<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, 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 October 31, 1996, 67,402,282 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>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ -------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $403.2 $327.0 $1,141.3 $992.9
------ ------ -------- ------
Costs and Expenses
Cost of providing services and products sold . . . . 220.3 169.9 610.0 518.2
Selling, general and administrative. . . . . . . . . 70.2 59.6 198.2 190.0
Depreciation and amortization. . . . . . . . . . . . 43.3 40.4 127.6 119.7
Special charges. . . . . . . . . . . . . . . . . . . (5.5) - (16.5) 132.0
------ ------ -------- ------
Total Costs and Expenses. . . . . . . . . . . . . 328.3 269.9 919.3 959.9
------ ------ -------- ------
Operating Income . . . . . . . . . . . . . . . . . . . 74.9 57.1 222.0 33.0
Other Income (Expense), Net. . . . . . . . . . . . . . 4.9 .6 9.4 .7
Interest Expense . . . . . . . . . . . . . . . . . . . 7.1 13.8 25.1 39.8
------ ------ -------- ------
Income (Loss) Before Income Taxes. . . . . . . . . . . 72.7 43.9 206.3 (6.1)
Income Taxes . . . . . . . . . . . . . . . . . . . . . 25.8 15.1 72.9 (2.3)
------ ------ -------- ------
Net Income (Loss). . . . . . . . . . . . . . . . . . . $46.9 $ 28.8 $133.4 $(3.8)
------ ------ -------- ------
------ ------ -------- ------
Earnings (Loss) Per Common Share . . . . . . . . . . . $ .68 $ .43 $1.94 $(.06)
------ ------ -------- ------
------ ------ -------- ------
Dividends Declared Per Common Share. . . . . . . . . . $ .20 $ .20 $.60 $.60
------ ------ -------- ------
------ ------ -------- ------
Average Common Shares Outstanding Including
Equivalents (000). . . . . . . . . . . . . . . . . . 68,980 66,350 68,645 66,204
Retained Earnings
Beginning of Period. . . . . . . . . . . . . . . . . $216.6 $187.5 $ 157.1 $246.6
Net Income (Loss). . . . . . . . . . . . . . . . . . 46.9 28.8 133.4 (3.8)
Common Dividends Declared. . . . . . . . . . . . . . (13.4) (13.4) (40.4) (39.9)
------ ------ -------- ------
End of Period. . . . . . . . . . . . . . . . . . . . $250.1 $202.9 $ 250.1 $202.9
------ ------ -------- ------
------ ------ -------- ------
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 8.7 $ 2.9
Receivables, less allowances of $12.8 and $14.7. . . . . . . . 302.2 266.7
Material and supplies. . . . . . . . . . . . . . . . . . . . . 15.8 10.5
Deferred income tax. . . . . . . . . . . . . . . . . . . . . . 19.9 25.4
Prepaid expenses and other current assets. . . . . . . . . . . 41.9 35.9
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . 388.5 341.4
Property, Plant and Equipment - net. . . . . . . . . . . . . . . 973.7 993.9
Goodwill and other intangibles . . . . . . . . . . . . . . . . . 178.0 172.3
Investments in unconsolidated entities . . . . . . . . . . . . . 63.3 53.4
Deferred charges and other assets. . . . . . . . . . . . . . . . 27.8 30.7
-------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $1,631.3 $1,591.7
-------- --------
-------- --------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year. . . . . . . . . . . . . . . . . . . $ 136.1 $ 126.1
Accounts payable and accrued liabilities . . . . . . . . . . . 165.0 201.2
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . . 38.9 48.0
Advance billing and customers' deposits. . . . . . . . . . . . 31.9 40.5
Other current liabilities. . . . . . . . . . . . . . . . . . . 39.9 37.5
-------- --------
Total current liabilities . . . . . . . . . . . . . . . 411.8 453.3
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 381.3 386.8
-------- --------
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 115.3 111.3
Unamortized investment tax credits . . . . . . . . . . . . . . . 13.3 14.8
Other long-term liabilities. . . . . . . . . . . . . . . . . . . 124.2 147.4
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . $1,045.9 $1,113.6
-------- --------
Shareowners' Equity
Common shares-$1 par value; 240,000,000 shares authorized. . . 67.4 66.7
Additional paid-in capital . . . . . . . . . . . . . . . . . . 270.4 256.1
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 250.1 157.1
Currency translation adjustments . . . . . . . . . . . . . . . (2.5) (1.8)
-------- --------
Total shareowners' equity. . . . . . . . . . . . . . . . 585.4 478.1
-------- --------
Total Liabilities and Shareowners' Equity. . . . . . . . . . . . $1,631.3 $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>
Nine Months
Ended September 30,
--------------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 133.4 $ (3.8)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 127.6 119.7
Special charges. . . . . . . . . . . . . . . . . . . . . . . . . . (16.5) 132.0
Provision for loss on receivables. . . . . . . . . . . . . . . . . 5.7 6.6
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.5) 1.8
Changes in assets and liabilities net of effects from acquisitions:
Decrease (increase) in receivables . . . . . . . . . . . . . . . . (34.8) 4.5
Increase in other current assets . . . . . . . . . . . . . . . . . (5.8) (6.1)
Decrease in accounts payable and accrued liabilities . . . . . . . (33.6) (19.6)
Decrease in other current liabilities. . . . . . . . . . . . . . . (14.4) (16.7)
Increase (decrease) in deferred income taxes and unamortized
investment tax credits. . . . . . . . . . . . . . . . . . . . . . 2.4 (48.9)
Decrease in other assets and liabilities-net . . . . . . . . . . . 2.1 10.6
------ ------
Net cash provided by operating activities . . . . . . . . . . . 161.6 180.1
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant . . . . . . . . . . . . . . . (71.5) (65.8)
Capital expenditures-other . . . . . . . . . . . . . . . . . . . . (41.2) (15.4)
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . (28.0) (18.2)
Disposition of assets. . . . . . . . . . . . . . . . . . . . . . . 12.7 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.4) 7.2
------ ------
Net cash used in investing activities . . . . . . . . . . . . . (130.4) (92.2)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt. . . . . . . . . . . . . . . . . . . 10.2 4.5
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . (8.0) (1.6)
Issuance of common shares. . . . . . . . . . . . . . . . . . . . . 12.6 6.4
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (40.2) (39.7)
------ ------
Net cash used in financing activities . . . . . . . . . . . . . (25.4) (30.4)
------ ------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . 5.8 57.5
Cash and cash equivalents at beginning of period . . . . . . . . . . 2.9 78.4
------ ------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 8.7 $135.9
------ ------
------ ------
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . $24.6 $ 28.0
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $70.0 $ 52.5
</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 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, which include local
service, network access and toll telephone services in the Greater
Cincinnati area. 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 telephone marketing services
segment, MATRIXX Marketing Inc. (MATRIXX), provides telephone marketing,
research, fulfillment, database management, interactive voice response and
Internet services. The operations of the Company's long distance,
directory services, and equipment supply businesses are included in the
Other category.
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.
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. 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 Forms 10-Q.
(2) STATUS OF RESTRUCTURING RESERVES - In the first quarter of 1995, the
Company approved a restructuring plan resulting in the need for fewer
people to operate the businesses of CBT and CBI. The workforce reduction
was to be accomplished by the offer of early retirement incentives to
eligible retirees. More than 1,300 employees accepted the retirement
offer, including 1,000 hourly employees. The Company has the option to
delay the retirement date of hourly employees until March 31, 1997.
During 1995 the Company recorded $137.5 million of pre-tax special charges
and offsetting pension settlement gains of $5.9 million for the
restructuring. In the first quarter of 1995, special charges of $135.2
million and $3.2 million of settlement gains were recorded for the
restructuring programs at CBT and CBI. In the fourth quarter of 1995, the
Company recognized additional restructuring charges of $2.3 million and
$2.7 million of settlement gains. Approximately $112 million of the 1995
charges were for pension enhancements and curtailment losses for
postretirement health costs and the related liabilities were included in
other long-term liabilities.
As a result of the restructuring plan, the Company has significantly
reduced its management and hourly work force during 1995 and 1996. As of
September 30, 1996, approximately 1,020 employees (350 management and 670
hourly employees) had left the Company. CBT has delayed the retirement
dates of some of the hourly employees, but all remaining employees will
retire no later than March 31, 1997.
5
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
For the three and nine months ended September 30, 1996, CBT recorded $5.5
million and $16.5 million, respectively, of pre-tax non-cash settlement
gains resulting from lump-sum pension distributions to employees retiring
under the offer. The Company expects settlement gains may approximate $20
to $30 million in 1996 based on current actuarial estimates. The Company
expects to record additional settlement gains through 1997 as employees
retire under the offer.
A total of $2.3 million in cash outlays were charged to the reserves in the
first nine months of 1996. These costs were mainly for vacation buyouts,
severance pay and real estate costs. At September 30, 1996, a balance of
$11.8 million remained in these restructuring reserves.
The balance of the CBIS restructuring and disposal reserve established in
1993 was $3.5 million at September 30, 1996. Charges for discontinued
products and contingencies of the businesses sold reduced the reserve by
$2.8 million during the nine months ended September 30, 1996.
(3) ACQUIRED RESEARCH AND DEVELOPMENT - During the quarter ended September 30,
1996, CBIS recorded a $2.1 million charge to operating expenses for
in-process research and development costs associated with the acquisition
of International Computer Systems, Inc. CBIS recorded $2.5 million of
similar charges in the first quarter of 1995 for the acquisition of X
International.
(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:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- -------
Revenues . . . . . . . $162.8 $156.3 $483.5 $466.2
Costs and Expenses . . $126.4 $125.9 $370.9 $503.6
Net Income (Loss). . . $ 23.1 $ 17.3 $ 67.8 $(29.9)
Results for the three and nine months of 1996 include $5.5 million and
$16.5 million, respectively, of pension settlement gains. Results for the
same periods include the reversal of $2.5 million of accrued interest
expense related to overearnings liabilities. These items increased net
income by about $5.1 million and $12.1 million for the three and nine month
periods of 1996. Results for the first nine months of 1995 include $124.0
million of restructuring charges, net of settlement gains, which reduced
net income by $79.0 million. The pension settlement gains and the
restructuring charges are further described in Note (2).
6
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, December 31,
1996 1995
-------- --------
Current Assets . . . . . . . . . . . . . . . . . $ 134.9 $ 197.1
Telephone Plant-Net. . . . . . . . . . . . . . . 854.9 880.5
Other Noncurrent Assets. . . . . . . . . . . . . 13.9 17.5
-------- --------
Total Assets . . . . . . . . . . . . . . . . . . $1,003.7 $1,095.1
-------- --------
-------- --------
Current Liabilities. . . . . . . . . . . . . . . $182.0 $219.3
Noncurrent Liabilities . . . . . . . . . . . . . 151.2 204.3
Long-Term Debt . . . . . . . . . . . . . . . . . 221.7 233.9
Shareowner's Equity. . . . . . . . . . . . . . . 448.8 437.6
-------- --------
Total Liabilities and Shareowner's Equity. . . . $1,003.7 $1,095.1
-------- --------
-------- --------
(5) AT&T RELATIONSHIP - Each of the Company's major subsidiaries derives
significant revenues from AT&T and its affiliates by providing network
services, billing and customer care systems and telephone marketing
services. Revenues from AT&T, including network access revenues, were 24%
and 26% of the Company's consolidated revenues for the nine months ended
September 30, 1996 and 1995.
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 represent approximately $36 million or 6% of
CBT's 1995 revenues, but portions of the contract provide above-average
profit contribution. The outcome of such discussions cannot be predicted,
but significant changes in the relationship could have a material adverse
impact on CBT's future earnings. These discussions with AT&T do not
involve AT&T's relationship with other Cincinnati Bell subsidiaries.
(6) CONTINGENCIES - The Company owns a 45% limited partnership interest in a
cellular telephone service business that covers much of central and
southwestern Ohio, northern Kentucky and small portions of southeastern
Indiana. The Company's proportionate share of this cellular market
represents approximately 2.3 million POPs. In 1994, the Company filed suit
in Chancery Court in Delaware against the partnership's general partner
seeking to dissolve the partnership for poor performance and reclaim the
Company's proportionate share of the partnership's assets. On September 3,
1996, the Court denied the Company's motion for summary judgment and
granted the general partner's motion for summary judgment. The Company has
appealed the ruling to the Delaware Supreme Court. At September 30, 1996,
the Company's investment in the partnership was $56.6 million.
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) SUBSEQUENT EVENT - On October 8, 1996, the Company filed a registration
statement with the Securities and Exchange Commission to register the sale
or delivery of 5.8 million shares of the Company's common stock owned by
Waslic Company II, a wholly owned subsidiary of The Western and Southern
Life Insurance Company, and the Cincinnati Bell Pension Plans Trust. The
Western and Southern Life Insurance Company and its subsidiaries are the
Company's largest shareholder. All of the shares being registered are
previously issued and outstanding shares, and the Company will receive no
proceeds from the sale or delivery of such shares.
7
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(8) BUSINESS SEGMENT INFORMATION - The Company operates primarily in three
industry segments, Telephone Operations, Information Systems and Telephone
Marketing Services. Certain corporate administrative expenses have been
allocated to segments based upon the nature of the expense. Assets are
those assets used in the operations of the segment. The Company's business
segment information, in millions of dollars, is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
----- ----- ------ ------
<S> <C> <C> <C> <C>
REVENUES
Telephone Operations $162.8 $156.3 $ 483.5 $466.2
Information Systems 125.1 91.1 346.5 275.8
Telephone Marketing Services 95.5 63.7 252.9 200.8
Other 40.1 32.7 115.9 101.6
Corporate - .6 .4 1.9
Intersegment (20.3) (17.4) (57.9) (53.4)
----- ----- ------ ------
$403.2 $327.0 $1,141.3 $992.9
----- ----- ------ ------
----- ----- ------ ------
INTERSEGMENT REVENUES
Telephone Operations $ 5.8 $ 5.8 $ 17.6 $ 17.0
Information Systems 11.5 9.5 32.8 31.0
Telephone Marketing Services 1.1 .7 3.1 1.7
Other 1.9 .8 4.0 1.9
Corporate - .6 .4 1.8
----- ----- ------ ------
$ 20.3 $ 17.4 $ 57.9 $ 53.4
----- ----- ------ ------
----- ----- ------ ------
OPERATING INCOME (LOSS)
As Reported
Telephone Operations $ 36.4 $ 30.4 $ 112.6 $(37.4)
Information Systems 18.1 11.0 54.4 31.2
Telephone Marketing Services 12.0 7.6 31.2 24.4
Other 8.5 6.9 25.2 22.4
Corporate and Eliminations (.1) 1.2 (1.4) (7.6)
----- ----- ------ ------
$ 74.9 $ 57.1 $ 222.0 $ 33.0
----- ----- ------ ------
----- ----- ------ ------
OPERATING INCOME (LOSS)
Excluding Special Items
Telephone Operations $ 30.9 $ 30.4 $ 96.1 $ 86.6
Information Systems 20.2 11.0 56.5 33.7
Telephone Marketing Services 12.0 7.6 31.2 24.4
Other 8.5 6.9 25.2 22.4
Corporate and Eliminations (.1) 1.2 (1.4) .4
----- ----- ------ ------
$ 71.5 $ 57.1 $ 207.6 $167.5
----- ----- ------ ------
----- ----- ------ ------
ASSETS (at September 30)
Telephone Operations $1,003.7 $1,116.7
Information Systems 276.2 221.5
Telephone Marketing Services 268.7 263.1
Other 51.5 40.8
Corporate and Eliminations 31.2 101.4
------ ------
$1,631.3 $1,743.5
------ ------
------ ------
CAPITAL ADDITIONS (including acquisitions)
Telephone Operations $29.6 $20.6 $71.5 $68.2
Information Systems 17.7 4.5 32.2 13.9
Telephone Marketing Services 16.1 3.4 28.1 18.7
Other and Corporate .6 .7 3.7 1.9
----- ----- ------ ------
$64.0 $29.2 $135.5 $102.7
----- ----- ------ ------
----- ----- ------ ------
DEPRECIATION AND AMORTIZATION
Telephone Operations $29.3 $28.4 $87.1 $84.3
Information Systems 8.0 7.4 23.9 21.7
Telephone Marketing Services 5.1 3.9 13.9 11.4
Other and Corporate .9 .7 2.7 2.3
----- ----- ------ ------
$43.3 $40.4 $127.6 $119.7
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
8
<PAGE>
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information included in this quarterly report on Form 10-Q contains certain
forward-looking statements that involve potential risks and uncertainties within
the meaning of the Private Securities Litigation Reform Act of 1995, and is
subject to the safe harbor created by the Act. Factors that could cause or
contribute to such differences, include, but are not limited to, those discussed
herein and those discussed in the Form 10-K for December 31, 1995, Forms 10-Q
for March 31 and June 30, 1996 and Form S-3 filed October 8, 1996 as amended on
October 23, 1996. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date thereof.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and segment data. Results for interim periods may not be
indicative of the results for the full year.
CONSOLIDATED OVERVIEW
The Company's consolidated revenues for the three and nine months ended
September 30, 1996 were $403.2 million and $1,141.3 million compared to $327.0
million and $992.9 million for the three and nine months ended September 30,
1995. The increases for the three and nine month periods in 1996 compared to
1995 were 23% and 15%, respectively. The Company's consolidated net income was
$46.9 million for the third quarter of 1996 compared to $28.8 million for the
third quarter of 1995. For the nine months of 1996, net income was $133.4
million compared to a net loss of $3.8 million in 1995. Earnings per common
share for the third quarter and nine months of 1996 were $.68 and $1.94,
respectively, compared to an earnings per common share of $.43 for the third
quarter of 1995 and a loss per common share of $.06 for the nine months of 1995.
Results for the three and nine months of 1996 included $5.5 million and $16.5
million, respectively, of pension settlement gains associated with the 1995
business restructuring. Also during the quarter ended September 30, 1996, the
Company incurred a $2.1 million charge for acquired research and development and
reversed $2.5 million of accrued interest expense related to overearnings
liabilities. These items increased net income $3.8 million and $10.8 million
and earnings per share $.06 and $.15, for the third quarter and nine months of
1996, respectively.
The results for the nine months of 1995 included $132.0 million of special
charges for business restructurings at CBT and CBI, and a $2.5 million charge
for acquired research and development. These charges reduced net income by
$85.6 million or $1.29 per common share.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
TELEPHONE OPERATIONS
($ Millions)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
---------------------------- ----------------------------
1996 1995 Change % 1996 1995 Change %
------ ----- ------ --- ------ ------ ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Local service $ 93.8 $89.4 $ 4.4 5 $276.6 $262.6 $ 14.0 5
Network access 39.7 34.4 5.3 15 118.6 106.6 12.0 11
Long distance 6.9 8.5 (1.6) (19) 21.1 25.8 (4.7) (18)
Other 22.4 24.0 (1.6) (7) 67.2 71.2 (4.0) (6)
------ ----- ------ ------ ------ -------
Total 162.8 156.3 6.5 4 483.5 466.2 17.3 4
Costs and expenses 131.9 125.9 6.0 5 387.4 379.6 7.8 2
Special charges (5.5) - (5.5) - (16.5) 124.0 (140.5) -
------ ----- ------ ------ ------ -------
Total 126.4 125.9 .5 - 370.9 503.6 (132.7) (26)
Operating income (loss) $ 36.4 $30.4 $ 6.0 20 $112.6 $(37.4) $150.0 -
Excluding special items:
Operating income $30.9 $30.4 $ .5 2 $ 96.1 $ 86.6 $ 9.5 11
Operating margin 19.0% 19.4% 19.9% 18.6%
Access lines (000) 936 900 36 4
Minutes of Use (In millions) 920 880 40 5 2,761 2,605 156 6
</TABLE>
Local service revenues increased $4.4 million and $14.0 million for the three
and nine months of 1996 compared to 1995 primarily due to 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 new rates approved by the Public Service Commission of
Kentucky (PSCK) that became effective in May 1995 accounted for the remainder of
the increase. The approval by the PSCK maintained uniform rates for basic
services in CBT's Kentucky and Ohio metropolitan areas.
Network access revenues increased for both periods by $5.3 million and $12.0
million from a 5% and 6% growth in access minutes of use, respectively; higher
end user charges as a result of access line growth, and a change in estimates
for potential overearnings liability.
The $1.6 million and $4.7 million decreases in long distance revenues for both
periods were caused by lower settlement revenues from interexchange carriers and
independent companies and a decline in long distance message revenues from the
expansion of local service areas in some Northern Kentucky counties in November
1995.
Other telephone operations revenues decreased $1.6 million and $4.0 million in
1996 when compared to the same periods in 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 increases in payphone agent revenues 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).
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Contracted services, consulting fees and data processing costs increased $2.7
million and $8.9 million as a result of business restructuring projects, many of
which started in the second quarter of 1996. Advertising costs were higher by
$.2 million and $1.6 million because of specific campaigns marketing new
services, additional lines and internet access. The level of cost reduction
from salaries and wages is less than headcount reduction as costs have increased
concurrently for overtime resulting from business growth and the need to
maintain high quality customer service. The extremely wet weather in the
Cincinnati area during the second quarter of 1996 also contributed to increased
labor costs required for repairs. Depreciation and amortization expenses
increased $.9 million and $2.7 million primarily as a result of increases in
switching, circuit and outside plant assets.
Right-to-use fees were higher for the three months by $1.0 million from
plant-related software expenditures but lower for the nine months by $1.8
million as a result of network software upgrades made in 1995 to provide
additional customer services. Operating taxes decreased $.6 million and $4.7
million primarily from a 1995 Ohio tax law change on equipment placed into
service after January 1, 1994. Facilities expenses decreased $1.4 million
and $3.5 million because certain leases for administrative buildings were
terminated or expired as part of the business restructuring. The remaining
differences for both periods were primarily in costs of goods sold, supplies
and miscellaneous expenses.
INFORMATION SYSTEMS
($ Millions)
Three Months Nine Months
Ended September 30 Ended September 30
------------------------- --------------------------
1996 1995 Change % 1996 1995 Change %
------ ----- ------ -- ------ ------ ------ --
Revenues $125.1 $91.1 $34.0 37 $346.5 $275.8 $70.7 26
Costs and expenses 104.9 80.1 24.8 31 290.0 242.1 47.9 20
Special items 2.1 - 2.1 - 2.1 2.5 (.4) (16)
------ ----- ------ ------ ------ ------
Total 107.0 80.1 26.9 34 292.1 244.6 47.5 19
Operating income $ 18.1 $11.0 $ 7.1 65 $ 54.4 $ 31.2 $23.2 74
Excluding special items:
Operating income $ 20.2 $11.0 $ 9.2 84 $ 56.5 $ 33.7 $22.8 68
Operating margin 16.1% 12.1% 16.3% 12.2%
Revenues increased $34.0 million and $70.1 million, respectively, for the
three and nine months of 1996 compared to the same periods in 1995. For the
three and nine month periods data processing revenues contributed $8.8
million and $22.1 million of the increase from strong subscriber growth of
cellular customers. Professional and consulting service revenues increased
$13.2 million and $24.4 million from a combination of development requests
from existing and new customers, new personal communications services (PCS)
opportunities and the acquisition of Information Systems Development
Partnership (ISD), a cable software company, in the fourth quarter of 1995.
Hardware sales of ISD accounted for most of the increase in licenses and
other fees of $4.5 million and $13.5 million. International revenues were
$7.5 million and $10.7 million higher, respectively, from improved
contractual agreements and the acquisition in the third quarter of 1996 of
International Computer Systems, Inc.
Costs and expenses increased $24.8 million and $47.9 million excluding special
items during the three and nine months this year compared to last year. Costs
associated with new and existing customers resulted in increases of $12.0
million and $25.1 million. Research and development costs increased $7.7
million and $13.5 million from development activity for billing solutions
software. An increase in depreciable assets increased depreciation and
amortization expenses by $.6 million and $2.2 million. Sales, marketing and
general and administrative costs increased $4.5 million and $7.1 million
primarily as a result of additional business. Non-recurring charges of $2.1
million and $2.5 million for acquired in-process research and development
expenses were recorded in the third quarter of 1996 and the first quarter of
1995, respectively.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
TELEPHONE MARKETING SERVICES
($ Millions)
Three Months Nine Months
Ended September 30 Ended September 30
-------------------------- ----------------------------
1996 1995 Change % 1996 1995 Change %
----- ----- ------ -- ------ ------ ------ --
Revenues $95.5 $63.7 $31.8 50 $252.9 $200.8 $52.1 26
Costs and expenses 83.5 56.1 27.4 49 221.7 176.4 45.3 26
----- ----- ------ ------ ------ ------
Operating income $12.0 $ 7.6 $ 4.4 58 $ 31.2 $ 24.4 $ 6.8 28
Operating margin 12.6% 11.9% 12.3% 12.2%
Telephone marketing services revenues increased $31.8 million and $52.1 million
for the three and nine months ended September 30, 1996 compared to the same
periods in 1995. The increases represented strong growth in the outsourced
dedicated services sector, which provided $24.1 million or 76% for the three
months and $39.2 million or 75% for the nine months of the growth. Traditional
telephone marketing services provided $6.6 million or 21% for the three months
and $9.2 million or 18% for the nine months of the growth. Industries
experiencing the greatest growth were telecommunications and technology. The
remaining increases were primarily from international operations.
Costs and expenses increased $27.4 million and $45.3 million for the three and
nine month periods in 1996 compared to the same three and nine month periods in
1995, at a rate comparable to revenues. The increases for the two periods were
principally the result of higher direct labor costs reflecting higher activity.
In 1996, MATRIXX expanded its DIRECTV dedicated call center near Cincinnati and
opened a new dedicated call center in Orem, Utah. There were approximately
13,300 MATRIXX employees at September 30, 1996, an increase of 4,300 employees
from September 30, 1995.
OTHER AND CORPORATE
($ Millions)
Three Months Nine Months
Ended September 30 Ended September 30
------------------------- ---------------------------
1996 1995 Change % 1996 1995 Change %
----- ----- ------ -- ------ ------ ------ --
Revenues $40.1 $33.3 $6.8 20 $116.3 $103.5 $12.8 12
Costs and expenses 32.9 26.1 6.8 26 95.3 82.6 12.7 15
Special Charges - - - - - 8.0 (8.0) -
----- ----- ------ ------ ------ ------
Total 32.9 26.1 6.8 26 95.3 90.6 4.7 5
Operating income $ 7.2 $ 7.2 $ - - $ 21.0 $ 12.9 $ 8.1 63
Excluding special items:
Operating income $ 7.2 $ 7.2 $ - - $ 21.0 $ 20.9 $ .1 -
Operating margin 18.0% 21.6% 18.1% 20.2%
Revenues increased from growth in directory sales, higher levels of wholesale
long distance traffic partially offset by price discounts and an increase in
computer sales in the equipment supply business. Costs and expenses increased
from direct printing and production costs, commissions, sales headcount,
increased costs of materials and higher corporate costs for several items.
Costs and expenses for the first quarter of 1995 included special charges of
$8.0 million at CBI for business restructuring (see Note (2) of Notes to
Financial Statements).
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Three Months Nine Months
($ Millions) Ended September 30 Ended September 30
------------------------- ----------------------------
1996 1995 Change % 1996 1995 Change %
---- ----- ------ --- ----- ----- ------ ---
OTHER INCOME
(EXPENSE), NET $4.9 $ .6 $ 4.3 - $ 9.4 $ .7 $ 8.7 -
The increases in 1996 periods compared to 1995 were principally the result of
increased earnings from the Company's investment in a cellular partnership, and
lower contributions to the Company's charitable foundation. The increase was
partially offset by a decrease in interest income on temporary cash investments.
Three Months Nine Months
($ Millions) Ended September 30 Ended September 30
------------------------- ----------------------------
1996 1995 Change % 1996 1995 Change %
---- ----- ------ --- ----- ----- ------ ---
INTEREST EXPENSE $7.1 $13.8 $ (6.7) (49) $25.1 $39.8 $(14.7) (37)
The retirement of high cost long-term debt (including an interest rate and
currency swap) at CBI in late 1995 and CBT in early 1996 resulted in reductions
of $4.8 million and $13.5 million in interest expense for the three and nine
months, respectively, compared to last year. Additionally, CBT reversed $2.5
million of interest expense related to overearnings liabilities in the third
quarter of 1996. The weighted average interest rate for debt (including the
interest rate and currency swap) decreased from 8.5% at September 30, 1995, to
7.0% at September 30, 1996. Average debt outstanding decreased from $600.5
million to $510.2 million during the same time period.
Three Months Nine Months
($ Millions) Ended September 30 Ended September 30
------------------------- ----------------------------
1996 1995 Change % 1996 1995 Change %
----- ----- ------ --- ----- ----- ------ ---
INCOME TAXES $25.8 $15.1 $ 10.7 71 $72.9 $(2.3) $75.2 -
Higher income before taxes for the three and nine months were the principal
reasons for the increase in income tax expenses. The Company's effective tax
rates for the three and nine months ending September 30, 1996 were 35.5% and
35.3%, respectively, compared to 34.5% and 37.0% for the same two periods last
year. The effective tax rate for the nine months of 1995, excluding the 1995
special items, would have been 36.3%. A reduction in state income tax expenses
was the principal reason for the decrease in the effective tax rate for the nine
month period of 1996.
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 borrowings as needed for general corporate purposes.
Cash provided by operating activities, which is the Company's primary source of
liquidity, was $161.6 million for the first nine months of 1996 and was used
primarily to pay for capital expenditures (including acquisitions) and
dividends.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
The Company's most significant investing activity for the first nine months
of 1996 continued to be capital expenditures. Capital expenditures were
$112.7 million, up $31.5 million from the first nine months of 1995. Most of
the increase was for a new data center in Orlando, Florida for CBIS and for
expansion of facilities to accommodate new business at MATRIXX. The Company
continuously evaluates requirements for additional updating of facilities
based on customer and market demands, and engineering economics. Due to
stronger-than-expected growth in all its businesses, the Company has
increased its estimate of 1996 capital expenditures and anticipates spending
approximately $160 million with $100 million of that total expected for CBT.
Other investing activities in the first nine months of 1996 included payments
for acquisitions in late 1995 and 1996. Offsetting the acquisition payments was
cash received for the disposition of certain real estate. The primary cause of
the increase in Common Shares issued during the first nine months of 1996 was
the exercise of 577,000 stock options by Cincinnati Bell employees.
Receivables increased $35.5 million from December 31, 1995 primarily as a result
of increased sales. Investments in unconsolidated entities increased $9.9
million principally as a result of the increase in the Company's cellular
partnership investment which is accounted for using the equity method. Accounts
payable and accrued liabilities decreased $36.2 million primarily due to the
payment of acquisition costs for a fourth quarter 1995 acquisition, reductions
in overearnings liabilities at CBT from payments and adjustments, and funding of
the Company's charitable foundation. The balance of accrued taxes decreased
$9.1 million primarily due to property tax payments. Long-term liabilities
decreased as a result of the $16.5 million of settlement gains that reduced the
Company's pension liabilities.
OTHER INFORMATION
New three-year contracts between CBT and the Communications Workers of America
(CWA) and CBIS and the CWA were approved in the second and third quarters of
1996. The contracts include pay increases of 10.5% over the three-year period
1996-1999 with bonus incentives based on service and/or financial performance.
The contracts also address job security and benefit issues, while providing
additional flexibility in the pension plans 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 1996.
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 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 its consolidated financial statements.
REGULATORY MATTERS
TELECOMMUNICATIONS COMPETITION
Recently enacted and future legislative and regulatory initiatives will have an
impact on CBT and other incumbent local exchange carriers (LECs), including the
Regional Bell Operating Companies (RBOCs) and other independent telephone
companies. The extent of that impact will not be known until the initiatives
are fully implemented. The basic thrust of these initiatives is to encourage
and accelerate the development of competition in the telecommunications industry
by removing legal barriers to competition across major segments of that
industry. Under the initiatives, companies that today are limited to one or
more of those segments, including local exchange, long distance, wireless, cable
television and information services, could enter the other segments to compete
with the incumbent providers and other new entrants.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Today's technology makes it possible to interconnect facilities of competing
telecommunications carriers and to provide the service offerings of multiple
competitors through the network facilities of one or more incumbents. At the
federal level, the Telecommunications Act of 1996 (the Act) passed in February
1996 requires incumbent LECs like CBT to interconnect with the networks of other
service providers, unbundle certain network elements and make them available to
competing providers at wholesale rates. Additionally, the Act requires the
removal of other perceived barriers to competitive entry by alternative
providers of local exchange services. 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 8, 1996, the FCC issued an order establishing regulations to implement
the "local competition" provisions of the Act. These regulations essentially
establish parameters under which a LEC must allow other telecommunications
carriers to interconnect with its network, including the compensation that a LEC
would receive for terminating calls originating from the networks of the other
carriers. The FCC's regulations also establish parameters under which LECs must
unbundle network elements and offer them to other telecommunications carriers.
The prices for interconnection and unbundled elements either are to be
negotiated between the parties (and approved by the relevant state commission)
or, if the parties fail to reach an agreement, the rates are to be set by the
relevant state commission based on guidelines established by the Act and
implemented by the FCC. Under the Act, these rates must be based on the cost of
providing the interconnection or unbundled elements, be nondiscriminatory and
include a reasonable profit. The FCC has determined that the prices for these
unbundled elements and interconnection are to be based on a methodology governed
by forward-looking, long-run incremental costs. The Act also requires LECs to
offer to other telecommunications carriers, at wholesale rates, any retail
telecommunications service offered by the LEC to end-users. The FCC has
determined that the wholesale rates are to be based on the LEC's retail rates,
less the costs avoided by the LEC in offering its services for resale.
CBT and several other LECs believe the FCC's regulations with respect to
interconnection, unbundling and resale unlawfully exceed the requirements of the
Act. Accordingly, they have sought review of the FCC's order in the United
States Court of Appeals. The primary objections raised by CBT and the other
LECs are that the pricing rules and standards for interconnection, unbundling
and resale, and the rules allowing interconnecting carriers to "pick and choose"
from various unbundled elements and services, along with their prices, being
provided by LECs pursuant to pre-approved contracts with other carriers, will
not provide the LECs with adequate compensation. On October 15, 1996, the
United States Court of Appeals for the Eighth Circuit stayed the effectiveness
of the portions of the FCC order establishing the pricing standards and the
"pick and choose" rules. A petition to vacate the Eighth Circuit's stay of
these rules is pending before the United States Supreme Court, but one Justice
on the Supreme Court has already denied a petition to lift the stay. As a
result of the stay, these rules are suspended, pending a final decision on the
merits of the petition for review of these rules. The appeal is scheduled for
argument the week of January 13, 1997. The FCC regulations requiring LECs to
negotiate with new entrants, unbundle and resell still exist; however, pending a
decision on the appeal, pricing will be determined by private negotiations as
approved by state regulatory authorities or by state arbitrations.
If the FCC's order were implemented as written, and if CBT were unable to obtain
waivers to certain requirements or to replace its lost revenues, the Company
believes that the result would have a material adverse impact on its revenues
and earnings. The material impact would result from the elimination of certain
revenues designed to subsidize residential telephone service and increased costs
to develop or modify systems to allow number portability and interconnection.
CBT also believes that implementation of the FCC order would significantly
enhance the position of its competitors, which would have an additional adverse
impact on CBT's revenues and earnings from operations within its territory.
The outcome of three separate, but related, FCC proceedings could be significant
for CBT. In the first of these proceedings, the FCC will be implementing a
universal service funding mechanism which is currently being developed by a
joint board made up of state and federal regulators. In the second of these
proceedings, the FCC will be reforming the current access charge regime, which
could result in an additional reduction in revenues. In the third, the FCC will
be implementing regulations that may require certain LECs to share their
infrastructure, technology, information and facilities with certain smaller
telecommunications service providers.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
At the state level, the PUCO issued its local exchange competition decision and
guidelines in June 1996, which certify competing carriers and establish certain
rules that must be complied with by LECs. In July 1996, CBT and other
interveners requested that the PUCO reconsider certain parts of the guidelines.
On November 7, 1996, in response to the request of CBT and others for rehearing,
the PUCO reissued the guidelines for local competition in Ohio. CBT is
currently analyzing the impact of these guidelines. On July 18, 1996, CBT filed
an amendment to its alternative regulation plan with the PUCO. The proposed
amendments, if approved, would make CBT's telecommunications network available
to would-be competitors for local telephone service. The amendments also would
provide CBT with greater pricing and marketing flexibility. In conjunction with
these proposed amendments, CBT proposed to reduce its rates to customers by
approximately $2.7 million annually. On September 5, 1996, the PUCO issued an
order stating the CBT's July 18, 1996 filing would be processed as a new plan,
rather than as an amendment. Since the PUCO decided to process the filing as a
new plan and because of various regulatory developments, on November 5, 1996,
CBT notified the PUCO that it would be filing a revised plan in the near future.
On September 26, 1996, the PSCK issued its rules for local competition in
Kentucky. A major portion of the rules outlines the PSCK's perspective
regarding universal service and the development of a universal service fund
intended to keep residential rates within the state affordable. The rules
established a workshop process to review universal service funding. The rules
also established an interim resale discount of 17% for most LEC's including CBT
pending the submission of company-specific cost studies supporting a smaller
discount. The PSCK did not, however, adopt detailed rules for interconnection.
CBT is reviewing the rules to determine their impact, but the adopted rules are
likely to lead to increased competition for CBT in Kentucky and may have an
adverse effect on its operating results.
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.
ALTERNATIVE REGULATION
CBT requested a threshold increase in rates in an alternative regulation
proposal filed with the PUCO in 1993. Thereafter, CBT and the interveners
signed a settlement agreement which was approved by the PUCO on May 5, 1994,
increasing revenue by $11.9 million annually. The alternative regulation
commitments and new rates became effective May 6, 1994. CBT's authorized rate
of return on capital is 11.18%, but CBT can earn up to 11.93% in a monitoring
period without any re-targeting of rates. Earnings higher than 11.93% will
trigger a formula which allows for certain rates to be changed in the following
monitoring period.
OPTIONAL INCENTIVE REGULATION
CBT began to operate under an optional incentive regulation plan for interstate
services in January 1994. Every two years CBT compares actual return with the
authorized rate of return, currently 11.25%. Rate changes and new services can
be made on a 14-day notice without cost support if CBT sets rates no higher than
a geographically adjacent LEC that operates under price cap regulation. This
allows CBT to be more responsive to customers and the market.
KENTUCKY FILING
In May 1995, the 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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
DEPRECIATION RATE CHANGES
The FCC is required by the Communications Act of 1934 to prescribe the
depreciation rates used to compute depreciation expense for communications
common carriers. It is the FCC's practice to review and revise CBT's
depreciation rates and amortizations once every three years, in conjunction with
the PUCO and the PSCK.
In January 1994, CBT completed a triennial depreciation represcription with
regulators from the FCC, the PUCO and the PSCK. The new depreciation rates were
effective January 1, 1994, in the interstate and Kentucky jurisdictions, and
effective July 1, 1994, in the Ohio jurisdiction. Depreciation rate changes are
up for discussion again in 1997. It is possible that depreciation rates and
depreciation expense will increase as a result of these discussions.
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 believes that its current rate-of-return
regulatory plan, under which rates are established that provide for the recovery
of the carrying value of its assets, and the absence of any significant current
competition in its territory support the continued application of SFAS 71.
Uncertainties regarding the future competitive environment and the ultimate form
and impact of recently enacted and expected legislative and regulatory
initiatives on future revenues will require CBT to review these criteria
periodically to evaluate whether 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 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 competitive environment at the time. Based on
its assessment of CBT's current competitive and regulatory environment, the
Company believes that the application of SFAS 71 remains appropriate.
BUSINESS OUTLOOK
The Company 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 the Company's financial
results on a period-to-period basis. The Company is the market leader in its
three principal businesses - local telephony in the Greater Cincinnati area,
information systems to the telecommunications market and telephone marketing
services.
CBT is introducing new services and features to meet the challenges of
regulatory actions, competition and the changing market. CBT and AT&T are
discussing whether to revise portions of their agreement concerning the joint
provision of certain telecommunications services. Revenues subject to
discussion represent approximately $36 million or 6% of CBT's 1995 revenues, but
portions of the contract provide above average profit contribution. The outcome
cannot be predicted at this time, but could result in a material adverse impact
on CBT's earnings.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
In 1996, CBIS has announced several new contracts and contract extensions.
Two new contracts were for long-term billing and customer care agreements
with prominent PCS companies in the United States. A third new contract was
for development and data processing services for AT&T's re-entry into the
local telephone market. A contract extension was signed in October 1996 with
AT&T Wireless Services and the CMT Partners for billing and billing related
services through 2001 with a provision for further extension for an
additional two years. In 1996, CBIS also signed contract extensions with
Comcast Cellular Corporation (Comcast Cellular) and with 360 Degrees
Communications Company (formerly Sprint Cellular Co.) (360 Degrees
Communications). CBIS's contract with Comcast Cellular was extended to 2003
and its contract with 360 Degrees Communications was extended to 2006. In
all three contracts, CBIS will provide customer care and billing services on
a service bureau basis. 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 of their markets; third
is the market success of CBIS's PCS customers. During all of these
activities, CBIS must also continue to satisfy the current needs of its
clients with continued service and value. As previously reported in
Cincinnati Bell's 1995 Annual Report, one of CBIS's clients, representing
approximately 5% of CBIS's 1995 revenues, indicated that it may transition to
another provider of billing services during 1997.
In addition to the contracts discussed above, CBIS announced a joint marketing
relationship with a company that renders solutions to combat cellular telephone
fraud and churn.
The continued trend in the outsourcing of telephone marketing services by major
companies is fueling MATRIXX's continued growth. 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. On November 8, 1996,
MATRIXX announced its intention to acquire Software Support Company, Inc., a
provider of technical assistance over the telephone to users of computer
hardware and software. The parties are currently negotiating the final terms
of the acquisition but have not entered into any binding agreement as of the
date of this filing.
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 utilizes software and related technologies throughout its businesses
that will be affected by the date change in the year 2000. An internal study is
currently under way to determine the full scope and related costs to insure that
the Company's systems continue to meet its internal needs and those of its
customers. The Company could begin to incur significant expenses in 1997 to
resolve this issue and such expenses may continue through the year 2000.
The Company continues to review opportunities for acquisitions and divestitures
for all its businesses to enhance shareowner value.
18
<PAGE>
Form 10-Q Part II CINCINNATI BELL Inc.
ITEM 5. OTHER INFORMATION
On October 22, 1996, the Company announced that David S. Gergacz, President
and Chief Executive Officer of CBT and an Executive Vice President of the
Company, resigned from these positions. Until a successor is named, CBT
management will report to James F. Orr, Chief Operating Officer of the
Company.
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.
19
<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 12, 1996 /s/ Brian C. Henry
----------------- ----------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
20
<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, 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 September 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>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding . . . . . . . . 67,357 66,350 67,150 66,204
Net effect of stock options, if dilutive, based on
the treasury stock method using the average
market price . . . . . . . . . . . . . . . . . . . . . 1,623 595 1,495 395
------ ------ ------ ------
Total shares for computing primary earnings per share. . . 68,980 66,945 66,945 66,599
------- ------ ------ ------
------- ------ ------ ------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $46.9 $28.8 $133.4 $(3.8)
------- ------ ------ ------
------- ------ ------ ------
Net income (loss) per share. . . . . . . . . . . . . . . . $.68 $.43 $1.94 $(.06)
------- ------ ------ ------
------- ------ ------ ------
FULLY DILUTED
Weighted average common shares outstanding . . . . . . . . 67,357 66,350 67,150 66,204
Net effect of stock options, if dilutive, based on
the treasury stock method using the greater
of average or period - end market price. . . . . . . . 1,709 602 1,709 602
------- ------ ------ ------
Total shares for computing fully diluted earnings per share 69,066 66,952 68,859 66,806
------- ------ ------ ------
------- ------ ------ ------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $46.9 $ 28.8 $133.4 $ (3.8)
------- ------ ------ ------
------- ------ ------ ------
Net income (loss) per share. . . . . . . . . . . . . . . . $ .68 $ .43 $ 1.94 $ (.06)
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
Earnings per common share for the three and nine months ended September 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 nine months ended September 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 immaterial.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,700
<SECURITIES> 0
<RECEIVABLES> 315,000
<ALLOWANCES> 12,800
<INVENTORY> 15,800
<CURRENT-ASSETS> 388,500
<PP&E> 1,859,100
<DEPRECIATION> 885,400
<TOTAL-ASSETS> 1,631,300
<CURRENT-LIABILITIES> 411,800
<BONDS> 381,300
0
0
<COMMON> 67,400
<OTHER-SE> 518,000
<TOTAL-LIABILITY-AND-EQUITY> 1,631,300
<SALES> 0
<TOTAL-REVENUES> 1,141,300
<CGS> 0
<TOTAL-COSTS> 610,000
<OTHER-EXPENSES> 309,300
<LOSS-PROVISION> 5,700
<INTEREST-EXPENSE> 25,100
<INCOME-PRETAX> 206,300
<INCOME-TAX> 72,900
<INCOME-CONTINUING> 133,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,400
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
</TABLE>
