<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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------- --------
Commission File Number 1-8519
CINCINNATI BELL INC.
Incorporated under the laws of the State of Ohio
201 East Fourth Street, Cincinnati, Ohio 45202
I.R.S. Employer Identification Number 31-1056105
Telephone - Area Code 513 397-9900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X . No .
-- --
At July 31, 1996, 67,339,103 Common Shares were outstanding.
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $376.0 $334.1 $738.1 $665.9
------ ------ ------ ------
Costs and Expenses
Cost of providing services and products sold. . 201.8 176.5 389.7 348.3
Selling, general and administrative . . . . . . 62.8 61.5 128.0 130.4
Depreciation and amortization . . . . . . . . . 42.4 39.8 84.3 79.3
Special charges . . . . . . . . . . . . . . . . (5.5) - (11.0) 132.0
------ ------ ------ ------
Total Costs and Expenses. . . . . . . . . . . 301.5 277.8 591.0 690.0
------ ------ ------ ------
Operating Income (Loss). . . . . . . . . . . . . 74.5 56.3 147.1 (24.1)
Other Income (Expense), Net. . . . . . . . . . . 2.8 (1.8) 4.0 (3.2)
Interest Income. . . . . . . . . . . . . . . . . 2 1.8 .5 3.3
Interest Expense . . . . . . . . . . . . . . . . 8.4 13.2 18.0 26.0
------ ------ ------ ------
Income (Loss) Before Income Taxes. . . . . . . . 69.1 43.1 133.6 (50.0)
Income Taxes . . . . . . . . . . . . . . . . . . 24.3 16.1 47.1 (17.4)
------ ------ ------ ------
Net Income (Loss). . . . . . . . . . . . . . . . $ 44.8 $ 27.0 $ 86.5 $(32.6)
------ ------ ------ ------
------ ------ ------ ------
Earnings (Loss) Per Common Share . . . . . . . . $ .65 $ .41 $ 1.26 $ (.49)
------ ------ ------ ------
------ ------ ------ ------
Dividends Declared per Common Share. . . . . . . $ .20 $ .20 $ .40 $ .40
------ ------ ------ ------
------ ------ ------ ------
Average Common Shares Outstanding Including
Equivalents (000). . . . . . . . . . . . . . . 68,946 66,216 68,522 66,131
Retained Earnings at Beginning of Period . . . . $185.3 $173.8 $157.1 $246.6
Net Income (Loss). . . . . . . . . . . . . . . . 44.8 27.0 86.5 (32.6)
Common Dividends Declared. . . . . . . . . . . . (13.5) (13.3) (27.0) (26.5)
------ ------ ------ ------
Retained Earnings at End of Period . . . . . . . $216.6 $187.5 $216.6 $187.5
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . $ 10.0 $ 2.9
Receivables, less allowances of $12.6 and $14.7 . . . 282.2 266.7
Material and supplies . . . . . . . . . . . . . . . . 10.6 10.5
Deferred income tax . . . . . . . . . . . . . . . . . 21.5 25.4
Prepaid expenses and other current assets . . . . . . 42.7 35.9
-------- --------
Total current assets. . . . . . . . . . . . . . . . 367.0 341.4
Property, Plant and Equipment, net . . . . . . . . . . 969.8 993.9
Goodwill and other intangibles . . . . . . . . . . . . 169.0 172.3
Investments in unconsolidated entities . . . . . . . . 60.1 53.4
Deferred charges and other assets. . . . . . . . . . . 26.5 30.7
-------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . $1,592.4 $1,591.7
-------- --------
-------- --------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year . . . . . . . . . . . . . . $ 127.4 $ 126.1
Accounts payable and accrued liabilities. . . . . . . 170.3 201.2
Accrued taxes . . . . . . . . . . . . . . . . . . . . 24.7 48.0
Advance billing and customers' deposits . . . . . . . 34.7 40.5
Other current liabilities . . . . . . . . . . . . . . 34.0 37.5
-------- --------
Total current liabilities . . . . . . . . . . . . . 391.1 453.3
Long-Term Debt . . . . . . . . . . . . . . . . . . . . 384.5 386.8
-------- --------
Deferred income taxes. . . . . . . . . . . . . . . . . 116.4 111.3
Unamortized investment tax credits . . . . . . . . . . 14.2 14.8
Other long-term liabilities. . . . . . . . . . . . . . 135.6 147.4
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . 1,041.8 1,113.6
-------- --------
Shareowners' Equity
Common shares-$1 par value; 240,000,000 shares
authorized. . . . . . . . . . . . . . . . . . . . . 67.3 66.7
Additional paid-in capital. . . . . . . . . . . . . . 268.9 256.1
Retained earnings . . . . . . . . . . . . . . . . . . 216.6 157.1
Currency translation adjustments. . . . . . . . . . . (2.2) (1.8)
-------- --------
Total shareowners' equity . . . . . . . . . . . . . 550.6 478.1
-------- --------
Total Liabilities and Shareowners' Equity. . . . . . . $1,592.4 $1,591.7
-------- --------
-------- --------
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 86.5 $(32.6)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 84.3 79.3
Special charges . . . . . . . . . . . . . . . . . . . . . . . . (11.0) 132.0
Provision for loss on receivables . . . . . . . . . . . . . . . 3.3 5.0
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . (2.4) 1.8
Changes in assets and liabilities:
Increase in receivables . . . . . . . . . . . . . . . . . . . . (18.8) (.8)
Increase in other current assets. . . . . . . . . . . . . . . . (3.0) (2.4)
Decrease in accounts payable and accrued liabilities. . . . . . (18.3) (16.3)
Decrease in other current liabilities . . . . . . . . . . . . . (33.2) (35.5)
Increase (decrease) in deferred income taxes and unamortized
investment tax credits . . . . . . . . . . . . . . . . . . . . 5.0 (58.5)
Decrease (increase) in other assets and liabilities-net . . . . (1.2) 15.2
------ ------
Net cash provided by operating activities . . . . . . . . . . 91.2 87.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant. . . . . . . . . . . . . . (39.8) (45.2)
Capital expenditures-other. . . . . . . . . . . . . . . . . . . (23.7) (7.8)
Acquisitions, net of cash acquired. . . . . . . . . . . . . . . (12.6) (18.1)
Disposition of assets . . . . . . . . . . . . . . . . . . . . . 12.7 -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . (4.2) 8.5
------ ------
Net cash used in investing activities . . . . . . . . . . . . (67.6) (62.6)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in notes payable . . . . . . . . . . . . . . . . . . 1.8 3.5
Repayments of long-term debt. . . . . . . . . . . . . . . . . . (4.9) (1.4)
Issuance of common shares . . . . . . . . . . . . . . . . . . . 13.3 5.1
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . (26.7) (26.4)
------ ------
Net cash used in financing activities . . . . . . . . . . . . (16.5) (19.2)
------ ------
Net increase in cash and cash equivalents. . . . . . . . . . . . 7.1 5.4
Cash and cash equivalents at beginning of period . . . . . . . . 2.9 78.4
------ ------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 10.0 $ 83.8
------ ------
------ ------
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . . . $ 16.5 $ 22.8
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 49.2 $ 40.9
</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) and (3). 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 1995 Annual Report on Form 10-K and the current year's previously
issued Form 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, Cincinnati Bell Telephone Company (CBT), provides
telecommunications services and products, mainly local service, network
access and toll telephone services. The information systems segment,
Cincinnati Bell Information Systems Inc. (CBIS), provides data processing
services and software development services through long-term contracts
primarily to the U.S. telecommunications industry. The marketing services
segment, MATRIXX Marketing Inc. (MATRIXX) provides telephone marketing,
research, fulfillment and database services.
Beginning in the first quarter of 1996, certain costs and expenses which
were previously classified as operating, plant and building services and
taxes other than income taxes have been reclassified to cost of providing
services and products sold, and selling, general and administrative to
provide better information on the Company's margins and overhead. All
prior period financial information has been reclassified to conform with
this year's presentation.
(2) 1995 BUSINESS RESTRUCTURING - In the first quarter 1995, the Company
approved a restructuring plan for CBT and CBI. The restructuring plan
resulted in the need for fewer people to operate the businesses. More than
1,300 employees accepted the retirement offer, including 1,000 hourly
employees. Through the end of the second quarter 1996, approximately 350
management and 570 hourly employees had retired under this offer. The
Company recorded $132 million of special charges in the first quarter 1995
to reflect the cost of restructuring programs at CBT ($124 million) and CBI
($8 million). For the three and six months 1996, CBT recorded $5.5 million
and $11.0 million, respectively, of non-cash pension settlement gains
resulting from lump-sum distributions to employees retiring under the
offer. The Company expects to record additional settlement gains through
1997 as employees retire under the offer. Current actuarial estimates are
that the Company's settlement gains may approximate $20 million to $40
million in 1996.
5
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(3) DISPOSAL AND RESTRUCTURING OF CBIS OPERATIONS - At the beginning of 1996
the balance of the CBIS restructuring and disposal reserve established in
1993 was $6.3 million. For the six months ended June 30, 1996 a total of
$1.9 million was charged to the reserve of which $1.8 million required cash
outlays. The charges were for discontinued products and related
contingencies of the businesses sold. The remaining reserve balance of
$4.4 million is for estimated future costs associated with a lease
termination, discontinued products and contingencies related to businesses
sold.
(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:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- ------- -------
Revenues............... $161.9 $156.6 $320.7 $309.9
Costs and Expenses..... $124.1 $128.1 $244.5 $377.7
Net Income (Loss)...... $ 22.7 $ 16.0 $ 44.7 $(47.2)
Results for the three and six months 1996 include $5.5 million and $11.0
million, respectively, of pension settlement gains which increased net
income by $3.5 million and $7.0 million, respectively. Results for the six
months of 1995 include $124 million of special charges which decreased
CBT's net income by $79.0 million. These charges and credits are
associated with the restructuring of CBT's operations as described in Note
(2).
June 30, December 31,
1996 1995
-------- --------
Current Assets............................. $ 134.5 $ 197.1
Telephone Plant-Net........................ 853.4 878.7
Other Noncurrent Assets.................... 16.6 19.3
-------- --------
Total Assets............................... $1,004.5 $1,095.1
-------- --------
-------- --------
Current Liabilities........................ $ 135.8 $ 219.3
Noncurrent Liabilities..................... 199.1 204.3
Long-Term Debt............................. 221.9 233.9
Shareowner's Equity........................ 447.7 437.6
-------- --------
Total Liabilities and Shareowner's Equity.. $1,004.5 $1,095.1
-------- --------
-------- --------
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 from AT&T
and its affiliates by providing network services, information management
systems, and marketing services. Revenues from AT&T were 24% and 27% of the
Company's consolidated revenues for the six months ended June 30, 1996 and
1995. Excluding network access revenues, revenues from AT&T were 20% and
22%.
CBT and AT&T are discussing whether to revise portions of their joint
provision of certain telecommunications services. Revenues subject to
discussion are less than 10% of CBT's revenues but represent above average
profit contribution. In a worst case scenario the results could have a
material effect on CBT's net income beginning in the last quarter of 1996.
The outcome cannot be predicted at this time. The discussions do not
involve AT&T relationships with the Company's other subsidiaries.
(6) CONTINGENCIES - The Company, which has a 45% interest in a cellular
partnership, is seeking to dissolve the partnership because of poor
performance. In February, 1996 the Telecommunications Act of 1996 was
signed into law. The Telecommunications Act together with recent changes
in the telecommunications industry have positioned the partnership in
direct competition with the two partners, including the Company, creating
irreconcilable conflicts of interest. The potential impact of a settlement
from the lawsuit is extremely broad-range depending upon the form of
distribution and amount of damages awarded or any other possible outcome.
However, the Company believes it will recover its $53 million investment in
the partnership.
The Company is from time to time subject to routine complaints incidental
to the business. The Company believes that the results of any complaints
and proceedings will not have a materially adverse effect on the Company's
financial condition.
7
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(7) BUSINESS SEGMENT INFORMATION - The Company operates primarily in three
industry segments, Telephone Operations, Information Systems and Marketing
Services. The Company's business segment information, in millions of
dollars, is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1996 1995 1996 1995
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Telephone Operations $ 161.9 $ 156.6 $ 320.7 $ 309.9
Information Systems 114.5 94.6 221.4 184.7
Marketing Services 80.0 66.5 157.4 137.1
Other 39.6 33.6 75.8 68.9
Corporate - .6 .4 1.3
Intersegment (20.0) (17.8) (37.6) (36.0)
-------- -------- -------- --------
TOTAL $ 376.0 $ 334.1 $ 738.1 $ 665.9
--------------------------------------------------------------------------------------------------
Intersegment Revenues
Telephone Operations $ 5.9 $ 5.9 $ 11.8 $ 11.2
Information Systems 11.5 10.5 21.3 21.5
Marketing Services 1.3 .4 2.0 1.0
Other 1.2 .4 2.1 1.1
Corporate .1 .6 .4 1.2
-------- -------- -------- --------
TOTAL $ 20.0 $ 17.8 $ 37.6 $ 36.0
--------------------------------------------------------------------------------------------------
Operating Income (Loss) (1)
Telephone Operations $ 37.8 $ 28.4 $ 76.2 $ (67.8)
Information Systems 18.8 12.2 36.3 20.2
Marketing Services 9.6 8.8 19.2 16.8
Other 8.9 7.6 16.7 15.5
Corporate and Eliminations (.6) (.7) (1.3) (8.8)
-------- -------- -------- --------
TOTAL $ 74.5 $ 56.3 $ 147.1 $ (24.1)
--------------------------------------------------------------------------------------------------
Assets (at June 30)
Telephone Operations $1,004.5 $1,104.8
Information Systems 251.2 235.6
Marketing Services 261.1 261.9
Other 46.0 42.2
Corporate and Eliminations 29.6 71.7
-------- --------
TOTAL $1,592.4 $1,716.2
--------------------------------------------------------------------------------------------------
Capital Additions (including acquisitions)
Telephone Operations $ 24.2 $ 26.0 $ 41.9 $ 47.6
Information Systems 7.2 1.4 14.5 9.4
Marketing Services 8.6 2.6 12.0 15.3
Other 2.8 .6 3.1 1.2
-------- -------- -------- --------
TOTAL $ 42.8 $ 30.6 $ 71.5 $ 73.5
--------------------------------------------------------------------------------------------------
Depreciation and Amortization
Telephone Operations $ 29.0 $ 28.0 $ 57.8 $ 55.9
Information Systems 7.9 7.2 15.9 14.3
Marketing Services 4.6 3.8 8.8 7.5
Other .9 .8 1.8 1.6
-------- -------- -------- --------
TOTAL $ 42.4 $ 39.8 $ 84.3 $ 79.3
--------------------------------------------------------------------------------------------------
</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.
(1) Results for the three and six months ended June 30, 1996 include $5.5
million and $11.0 million, respectively, in pension settlement gains
(see Note 2).
Results for the six months ended June 30, 1995 include
restructuring charges of $132.0 million and acquired in-process
research and development expenses at CBIS of $2.5 million.
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
CBI's consolidated revenues for the three and six months ended June 30, 1996
were $376.0 million and $738.1 million compared to $334.1 million and $665.9
million for the three and six months ended June 30, 1995. The increases for the
three and six months periods in 1996 compared to 1995 were 13% and 11%,
respectively. The Company's consolidated net income was $44.8 million for the
second quarter 1996 compared to $27.0 million for the second quarter 1995. For
the six months 1996, net income was $86.5 million compared to a net loss of
$32.6 million in 1995. Earnings per common share for the second quarter and six
months 1996 were $.65 and $1.26, respectively, compared to an earnings per
common share of $.41 for the second quarter 1995 and a loss per common share of
$.49 for the six months 1995.
Results for the three and six months 1996 included $5.5 million and $11.0
million, respectively, of pension settlement gains from the 1995 business
restructuring. These gains increased net income $3.5 million and $7.0 million
and earnings per share $.05 and $.10, respectively, for the second quarter and
six months 1996. The results for the six months 1995 included $132 million of
special charges for business restructuring at CBT ($124.0) and CBI ($8.0), 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 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.
REVENUES AND COSTS AND EXPENSES
TELEPHONE OPERATIONS
(Dollars in Millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------------------ ------------------------------------------
1996 1995 CHANGE % 1996 1995 CHANGE %
------ ------ ------------------ ------ ------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service $ 92.3 $ 87.7 $ 4.6 5 $182.8 $173.2 $ 9.6 6
Network access 40.1 35.4 4.7 13 78.9 72.2 6.7 9
Long distance 7.1 8.7 (1.6) (18) 14.2 17.3 (3.1) (18)
Other 22.4 24.8 (2.4) (10) 44.8 47.2 (2.4) (5)
------ ------ ------ ------ ------ -------
Total $161.9 $156.6 $ 5.3 3 $320.7 $309.9 $ 10.8 3
Costs and expenses
Special charges $ (5.5) $ - $ (5.5) - $(11.0) $124.0 $(135.0) -
Other expenses 129.6 128.1 1.5 1 255.5 253.7 1.8 1
------ ------ ------ ------ ------ -------
$124.1 $128.1 $ (4.0) (3) $244.5 $377.7 $(133.2) (35)
Operating income (loss) $ 37.8 $ 28.5 $ 9.3 33 $ 76.2 $(67.8) $ 144.0 -
Excluding special items:
Operating income $ 32.3 $ 28.5 $ 3.8 13 $ 65.2 $ 56.2 $ 9.0 16
Operating margin 20.0% 18.2% 20.3% 18.1%
Access lines (000) 927 893 34 4
Minutes of Use (In millions) 925 864 61 7 1,841 1,725 116 7
</TABLE>
9
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Local service revenues increased $4.6 million and $9.6 million for the three and
six months 1996 compared to 1995 mainly from continuing access line growth.
Much of the access line growth was attributed to higher installations of second
residential lines for home office and on-line computer services. Growth in
enhanced custom calling services, central office features, public telephone
revenues and a new Kentucky rate plan effective in May 1995 accounted for the
remainder of the increase.
Network access revenues increased for both periods by $4.7 million and $6.7
million from a 7% growth in interstate minutes of use, end user charges as a
result of access line growth and a change in estimates for potential
overearnings liability.
The $1.6 million and $3.1 million decreases in long distance revenues for both
periods were caused by lower settlement revenues from interexchange carriers and
independent companies and long distance message revenues from the expansion of
local service areas in some Northern Kentucky counties in November 1995.
Other revenues decreased $2.4 million in 1996 when compared to 1995. Billing
and collection services decreased as more customers are now performing these
services in-house. Commission revenue decreased from less sales subject to
commissions. An increase in the provision for uncollectible accounts caused a
decrease in revenues. Partially offsetting the decreases were higher sales of
wiring services and payphone agent revenues increasing because of increased
levels of business activity.
Costs and expenses were comparable to both periods of last year after excluding
special charges and credits for the 1995 business restructuring (see Note (2) of
Notes to Financial Statements). Contracted network labor and data processing
costs increased as a result of business restructuring projects, many of which
started in the second quarter 1996. Advertising costs were higher from specific
planned campaigns including new services, second lines and internet access.
Depreciation and amortization expenses increased particularly for increases in
switching, circuit and outside plant assets. Property taxes decreased as a
result of a tax law change in Ohio on equipment placed into service after
January 1, 1994. The business restructuring has resulted in lower employee-
related expenses including payroll and facilities expenses because of headcount
levels. However, the level of cost reduction due to wages is less than headcount
reduction. Costs have increased for overtime and temporary help. The extremely
wet weather in the Cincinnati area during the second quarter contributed to
increased labor costs for repairs.
<TABLE>
<CAPTION>
INFORMATION SYSTEMS
(Dollars in Millions)
Three Months Ended June 30 Six Months Ended June 30
--------------------------------- ---------------------------------
1996 1995 Change % 1996 1995 Change %
------ ------ ------------- ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $114.5 $ 94.6 $ 19.9 21 $221.4 $184.7 $ 36.7 20
Costs and expenses
Special charges $ - $ - $ - - $ - $ 2.5 $ (2.5) -
Other expenses 95.7 82.4 13.3 16 185.1 162.0 23.1 14
------ ------ ------ ------ ------ -------
$ 95.7 $ 82.4 $ 13.3 16 $185.1 $164.5 $ 20.6 13
Operating income $ 18.8 $ 12.2 $ 6.6 54 $ 36.3 $ 20.2 $ 16.1 80
Excluding special items:
Operating income $ 18.8 $ 12.2 $ 6.6 54 $ 36.3 $ 22.7 $ 13.6 60
Operating margin 16.4% 12.9% 16.4% 12.3%
</TABLE>
10
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Revenues increased $19.9 million and $36.7 million for the three and six
months ended June 30, 1996 compared to the same periods last year. Data
processing revenues contributed $7.0 million and $13.3 million of the
increase from strong subscriber growth of cellular customers. Professional
services increased $6.1 million and $11.2 million from an acquisition of a
cable software company in the fourth quarter 1995, and a combination of
development requests and personal communications services opportunities as
well as growth from existing wireless cable customers. Hardware sales from a
recently acquired cable group accounted for an increase in licenses and other
fees of $5.6 million and $9.0 million. International revenues grew $1.2
million and $3.2 million from improved contractual agreements.
Costs and expenses increased $13.3 million and $23.1 million (excluding special
items) during the three and six months this year compared to last year. Costs
associated with new customers resulted in increases of $7.3 million and $12.4
million. Research and development costs increased $3.0 million and $5.8 million
from development activity for billing solutions software. An increase in
depreciable assets increased depreciation and amortization expenses by $.7
million and $1.6 million. Sales, marketing and general and administrative costs
increased $1.1 million and $2.6 million primarily as a result of additional
business. The remaining increases for the three and six months were due to
other direct costs associated with data processing and professional services
revenues. A non-recurring charge for acquired in-process research and
development expense of $2.5 million was recorded in the first quarter of 1995.
MARKETING SERVICES
(Dollars in Millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------------- ----------------------------------
1996 1995 CHANGE % 1996 1995 CHANGE %
------ ------ ------------ ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 80.0 $ 66.5 $ 13.5 20 $157.4 $137.1 $ 20.3 15
Costs and expenses $ 70.4 $ 57.7 $ 12.7 22 $138.2 $120.3 $ 17.9 15
Operating income $ 9.6 $ 8.8 $ .8 9 $ 19.2 $ 16.8 $ 2.4 14
Operating margin 12.0% 13.2% 12.2% 12.3%
</TABLE>
Marketing services revenues increased $13.5 million and $20.3 million for the
three and six months ended June 30, 1996 compared to the same periods in
1995. Custom services increased by $5.1 million and $9.0 million primarily
from three new contracts, two that began in the latter part of 1995 and one
that began in early 1996. Inbound services revenues increased $.6 million
and $3.2 million from travel and charge card services. Business to business
revenues grew $1.9 million and $2.9 million primarily from extensions of
programs from existing customers. International revenues increased $1.5
million and $2.7 million principally from business provided to new customers
and growth from existing customers. Technology revenues grew $3.2 million
and $2.2 million from additional business with a satellite broadcast customer.
The rate of increase for costs and expenses is be comparable to revenues.
The increases in costs and expenses for the three and six month periods in
1996 were $12.7 million and $17.9 million compared to the same three and six
month periods in 1995. The increases for the two periods were principally
the result of higher direct labor costs reflecting the increase in revenues
and higher wage rates.
11
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
OTHER
(Dollars in Millions)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------- ------ --------- ------ ------ ----------
Revenues $ 39.6 $ 34.2 $ 5.4 16 $ 76.2 $ 70.2 $ 6.0 9
Costs and expenses
Special charges $ - $ - $ - - $ - $ 8.0 $(8.0) -
Other expenses 32.2 27.5 4.7 17 62.4 56.5 5.9 10
$ 32.2 $ 27.5 $ 4.7 17 $ 62.4 $ 64.5 $(2.1) (3)
Operating income $ 7.4 $ 6.7 $ .7 10 $ 13.8 $ 5.7 $ 8.1 142
Excluding special items:
Operating income $ 7.4 $ 6.7 $ .7 10 $ 13.8 $ 13.7 $ .1 1
Operating margin 18.7% 19.6% 18.2% 19.5%
The increases in revenues and other expenses were comparable for 1996 versus
1995. The increases were the result of higher sales volume for the revenues and
direct costs associated with sales for the expenses. Costs and expenses for the
first quarter 1995 included special charges at CBI for business restructuring
(see Note (2) of Notes to Financial Statements).
OTHER INCOME (EXPENSE), NET
(Dollars in Millions)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------- ------ --------- ------ ------ ----------
$ 2.8 $(1.8) $ 4.6 - $ 4.0 $(3.2) $ 7.2 -
The increase for the three and six months is principally from improved results
of the Company's investment in a cellular partnership.
INTEREST INCOME
(Dollars in Millions)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------- ------ --------- ------ ------ ----------
$ .2 $ 1.8 $(1.6)(89) $ .5 $ 3.3 $(2.8) (85)
The decrease in interest income for both periods is related to the lower level
of temporary cash investments in 1996 than in 1995.
INTEREST EXPENSE
(Dollars in Millions)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------- ------ --------- ------ ------ ----------
$ 8.4 $ 13.2 $(4.8)(36) $ 18.0 $ 26.0 $(8.0) (31)
The replacement of higher cost long-term debt at CBI in late 1995 and CBT in
early 1996, and the termination of an interest rate and currency swap agreement
were the principal causes of the decrease in interest expense. The two items
resulted in $4.6 million and $8.7 million of lower interest expense for the
three and six months, respectively, when compared with the same periods in 1995.
The weighted average interest rate decreased from 7.7% at June 30, 1995
(excluding the swap agreement) to 7.1% at June 30, 1996. Average debt
outstanding decreased from $598 million to $510 million for the same two
periods.
12
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
INCOME TAXES
(Dollars in Millions)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------- ------ --------- ------ ------ ----------
$ 24.3 $ 16.1 $ 8.2 51 $ 47.1 $(17.4) $64.5 -
Higher income before taxes for the three and six months were the principal
reasons for the increase income tax expenses. The Company's effective tax rate
for the three and six months ending June 30, 1996 were 35.3% and 35.2%,
respectively, compared to 34.8% and 37.4% for the same two periods last year.
The effective tax rate, excluding the 1995 special items, would have been 37.2%
for the six months 1995. Reductions in state income tax expense was the
principal reason for the decrease in the effective tax rates from 1996 to 1995.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to finance its on-going 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 $91.2 million for the first six months of 1996 and was used
primarily to pay for capital expenditures and dividends.
The Company's most significant investing activity continued to be capital
expenditures. Capital expenditures were $63.5 million for the six months ended
June 30, 1996 up $10.5 million from last year. Most of the increase was for a
new data center in Orlando, Florida for the information services segment and for
an operations center in Cincinnati, Ohio for the marketing services segment.
Partially offsetting the increase were lower expenditures for switching
equipment and aerial cable for the telephone operations segment. Requirements
for additional updating of facilities will be continuously evaluated based on
customer and market demand and engineering economics. Due to stronger-than-
expected growth in all its businesses, the Company has increased upwardly its
estimate of 1996 capital expenditures. The Company anticipates spending
approximately $160 million with up to $100 million of that total expected for
the telephone operations segment.
Other investing activities included 1996 payments for acquisitions in late
1995 and the second quarter 1996. Offsetting the acquisition payments was cash
received for the disposition of certain real estate. As a result of the recent
increase in the market value of the Company's shares, many employees exercised
stock options. That was the primary cause of the increase in common shares
issued during the first half of 1996.
Receivables increased $15.5 million from December 31, 1995 as a result of
increased sales, contract discounts on telephone usage and extended payment
terms with two major clients. Accounts payable and accrued liabilities
decreased $30.9 million primarily from payments for employee-related expenses, a
late 1995 acquisition and funding for the company's charitable foundation. The
balance in accrued taxes decreased $23.3 primarily from property tax payments.
13
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
OTHER INFORMATION
A new three-year contract between CBT and the Communications Workers of America
was approved in the second quarter 1996. The contract includes pay increases of
10.5% over the next three years with bonus incentives based on service and
financial performances. The contract also addresses job security and benefit
issues, while providing additional flexibility in the pension plan for hourly
employees.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards (SFAS) 123
"Accounting for Stock-Based Compensation", which became effective for the fiscal
year beginning after December 15, 1995. SFAS 123 requires either the
recognition or the pro forma disclosure of compensation expense for stock
options and other equity instruments determined by a fair value based method of
accounting. The Company intends to disclose pro forma net income and earnings
per share in the 1996 Annual Report, which will have no effect on the
consolidated financial statements.
REGULATORY MATTERS
TELECOMMUNICATIONS COMPETITION
Regulatory agencies on the state and federal levels are accelerating
initiatives to increase competition in the telecommunications industry. At
the federal level, Congress passed the Telecommunications Act of 1996 in
February. It mandates the development of competitive markets. The full
impact for CBT will not be known until the Federal Communications Commission
and the states complete the numerous rulemakings mandated by the Act. At the
state level, the Public Utilities Commission of Ohio (PUCO) issued its local
exchange competition decision and guidelines in June 1996. The guidelines
affirm the PUCO's ability to certify competing carriers and establishes
certain rules that must be complied with by all local exchange carriers. In
July, 1996 CBT and other interveners requested that the PUCO reconsider
certain parts of the guidelines. On July 18, 1996 CBT filed an amendment to
its alternative regulation plan with PUCO. If it is approved, the plan will
make CBT's advanced telecommunications network available to would be
competitors for local telephone service. CBT also seeks pricing and
marketing flexibility by providing more choices to meet its customers'
changing needs. As part of the plan, CBT proposes to reduce its rates to
customers by approximately $2.7 mililon. If the plan is approved by the
PUCO, it could be implemented in early 1997.
In preparation for potential 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 products and services and reduce costs. Telephone plant and network are
being upgraded as business judgment dictates. The actions of regulatory
agencies may make it more difficult for CBT to maintain current revenue and
profit objectives.
KENTUCKY FILING
In May 1995, the Public Service Commission of Kentucky (PSCK) approved new
regulated rates for CBT customers in Kentucky. The order maintained uniform
rates for basic services in CBT's Kentucky and Ohio metropolitan service
areas. The result was essentially revenue neutral, as local service increases
are offset by carrier common line and other rate adjustments. CBT filed for
a rehearing of certain issues of the rate order. The PSCK granted a
rehearing in February, 1996 on the issue of re-regulation for inside wire
revenues only. The rest of the issues were denied. In June 1996, the PSCK
determined that inside wire maintenance revenues should remain nonregulated
in the state of Kentucky, upholding CBT's current treatment.
14
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
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." Criteria that would give rise to the discontinuance of
SFAS 71 include (1) increasing competition that restricts CBT's ability to
establish prices to recover specific costs, and (2) 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.
In the event CBT determines that it no longer meets the criteria for following
SFAS 71, the accounting impact to CBT could be an extraordinary non-cash charge
of an amount that would be material. This would include the elimination of
regulatory assets and liabilities and adjusting the carrying amount of telephone
plant to the extent that it is determined such amounts could be considered
overstated as a result of the regulatory process and are not recoverable in
future revenues. Asset lives used for future depreciation expense would likely
be shorter than those approved by regulators. CBT estimates that if it were to
discontinue SFAS 71, any pre-tax charge could be up to $300 million depending on
management's assessment of the regulatory and competitive environment at the
time. Based on assessment of CBT's current competitive and regulatory
environment, the Company believes that the application of SFAS 71 remains
appropriate.
15
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Cincinnati Bell Inc. ("CBI") desires to take advantage of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of 1995. CBI wishes
to caution readers that the following important factors, among others, in some
cases have affected, and in the future could affect, CBI's actual results and
could cause CBI's actual results for various financial reporting periods to
differ materially from those expressed in any forward-looking statements made by
or on behalf of CBI.
REGULATORY AND COMPETITIVE TRENDS
Cincinnati Bell Telephone Company
Recently enacted and future legislative and regulatory initiatives will have
an impact on Cincinnati Bell Telephone Company, although the full extent of
such impact will not be known until the mandates of such initiatives are
fully implemented. The basic thrust of these initiatives is to encourage and
accelerate the development of competition in all segments of the
telecommunications industry by removing the legally imposed barriers to
competition between various segments of the industry, thereby allowing local
exchange, long distance, wireless, cable and information services companies
to offer local exchange, long distance, wireless, entertainment and
information services in competition with each other. Technological advances
have already permitted multiple uses of each carrier's facilities for
competitive offerings. At the federal level, the recently passed
Telecommunications Act of 1996 (the "Act") requires incumbent local exchange
carriers (like Cincinnati Bell Telephone Company) to interconnect with the
networks of other service providers, unbundle certain network components and
make them available to competing providers at wholesale rates, and remove
other perceived barriers to competitive entry by alternative providers of
local exchange. Although the Act clearly states these mandates, it does so
in general terms and leaves the implementation of these mandates to the
Federal Communications Commission ("FCC") and the state regulatory agencies.
On August 1, 1996 the FCC adopted rules by which competitors will connect to
local network facilities.
At the state level, the Ohio regulatory agency, The Public Utilities
Commission of Ohio, (the "PUCO") initiated a generic rulemaking proceeding
and has adopted rules to govern the introduction of local exchange
competition. In addition, the PUCO has issued an order granting Time Warner
Communications of Ohio, L.P. a certificate of public convenience and
necessity to provide local exchange service in CBT's operating territory.
Other entities have been granted certificates to provide basic local exchange
service in Ohio, although not in CBT's operating territory.
16
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
One immediate effect of the legislative initiatives is to increase potentially,
if not immediately, the number of competitors and range of competitive
communications services being offered in CBT's local market area. Depending on
the final rules issued pursuant to the legislative and regulatory initiatives,
CBT may be placed at a competitive disadvantage. For example, if the regulatory
agencies do not require CBT's competitors to offer universal service and meet
the same service requirements that CBT has to meet, those competitors could skim
the markets offering only the most profitable services to the best positioned
customers. As a result, such competitors could offer those products below the
price at which CBT offers the same products because the competitors are not
required to offer marginally profitable or losing products to unprofitable
segments of the marketplace. Under such conditions, there can be no assurance
that CBT would be able to maintain current revenue and profit objectives for
current products and services.
CBT's competitors may be allowed to bundle the products and services and attract
CBT's customers by offering a product competitive with a CBT product as a "loss
leader" bundled within a package of products. CBT believes that being in a
position to offer bundled communications services is necessary for it to compete
effectively in the marketplace. However, at this time, other competitors may be
better positioned to offer such bundled services, and the ability of CBT to
obtain or develop the additional services required for a bundled package
offering at a reasonable cost is uncertain.
The FCC is examining the current access charge structure. To the extent that
the structure is modified, such modification could have a significant adverse
impact on the Company. The Company has not yet determined the impact of the
new rules adopted by the FCC on August 1, 1996, related to all aspects of the
interconnection, unbundling and resale provisions of the Act.
Cincinnati Bell Information Systems
Competition in the information services market is based mainly on product
quality, performance, price and the quality of client service. CBIS's
competitors include large firms with size and capabilities equal to or
greater than CBIS as well as potential competitors from other markets similar
to those served by CBIS. Niche players or new entrants could also capture a
segment of the information services market by developing new systems or
services which could impact CBIS's market potential. In addition, CBIS's
clients and potential clients are generally large companies with substantial
resources and the capabilities of providing the services themselves rather
than outsourcing such services. Faced with increasing competition, there can
be no assurance that CBIS can maintain its growth in the future at the same
rate as the past several years.
MATRIXX Marketing Inc.
Various federal and state legislative initiatives have been enacted to regulate
outbound telemarketing services, especially calls to consumers. Since MATRIXX
concentrates on inbound service and outbound business-to-business marketing
services, MATRIXX does not believe that such legislation adversely affects its
business presently. However, there can be no assurances that future legislation
will not have an expanded scope and restrict MATRIXX's ability to conduct its
business.
The marketing services business in the United States is highly fragmented.
MATRIXX's competitors range in size from very small firms offering special
applications or short term projects to large, independent firms and "in-house"
operations of potential client companies with size and capabilities equal to or
greater than those of MATRIXX. In addition, MATRIXX also serves clients which
are of a size that, if they wished, would allow them to provide such services
for themselves. In addition, consolidations of participants in the industry are
occurring and such consolidations create stronger, more formidable competitors.
With the wide range of competitors and low barriers to entry in this market, the
marketing services industry is highly competitive.
MATRIXX believes that the principal competitive factors in the telephone
marketing and related marketing services industry are reputation for quality,
sales and marketing skills, price, technological expertise and the ability to
promptly provide clients with customized solutions to their customer service,
sales and marketing needs. The competitive marketplace could begin to place
pressure on MATRIXX's ability to achieve these goals at a reasonable profit
margin. There can be no assurance that MATRIXX will be able to achieve the
growth and financial results that it has in the past several years.
17
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
NEW TECHNOLOGIES
All of CBI's industry segments face risks from the development of new
technologies that could lessen the demand for or replace the current product
offerings of such segments. For example, new wireless/personal communication
systems could be an alternative to wireline systems and, possibly at some
point in the future, supplant their growth. In addition, new wireless
communications systems could segment the cellular communications market and
reduce the need for CBIS billing systems. In addition, continued technology
advances and the expansion of the Internet offers an alternative means of
accomplishing the goals of telephone marketing.
CUSTOMER CONCENTRATION
Both MATRIXX and CBIS rely on several significant customers for a large
percentage of their respective revenues. Their relationships with customers
are based on written contracts with a set term; however, such contracts
sometimes contain provisions that allow a customer to terminate the
relationship prior to the end of the term. In the case of MATRIXX, three
customers represent more than 30% of its revenues. In the case of CBIS, its
five largest customers collectively represent approximately 75% of its
revenues. Thus, the loss of one or more customers would adversely impact the
company's results.
To the extent that MATRIXX would lose one of its significant customers and be
unable to replace it with additional business, such loss could cause idle
capacity and adversely affect its margins. If such loss of business volume
continued on a long term basis, further adverse consequences would occur due
to the closing of facilities.
CBI and its subsidiaries are parties to several agreements with the companies
resulting from AT&T's recent reorganization (principally, AT&T Corp. and Lucent
Technologies, Inc. (collectively, the "Reorganized Companies")) pursuant to
which CBI and its subsidiaries either purchase equipment, materials and services
from the Reorganized Companies, or derive significant revenues from the
Reorganized Companies by providing to them network, data processing, software
development and marketing services. During 1995, CBI's revenues from the
Reorganized Companies were approximately 26% of CBI's consolidated revenues,
and, excluding network access revenues, revenues from the Reorganized Companies
were approximately 22% of CBI's consolidated revenues. The length for which and
the extent to which these relationships will continue, to some extent, is
uncertain and depends upon the success of the Reorganized Companies and the
legislative initiatives discussed previously.
18
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
CBT and AT&T are discussing whether to revise portions of their agreement
concerning the joint provision of certain telecommunication services. Revenues
subject to discussion represents substantially less than 10% of CBT's revenues,
but portions of the contract provide above-average profit contribution. A
significant modification to the contract could have a materially adverse
impact on CBT's results. Discussions are continuing at this point. The
discussions do not involve AT&T's relationship with other CBI subsidiaries.
CUSTOMER SUCCESS
The revenues generated by MATRIXX and CBIS are dependent on the success of their
customers. If their customers are not successful, the amount of business that
such customers outsource will be diminished. Presently, several of the
customers of each company are newly formed entities. In other situations, the
future success of the product that such customers are marketing (for example,
personal communications services) is as yet unknown. Thus, although each
subsidiary has signed contracts with its customers to provide services, there
can be no assurance that the level of revenues to be received from such
contracts will meet expectations.
The ability to retain customers is also dependent on each subsidiary's
capability of servicing such customers in an effective, cost-efficient manner.
The ability to accomplish this goal is dependent upon several factors including
the retention of key management, the ability to grow and manage the business's
growth, the ability to satisfy customer expectations, and the ability to achieve
these results at a reasonable cost and expense level. There can be no assurance
that the CBI subsidiaries will be able to meet these challenges. CBT has been
in the process of reengineering the manner in which it conducts its business and
interfaces with its customers. It is possible that this implementation will
take longer or cost more than expected, and not all of the anticipated cost
savings to CBT from such reorganization will not materialize. The expansion
of the MATRIXX and CBIS operations in the past several years has placed
demands on its management and operations. Continued growth of both MATRIXX's
and CBIS's customer bases and volumes of business will continue to challenge
each subsidiary's management and operations, and each subsidiary's future
success will be dependent in part on its ability to expand its management and
systems successfully and respond to continuing changes in its business and
its customers' needs.
19
<PAGE>
INDUSTRY SUCCESS
Each of the business segments in which CBI's subsidiaries conduct its business
has grown significantly in the last several years; more specifically,
telecommunications, cellular communications and telephone marketing. The
continued growth of CBI's subsidiaries is dependent on continued demand for each
subsidiary's services from the industries served by the subsidiaries. To the
extent that growth in these industry segments declines, such decline could
adversely affect each of the CBI subsidiaries' business. In addition, the
possibility of continued growth in these segments could be affected by the
development of new product that provide alternatives to the product offerings
of MATRIXX, CBIS and CBT, and by a reversal in the trend of businesses generally
to outsource functions that are not related to their core capabilities. In
addition, each of the businesses could be negatively impacted by an economic
downturn, particularly in the U.S. economy.
20
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
EXISTING PRODUCT AND NEW PRODUCT ACCEPTANCE
Each of CBI's subsidiaries must position itself so that its existing and new
product offerings meet its customers' needs in the rapidly changing and
convergent telecommunications environment. If its present products do not
maintain their level of acceptance with its customers, that subsidiary could be
adversely affected. Each of the subsidiaries spends significant resources on
the development of new products and processes; however, there can be no
assurance that it will be successful in anticipating technological changes or in
selecting and developing new products and processes that meet sufficient
customer acceptance on a profitable basis. If a subsidiary's product offerings
do not have sufficient commercial success, that subsidiary's business will be
adversely affected.
DEPENDENCE ON LABOR FORCE
MATRIXX's service offerings are very labor intensive and dependent in part on
its ability to minimize personnel turnover. CBIS's systems development and
support are dependent on its ability to attract and retain its professional
staff. There can be no assurance that MATRIXX's and CBIS's labor costs will
not increase in the future. In addition, MATRIXX also competes for qualified
personnel with other employers and their geographic markets, and there can be
no assurance that they will be able to continue to hire and retain a
sufficient number of qualified personnel to support continued growth.
POTENTIAL VOLATILITY OF STOCK PRICE
The trading price of CBI's common shares is subject to fluctuations in response
to the Company's operating profits, announcements of technological innovations
or new products by CBI and its subsidiaries or their competitors, general
conditions in the market, changes in earnings estimates by analysts, failure to
meet the revenues or earning estimates of analysts or other events or factors.
The public stock markets have experienced price and trading volume volatility in
recent months. This volatility has significantly affected the market prices of
securities of many companies for reasons frequently unrelated to the operating
performance of the specific companies. The market price for the Company's
common shares has been highly volatile. Future announcements concerning CBI, it
subsidiaries or their competition, including the results of technological
innovations, new products, government regulations, litigation or public concern
with respect to CBI or its subsidiaries and other factors including those
described above, may have a significant impact on the market price of the
Company's common shares.
BUSINESS OUTLOOK
Cincinnati Bell operates businesses in several different markets under the
telecommunications umbrella. All of these markets are becoming more competitive
as regulatory barriers recede and the pace of technological change quickens.
This quickening pace may increase the variability of Cincinnati Bell's financial
results on a period-to-period basis. Cincinnati Bell has an advantage today
because it is the market leader in its three markets - local telephony in the
Greater Cincinnati area, data processing and billing services for
telecommunications companies and telephone marketing. Cincinnati Bell's
revenues should grow at a 10% plus rate in 1996. The growth will occur
primarily at CBIS and MATRIXX. CBT's revenues are expected to increase at a
3% plus rate in 1996, but could be somewhat offset by a decline in its
customer base from increased competition and adjustments to its agreement
with AT&T. CBT is introducing new services and features to meet the
challenges of regulatory actions, competition and the changing market. CBT
is also continuing discussions with AT&T as to whether to revise portions of
the companies' agreement governing their joint provision of certain
telecommunications services. The outcome cannot be predicted at this time,
but could result in a material impact on CBT earnings (see Note (5) of Notes
to Financial Statements).
In 1996, CBIS announced several new contracts. Two contracts were for
long-term billing and customer care agreements with key Personal
Communications Services (PCS) companies in the United States. A third
contract was for development and data processing services for AT&T's re-entry
into the local telephone market. The ultimate value and profitability of
these contracts hinge on several factors. First is CBIS's ability to provide
cost effective solutions; second is CBIS's ability to maintain and grow the
systems as their clients increase their penetration in their markets. Third,
is the market success of CBIS's PCS customers. During all of these
activities, CBIS must also continue to satisfy current clients' needs with
continued service and value.
In addition to the contracts discussed above, CBIS announced a joint marketing
relationship with a company that renders solutions to combat cellular telephone
fraud.
The continued trend in the outsourcing of telemarketing by major companies is
fueling MATRIXX's continued growth. More and more companies use telephone
marketing as an effective way to serve customers. MATRIXX has executed
several new long-term agreements with key customers in the past year and
continues to expand its facilities for anticipated new business.
The Company's other businesses also face competition from businesses offering
similar products and services. These businesses are meeting their competition
by addressing the needs of their customers, and offering superior value, quality
and service.
The Company continues to review opportunities for acquisitions and divestitures
for all its businesses to enhance shareowner value.
21
<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.
22
<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 August 12, 1996 /s/ Brian C. Henry
------------------ -----------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
23
<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, 1996
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 *
(27) Financial Data Schedule *
<PAGE>
Exhibit 11
to
Form 10-Q for the Quarterly
Period Ended June 30, 1996
CINCINNATI BELL INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Dollars in millions, except per share amounts; shares in thousands
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1996 1995 1996 1995
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net income (loss). . . . . . . . . . . . . . . $ 44.8 $ 27.0 $ 86.5 $(32.6)
Weighted average common shares outstanding . . 67,220 66,216 67,046 66,131
Common share equivalent shares applicable
to stock options . . . . . . . . . . . . . . . 1,726 444 1,476 266
------ ------ ------ -------
Total number of shares for computing
primary earnings per common share... . . . . 68,946 66,660 68,522 66,397
Incremental share for computing fully diluted
earnings per share Common shares equivalents -
fully diluted. . . . . . . . . . . . . . . . . 12 56 262 234
------ ------ ------ -------
Total number of shares for computing fully
diluted earnings per common share. . . . . . 68,958 66,716 68,784 66,631
------ ------ ------ -------
------ ------ ------ -------
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share. . . . $ .65 $ .41 $ 1.26 $ (.49)
------ ------ ------ -------
------ ------ ------ -------
Fully Diluted earnings (loss) per common
share. . . . . . . . . . . . . . . . . . . . . $ .65 $ .41 $ 1.26 $ (.49)
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
Earnings per common share for the three and six months ended June 30, 1996 is
computed by dividing income by the weighted average common shares outstanding
including stock equivalents for the respective periods. Earnings (loss) per
common share for the three and six months ended June 30, 1995, as reported in
the Consolidated Statements of Income, were based on the weighted average common
shares outstanding for the respective periods. In 1995, the dilutive effect of
common stock equivalents was not reflected because it was immaterial.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,000
<SECURITIES> 0
<RECEIVABLES> 294,800
<ALLOWANCES> 12,600
<INVENTORY> 10,600
<CURRENT-ASSETS> 367,000
<PP&E> 1,828,400
<DEPRECIATION> 858,600
<TOTAL-ASSETS> 1,592,400
<CURRENT-LIABILITIES> 391,100
<BONDS> 384,500
0
0
<COMMON> 67,300
<OTHER-SE> 483,300
<TOTAL-LIABILITY-AND-EQUITY> 1,592,400
<SALES> 0
<TOTAL-REVENUES> 376,000
<CGS> 0
<TOTAL-COSTS> 201,800
<OTHER-EXPENSES> 99,700
<LOSS-PROVISION> 12,600
<INTEREST-EXPENSE> 8,400
<INCOME-PRETAX> 69,100
<INCOME-TAX> 24,300
<INCOME-CONTINUING> 44,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,800
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
