MATTERS
FEDERAL COMMUNICATIONS COMMISSION (FCC)
In August 1995 a U.S. Court of Appeals denied an appeal to overturn the FCC's
order to refund excess earnings at CBT and also disallowed the FCC's limited
offset policy. The Company believes that it is adequately reserved for this
outcome.
KENTUCKY FILING
In October 1994 CBT filed a proposal with the Public Service Commission of
Kentucky ("PSCK") for new regulated rates for telephone services provided to
its Kentucky customers. An order was received from the PSCK in May 1995 that
maintains uniform rates for basic services in CBT's Kentucky and Ohio
metropolitan service areas, but is essentially revenue neutral, as local
service increases are offset by carrier common line and other rate
adjustments. Both CBT and the Kentucky Attorney General filed for rehearing
of certain aspects of the rate order. CBT has been granted a rehearing on one
issue, while all of the Attorney General's requests were denied.
LOCAL TELECOMMUNICATIONS COMPETITION
Several activities are being pursued by CBT specific to local competition. In
September 1995 CBT filed an application for rehearing with the Public
Utilities Commission of Ohio ("PUCO") concerning an August 1995 opinion and
order which granted a cable company a certificate to offer local exchange
service in all or parts of 37 counties in the state of Ohio. The application
for rehearing cites at least eight areas in which CBT believes the PUCO acted
unlawfully. The PUCO had thirty days to order a rehearing or allow the August
decision to stand. In October 1995 the PUCO allowed the opinion to stand.
CBT's application preserves the legal argument to pursue an appeal within
sixty days with the Ohio Supreme Court.
14
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Also in September 1995, the PUCO issued an entry establishing its own
investigation into local exchange competition. The entry establishes the
comment process concerning the local competition draft rules which were
issued in September 1995. Initial comments are due in December 1995 and reply
comments in January 1996. While the PUCO staff issued preliminary draft
guidelines in March 1995 followed by a number of informal workshops, the
draft rules have now been elevated to a formal process by the PUCO.
In April and July, 1995, the PSCK issued administrative orders on local
competition. The orders discuss procedural matters, including the filing of
testimony in February 1996, which will allow the PSCK to determine whether
switched local access competition is viable and sustainable. At this time,
CBT is uncertain as to the future direction the PSCK will take in this
inquiry after February 1996.
EFFECTS OF REGULATORY ACCOUNTING
CBT presently gives accounting recognition to the actions of regulators where
appropriate, as prescribed by Statement of Financial Accounting Standards
("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. Typically,
regulatory recovery periods are longer than the useful lives that otherwise
might be used. Conditions that could give rise to the discontinuance of SFAS
71 include increasing competition, which would restrict 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 is evaluating, in the light of recent
legislative and regulatory changes, its continuing ability to satisfy the
criteria established for reporting under FAS 71.
If CBT were to determine that it no longer meets the criteria for application
of SFAS 71, there would be a significant, extraordinary, non-cash charge.
This would include the elimination of its regulatory assets and liabilities.
It would also adjust the carrying amount of telephone plant to the extent it
is determined such amounts would be considered overstated as a result of the
inability to recover them in future rates. Any adjustment to the net carrying
amount of telephone plant and equipment would result in an increase to the
reserve for accumulated depreciation. CBT estimates the pre-tax charge for
the discontinuance of SFAS 71 could be $200 to $300 million depending on many
factors including business strategy, judgments of competitive impact and
technology changes at the time.
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. There is always a
business risk that a customer will decide to perform services in-house or
move its business to a competitor if the services do not meet price and
performance standards. These circumstances may increase the variability of
financial results on a period-to-period basis.
The Company's 1995 revenues may not grow at the same rate as in 1994 because
revenues generated from the WATS operations (acquired in 1993) for 1994 and
1995 will be on a comparable basis.
15
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
CBT's revenues are expected to increase but could be offset by a potential
decline in its customer base from increased competition. CBT is redesigning
and streamlining its processes and work activities to improve responsiveness
to customer needs, permit more rapid introduction of new products and
services, improve the quality of product and service offerings and reduce
costs.
CBIS will continue to concentrate primarily on building its core business in
the communications market. Timing and adjustments related to international
contracts have and can continue to add variability to CBIS's revenues and
earnings. The wireless market will be the principal driver for CBIS's growth
this year. During 1995, CBIS continued to maintain its client base with the
renewal of several multi-year contracts for customer care and billing
solutions services with major clients. As indicated in the past CBIS expects
current data processing activity for one client to decline up to $15 million
in 1996. However, CBIS also expects that normal growth of other data
processing clients will more than offset this expected decline in revenue.
The continued trend in the outsourcing of telemarketing by major companies is
important for MATRIXX's continued growth. MATRIXX's profitability depends
upon its ability to maintain existing and to add new strategic clients. The
Company continues to closely monitor the results of MATRIXX's operations in
France as they relate to potential impairment of goodwill. The French
operations are improving, but are still operating in a loss position. The
Company continually evaluates the balance of goodwill to determine if the
recorded amount reflects an amount recoverable from operations. The amount of
unamortized goodwill at the end of the third quarter 1995 was $43.5 million.
The other Company businesses expect to continue to grow by offering superior
value, quality and customer service.
The Company has general and specific risks that could affect trends in future
operating results. Some of the risks include international contracts,
sustaining the quality of customer service during downsizing and sustaining
high levels of revenues from certain customers.
The Company continues to review opportunities for acquisitions and
divestitures for all its businesses to enhance shareowner value.
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
27 Financial Data Schedule
(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>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cincinnati Bell Inc.
Date November 10, 1995 /s/ James M. Dahmus
----------------- --------------------------------------
James M. Dahmus
Vice President and Controller
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 September 30, 1995
CINCINNATI BELL INC.
(Exact Name of Registrant as specified in its charter)
EXHIBITS
19
<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 *
(27) Financial Data Schedule *
20
<PAGE>
Exhibit 11
to
Form 10-Q for the Quarterly
Period Ended September 30, 1995
CINCINNATI BELL INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
In thousands, except per share amounts
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1995 1994 1995 1994
------- ------- --------- -------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of
accounting change................................ $28,733 $20,107 $( 3,848) $54,473
Cumulative effect of accounting change............ - - - (2,925)
------- ------- -------- -------
Net income (loss)................................. $28,733 $20,107 $( 3,848) $51,548
======= ======= ======== =======
Weighted average number of common shares
outstanding...................................... 66,350 65,532 66,204 65,309
Common share conversions applicable to
common share options............................. 595 9 595 9
------- ------- -------- -------
Total number of shares for computing primary
and fully diluted earnings per common share*..... 66,945 65,541 66,799 65,318
======= ======= ======== =======
EARNINGS PER COMMON SHARE
As reported
Income (loss) before accounting change......... $ .43 $ .31 $ (.06) $ .83
Cumulative effect of accounting change......... - - - (.04)
------- ------- -------- -------
Net income (loss).............................. $ .43 $ .31 $ (.06) $ .79
======= ======= ======== =======
Primary
Income (loss) before accounting change......... $ .43 $ .31 $ (.06) $ .83
Cumulative effect of accounting change......... - - - (.04)
------- ------- -------- -------
Net income (loss).............................. $ .43 $ .31 $ (.06) $ .79
======= ======= ======== =======
Fully Diluted
Income (loss) before accounting change......... $ .43 $ .31 $ (.06) $ .83
Cumulative effect of accounting change......... - - - (.04)
------- ------- -------- -------
Net income (loss).............................. $ .43 $ .31 $ (.06) $ .79
======= ======= ======== =======
</TABLE>
Earnings (loss) per common share for the three and nine months ended
September 30, 1995 and 1994 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 (loss) per
common share were not shown in the Consolidated Statements of Income as they
differ from the reported earnings (loss) per common share by less than three
percent or are anti-dilutive.
* For the nine-month period ended September 30, 1995, common share conversions
applicable to common share options are anti-dilutive for the primary loss per
common share calculation and therefore are not included in the calculation.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 135,884
<SECURITIES> 0
<RECEIVABLES> 248,439
<ALLOWANCES> 14,417
<INVENTORY> 15,498
<CURRENT-ASSETS> 448,562
<PP&E> 1,774,723
<DEPRECIATION> 768,830
<TOTAL-ASSETS> 1,743,505
<CURRENT-LIABILITIES> 410,090
<BONDS> 491,083
<COMMON> 66,381
0
0
<OTHER-SE> 450,399
<TOTAL-LIABILITY-AND-EQUITY> 1,743,505
<SALES> 0
<TOTAL-REVENUES> 992,938
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 959,905
<LOSS-PROVISION> 6,625
<INTEREST-EXPENSE> 39,828
<INCOME-PRETAX> (6,112)
<INCOME-TAX> (2,264)
<INCOME-CONTINUING> (3,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,848)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
