<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, 1997
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, 1997, 135,992,181 Common Shares were outstanding.
<PAGE>
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,
------------------ -------------------
1997 1996 1997 1996
------ ------ ------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $433.2 $403.2 $1,295.8 $1,141.3
------ ------ ------- --------
Costs and Expenses
Cost of providing services and products sold . . . . . . . . . 218.5 216.3 690.8 606.0
Selling, general and administrative. . . . . . . . . . . . . . 77.9 74.2 214.0 202.2
Depreciation and amortization. . . . . . . . . . . . . . . . . 47.4 43.3 137.2 127.6
Year 2000 programming costs. . . . . . . . . . . . . . . . . . 4.8 - 6.9 -
Mandated telecommunications costs. . . . . . . . . . . . . . . 2.8 - 5.0 -
Special charges (credits). . . . . . . . . . . . . . . . . . . - (5.5) (21.0) (16.5)
------ ------ ------- --------
Total Costs and Expenses . . . . . . . . . . . . . . . . . . . 351.4 328.3 1,032.9 919.3
------ ------ ------- --------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . 81.8 74.9 262.9 222.0
Other Income (Expense), Net. . . . . . . . . . . . . . . . . . . 6.0 4.9 14.3 9.4
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . 9.1 7.1 26.8 25.1
------ ------ ------- --------
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . 78.7 72.7 250.4 206.3
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 26.9 25.8 87.2 72.9
------ ------ ------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51.8 $ 46.9 $ 163.2 $ 133.4
------ ------ ------- --------
------ ------ ------- --------
Earnings Per Common Share. . . . . . . . . . . . . . . . . . . . $ .38 $ .34 $ 1.19 $ .97
------ ------ ------- --------
------ ------ ------- --------
Dividends Declared Per Common Share. . . . . . . . . . . . . . . $ .10 $ .10 $ .30 $ .30
------ ------ ------- --------
------ ------ ------- --------
Average Common Shares Outstanding Including Equivalents (000). . 137.7 138.0 137.6 137.3
Retained Earnings
Beginning of Period. . . . . . . . . . . . . . . . . . . . . . $373.5 $216.6 $ 288.5 $ 157.1
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 51.8 46.9 163.2 133.4
Common Dividends Declared. . . . . . . . . . . . . . . . . . . (13.5) (13.4) (40.7) (40.4)
Other............... . . . . . . . . . . . . . . . . . . . . . (.4) - .4 -
------ ------ ------- --------
End of Period. . . . . . . . . . . . . . . . . . . . . . . . . $411.4 $250.1 $ 411.4 $ 250.1
------ ------ ------- --------
------ ------ ------- --------
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 5.7 $ 2.0
Receivables, less allowances of $13.8 and $11.7. . . . . . . 341.5 315.0
Material and supplies. . . . . . . . . . . . . . . . . . . . 15.6 17.3
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 15.3 15.4
Prepaid expenses and other current assets. . . . . . . . . . 47.4 40.9
-------- --------
Total current assets. . . . . . . . . . . . . . . . . 425.5 390.6
Property, plant and equipment - net. . . . . . . . . . . . . . 1,020.7 985.8
Goodwill and other intangibles . . . . . . . . . . . . . . . . 204.4 205.1
Investments in unconsolidated entities . . . . . . . . . . . . 68.7 61.3
Deferred charges and other assets. . . . . . . . . . . . . . . 32.8 28.1
-------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . $1,752.1 $1,670.9
-------- --------
-------- --------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year. . . . . . . . . . . . . . . . . . $ 219.3 $ 224.2
Accounts payable and accrued liabilities . . . . . . . . . . 182.4 176.2
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . 44.1 37.9
Advance billing and customers' deposits. . . . . . . . . . . 33.1 39.8
Other current liabilities. . . . . . . . . . . . . . . . . . 34.1 34.2
-------- --------
Total current liabilities . . . . . . . . . . . . . . 513.0 512.3
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 269.9 279.5
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 116.0 119.6
Other long-term liabilities. . . . . . . . . . . . . . . . . . 82.5 125.1
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . 981.4 1,036.5
-------- --------
Shareowners' Equity
Common shares-$1 par value; 480,000,000 shares authorized. . 135.9 135.1
Additional paid-in capital . . . . . . . . . . . . . . . . . 227.2 213.1
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 411.4 288.5
Currency translation adjustments . . . . . . . . . . . . . . (3.8) (2.3)
-------- --------
Total shareowners' equity . . . . . . . . . . . . . . 770.7 634.4
-------- --------
Total Liabilities and Shareowners' Equity. . . . . . . . . . $1,752.1 $1,670.9
-------- --------
-------- --------
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 163.2 $ 133.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 137.2 127.6
Special charges (credits). . . . . . . . . . . . . . . . . . . . . (21.0) (16.5)
Provision for loss on receivables. . . . . . . . . . . . . . . . . 9.7 5.7
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11.6) (4.5)
Changes in assets and liabilities net of effects from acquisitions
and disposals:
Increase in receivables. . . . . . . . . . . . . . . . . . . . . . (34.8) (34.8)
Increase in other current assets . . . . . . . . . . . . . . . . . (5.0) (5.8)
Increase (decrease) in accounts payable and accrued liabilities. . 6.6 (33.6)
Increase (decrease) in other current liabilities . . . . . . . . . .7 (14.4)
(Decrease) increase in deferred income taxes and unamortized
investment tax credits. . . . . . . . . . . . . . . . . . . . . (3.6) 2.4
(Decrease) increase in other assets and liabilities-net. . . . . . (31.7) 2.1
------- -------
Net cash provided by operating activities. . . . . . . . . . . . 209.7 161.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant . . . . . . . . . . . . . . . (114.1) (71.5)
Capital expenditures-other . . . . . . . . . . . . . . . . . . . . (62.6) (41.2)
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . - (28.0)
Disposition of assets. . . . . . . . . . . . . . . . . . . . . . . - 12.7
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 (2.4)
------- -------
Net cash used in investing activities. . . . . . . . . . . . . . (170.8) (130.4)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term debt. . . . . . . . . . . . . . . . . . 5.4 10.2
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . (8.9) (8.0)
Issuance of common shares. . . . . . . . . . . . . . . . . . . . . 9.0 12.6
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (40.7) (40.2)
------- -------
Net cash provided by (used in) financing activities. . . . . . . (35.2) (25.4)
------- -------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . 3.7 5.8
Cash and cash equivalents at beginning of period . . . . . . . . . . 2.0 2.9
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 5.7 $ 8.7
------- -------
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . $ 22.9 $ 24.6
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . $ 70.6 $ 70.0
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Cincinnati Bell Inc. and its wholly owned subsidiaries
(the Company). The Company is a diversified communications company with
principal businesses in three industry segments. The information
systems segment, Cincinnati Bell Information Systems Inc. (CBIS),
provides and manages customer care and billing solutions for the
communications and cable TV industries. The teleservices segment,
MATRIXX Marketing Inc. (MATRIXX), provides a full range of outsourced
marketing solutions to large corporations. The communications services
segment, consisting of Cincinnati Bell Telephone Company (CBT),
Cincinnati Bell Long Distance Inc. (CBLD), Cincinnati Bell Directory
Inc. (CBD) and Cincinnati Bell Supply Company (CBS), provides local
telephone exchange services and products in Greater Cincinnati, the
resale of long distance services, yellow pages, directory services and
telecommunications equipment. Previously, the financial information of
CBLD, CBD and CBS had been included in a separate category. The change
in presentation will better reflect the Company's communications
businesses and will have no effect on the financial results. All prior
period amounts have been reclassified to conform with the new
presentation. Certain other prior year amounts have been reclassified
to conform with the current classifications with no effect on financial
results.
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 Note (2). 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. The December 31, 1996 condensed
balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. It is suggested that these financial statements be read in
conjunction with financial statements and notes thereto included in the
Company's 1996 Annual Report on Form 10-K and the current year's
previously issued Forms 10-Q.
(2) STATUS OF 1995 BUSINESS RESTRUCTURING - In 1995, the Company initiated a
restructuring plan resulting in the need for fewer people to operate the
businesses of CBT and CBI. Over 1,300 employees accepted the early
retirement offer and left the Company through the first quarter of 1997.
For the nine months ended September 30, 1997 and 1996, the Company
recorded non-cash settlement gains resulting from lump-sum pension
distributions to employees retiring under the offer of $21.0 million and
$ 16.5 million, respectively. Cash expenditures of $.2 million during
the quarter reduced the restructuring liability to $5.7 million at
September 30, 1997. Management believes that the remaining balance is
adequate to complete the restructuring plan.
(3) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information is for the Company's consolidated wholly owned subsidiary,
Cincinnati Bell Telephone Company:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
MILLIONS OF DOLLARS 1997 1996 1997 1996
-------- -------- -------- --------
Revenues. . . . . . . . . . . . . $168.3 $162.8 $495.0 $483.5
Costs and Expenses. . . . . . . . 135.8 126.4 382.7 370.9
Operating Income. . . . . . . . . $ 32.5 $ 36.4 $112.3 $112.6
Net Income. . . . . . . . . . . . $ 17.9 $ 23.1 $ 64.9 $ 67.8
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Results for the three and nine months of 1997 include $2.8 million and
$5.0 million of mandated telecommunications costs necessary to modify CBT's
network to accommodate connections with competing networks and to allow
customers to maintain their telephone numbers when they switch local service
providers. Additionally, for both periods, the 1997 financial statements
include $1.5 million of Year 2000 programming costs. These mandated
telecommunications and Year 2000 programming costs decreased net income by
$2.8 million and $4.2 million for the three and nine months, respectively.
Results for the nine months of 1997 also include $21.0 million,
respectively, of pension settlement gains which increased net income by $13.4
million. Results for the three and nine months 1996 include $5.5 million and
$16.5 million of pension settlement gains, respectively. Results for the
same periods include a reversal of $2.5 million of accrued interest expense
related to overearnings liabilities. These items increased net income by
$5.1 million and $12.1 million for the three and nine month periods of 1996.
Effective January 1, 1997, a new services contract between CBT and CBD
was executed in response to the Telecommunications Act of 1996. For the
three and nine months of 1997, the new contract reduced CBT revenues by
approximately $3.5 million and $10.2 million, respectively, and increased CBT
expenses by $1.2 million and $3.5 million, respectively, over 1996 amounts.
September 30, December 31,
MILLIONS OF DOLLARS 1997 1996
------------- ------------
Current Assets. . . . . . . . . . . . . . . $ 135.2 $ 135.6
Telephone Plant-Net . . . . . . . . . . . . 879.1 855.2
Other Noncurrent Assets . . . . . . . . . . 23.0 14.7
-------- --------
Total Assets. . . . . . . . . . . . . . . . $1,037.3 $1,005.5
-------- --------
-------- --------
Current Liabilities . . . . . . . . . . . . $ 207.2 $ 154.3
Noncurrent Liabilities. . . . . . . . . . . 168.2 179.1
Long-Term Debt. . . . . . . . . . . . . . . 218.7 221.5
Shareowner's Equity . . . . . . . . . . . . 443.2 450.6
-------- --------
Total Liabilities and Shareowner's Equity . $1,037.3 $1,005.5
-------- --------
-------- --------
(4) AT&T RELATIONSHIP - Each of the Company's major subsidiaries derives
significant revenues from AT&T and its affiliates (AT&T) by providing
network services, customer care and billing systems and teleservices.
Revenues from AT&T, including network access revenues, were 23% and 24%
of the Company's consolidated revenues for both the nine months ended
September 30, 1997 and 1996, respectively.
During the first quarter of 1997, CBT and AT&T announced their intention
to extend their strategic relationship for the marketing and
provisioning of telecommunications services in the Cincinnati area. The
companies have jointly executed a memorandum of understanding to
continue to work together toward a multi-year agreement on the basis of
mutual benefit. Significant work remains to turn the understanding into
a contract satisfactory to CBT. This agreement does not involve AT&T's
relationship with the Company's other subsidiaries.
(5) CONTINGENCIES - The Company's partner in a cellular partnership sued the
Company in November 1996. After the Company was the successful bidder
for a personal communications services (PCS) license, the partnership's
general partner amended its lawsuit to seek a declaratory judgment that
the Company had withdrawn from the partnership. The Company believes
that none of its actions conflicts with its partnership interest and
that it continues to be a limited partner in good standing in the
partnership. The Delaware Chancery Court has dismissed the suit and the
plaintiff has appealed to the
6
<PAGE>
Supreme Court of Delaware. The Company's investment at September 30,
1997 was $59.6 million. The rights to the future earnings of the
partnership, the ability of the Company to realize the market value of
its investment and the Company's ability to provide competitive PCS
services would be uncertain if the suit were reinstated and decided in
favor of the general partners.
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.
(6) RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No.
128 specifies new standards designed to improve the earnings per share
(EPS) information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements,
and increasing the comparability of EPS data on an international basis.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company
has determined the impact of the implementation of SFAS No. 128 on its
financial statements and related disclosures will not be material.
On June 30, 1997, the FASB issued two new standards, SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both SFASs are
effective for periods beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting income and its components in a full
set of general-purpose financial statements. It does not change the
computation or presentation of net income. SFAS No. 131 establishes the
way entities report information about operating segments in annual
financial statements and requires the entities to report selected
information about operating segments in their interim financial reports
to shareowners. It also requires entity-wide disclosures about the
products and services an entity provides, the material countries in
which it holds assets and reports revenues, and its major customers.
7
<PAGE>
(7) BUSINESS SEGMENT INFORMATION - The Company operates primarily in three
industry segments, Communications Services, Information Systems, and
Teleservices. 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 is as follows:
Three Months Nine Months
MILLIONS OF DOLLARS Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
REVENUES
Communications Services $211.0 $196.2 $ 618.0 $ 580.6
Information Systems 137.2 125.1 401.7 346.5
Teleservices 103.0 95.5 329.4 252.9
Intersegment (18.0) (13.6) (53.3) (38.7)
------ ------ -------- --------
$433.2 $403.2 $1,295.8 $1,141.3
------ ------ -------- --------
------ ------ -------- --------
INTERSEGMENT REVENUES
Communications Services $ 4.0 $ 1.0 $ 12.1 $ 2.8
Information Systems 11.6 11.5 35.6 32.8
Teleservices 2.4 1.1 5.6 3.1
------ ------ -------- --------
$ 18.0 $ 13.6 $ 53.3 $ 38.7
------ ------ -------- --------
SPECIAL ITEMS *
Communications Services $ 4.3 $ (5.5) $ (14.5) $ (16.5)
Information Systems 3.0 2.1 5.1 2.1
Teleservices .3 - .3 -
------ ------ -------- --------
$ 7.6 $ (3.4) $ (9.1) $ (14.4)
------ ------ -------- --------
------ ------ -------- --------
OPERATING INCOME
Communications Services $ 45.8 $ 45.1 $ 152.5 $ 137.8
Information Systems 28.2 18.1 76.4 54.4
Teleservices 6.2 12.0 33.4 31.2
Corporate and Eliminations 1.6 (.3) .6 (1.4)
------ ------ -------- --------
$ 81.8 $ 74.9 $ 262.9 $ 222.0
------ ------ -------- --------
------ ------ -------- --------
ASSETS
Communications Services $1,105.4 $1,059.4
Information Systems 264.0 276.2
Teleservices 300.3 268.7
Corporate and Eliminations 82.4 27.0
-------- --------
$1,752.1 $1,631.3
-------- --------
-------- --------
CAPITAL ADDITIONS (including acquisitions)
Communications Services $ 37.6 $ 30.2 $ 126.8 $ 75.0
Information Systems 5.9 17.7 15.8 32.2
Teleservices 7.5 16.1 24.5 28.1
Corporate .3 - 5.4 .2
------ ------ -------- --------
$ 51.3 $ 64.0 $ 172.5 $ 135.5
------ ------ -------- --------
------ ------ -------- --------
DEPRECIATION AND AMORTIZATION
Communications Services $ 31.4 $ 30.1 $ 92.6 $ 89.5
Information Systems 9.1 8.0 24.8 23.9
Teleservices 6.8 5.1 19.5 13.9
Corporate .1 .1 .3 .3
------ ------ -------- --------
$ 47.4 $ 43.3 $ 137.2 $ 127.6
------ ------ -------- --------
------ ------ -------- --------
8
<PAGE>
* SPECIAL ITEMS
Communications Services
Results for the three months in 1997 include $2.8 million in regulator mandated
telecommunications costs to modify network systems to accomodate connections
with competing networks and to allow customers to retain their phone numbers
when they switch local service providers and $1.5 million to reprogram systems
and software for the Year 2000. Results for the nine months in 1997 include
$5.0 million in the regulator mandated telecommunications costs, $1.5 million in
Year 2000 programming costs and a credit of $21.0 million in pension settlement
gains. Results for the three and nine months in 1996 include $5.5 million and
$16.5 million, respectively, in pension settlement gains.
Information Systems
Results for the three and nine months in 1997 include costs of $3.0 million and
$5.1 million, respectively, in Year 2000 programming costs. Results for both
periods in 1996 include $2.1 million in acquired in-process research and
development costs related to an acquisition.
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Information included in this quarterly report on Form 10-Q contains certain
forward-looking statements that involve potential risks and uncertainties. The
Company's future results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences, include but are not
limited to, those discussed herein, and in the Forms 10-Q for the first and
second quarters of 1997 and the Form 10-K for the year ended December 31, 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 years.
CONSOLIDATED OVERVIEW
Revenues were $433.2 million and $1,295.8 million for the third quarter and the
first nine months in 1997, up 7% and 14% respectively, from $403.2 million and
$1,141.3 million for the same periods in 1996. The customer-care businesses
CBIS and MATRIXX produced most of the nine month revenue increase.
Costs and expenses were $351.4 million and $1,032.9 million for the third
quarter and first nine months in 1997, up 7% and 12%, respectively, from $328.3
million and $919.3 million for the same periods in 1996. Special items affected
results for the quarter and nine month periods of both years. Included in the
costs and expenses for the third quarter and nine months of 1997 were expenses
of $4.8 million and $6.9 million, respectively, to reprogram information systems
and softer for the Year 2000 and expenses of $2.8 million and $5.0 million,
respectively, to modify CBT's network to accomodate connections with competing
networks and to allow customers to maintain their telephone numbers when they
switch local service providers. For the nine months, there were credits of
$21.0 million for settlement gains from lump sum pension distributions paid to
employees retiring under the early retirement offer. Included in the costs and
expenses for the third quarter and nine months of 1996 were credits for
settlement gains of $5.5 million and $16.5 million, respectively. Also, during
the third quarter of 1996, there was a charge of $2.1 million for acquired
research and development for an acquisition and a reversal of $2.5 million for
accrued interest expense related to overearnings liabilities.
Operating income was $81.8 million and $262.9 million for the third quarter and
first nine months in 1997, up 9% and 18%, respectively, from $74.9 million and
$222.0 million for the same periods in 1996. Excluding the special items,
operating income was $89.4 million and $253.8 million, up 25% and 22%,
respectively, for both periods.
Net income in 1997 was $51.8 million or $.38 per common share for the third
quarter and $163.2 million or $1.19 per common share for the first nine months.
Excluding special items, net income was $56.8 million or $.41 per common share
and $157.6 million or $1.15 per common share for the third quarter and nine
months.
10
<PAGE>
COMMUNICATIONS SERVICES
Beginning in the first quarter of 1997, the Company enhanced the presentation of
its financial results by replacing the Telephone Operations segment with the
Communications Services segment . The Communications Services segment includes
CBT, CBLD, CBD and CBS. The change had no effect on the Company's financial
results and all prior period amounts have been reclassified to conform with the
new presentation.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
------- ------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Local service $ 96.6 $ 93.8 $ 2.8 3 $ 287.3 $ 276.6 $ 10.7 4
Network access 42.7 39.7 3.0 8 126.4 118.6 7.8 7
Other services 71.7 62.7 9.0 15 204.3 185.4 18.9 10
------- ------ ----- ------- -------- ------
Total 211.0 196.2 14.8 8 618.0 580.6 37.4 6
Costs and expenses 160.9 156.6 4.3 3 480.0 459.3 20.7 5
Special items:
Year 2000
programming costs 1.5 - 1.5 1.5 - 1.5
Mandated telecom-
munications costs 2.8 - 2.8 5.0 - 5.0
Pension settlement
gains - (5.5) 5.5 (21.0) (16.5) (4.5)
------- ------ ----- ------- -------- ------
Total 165.2 151.1 14.1 9 465.5 442.8 22.7 5
Operating income $ 45.8 $ 45.1 $ .7 2 $ 152.5 $ 137.8 $ 14.7 11
Access lines (In thousands) 944 950 44 5
Minutes of Use (In millions) 1,013 920 93 10 2,998 2,761 237 9
</TABLE>
The communications services segment had a good quarter and nine months excluding
special items. Access line growth, higher revenues at CBLD, CBS and CBD and cost
control efforts increased the operating margin excluding special items by 3.5
points in the third quarter and 1.4 points for the nine months.
Local service revenues increased $2.8 million and $10.7 million for the three
and nine months 1997, respectively, compared to the same periods a year ago.
The increase is primarily from continuing growth in access lines. The strong
business economy, higher installations of second lines and demand for access to
on-line computer services increased access lines 5% at the end of September 1997
versus a year ago. Access line growth and increased penetration of enhanced
custom calling features accounted for the local service increase for the three
and nine month periods.
Network access revenues increased $3.0 million and $7.8 million, respectively,
for the three and nine month comparable periods to last year. The increase was
principally from the increase in special access revenues, growth in access
lines, growth in access minutes of use of 10% for the quarter and 9% for the
nine months and increased state access revenues, net of changes in overearnings
accruals. The increase in special access revenues has been driven by increased
data volume associated with services to internet providers and the growth in new
wireless networks.
Other services increased $9.0 million for the three months and $18.9 million for
the nine months, primarily as a result of higher revenues at CBLD and CBS.
Excluding a new contract with CBT effective January 1, 1997, CBD revenues also
increased 2% and 5% for the three and nine months, respectively.
11
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Costs and expenses, excluding special items, increased $4.3 million for the
third quarter and $20.7 million for the nine months ended September 30, 1997.
Most of the increase was at CBT. Depreciation expense increased $1.3 million
and $3.2 million as a result of plant, property and equipment expenditures.
Materials and other costs increased $.6 million and $2.5 million from
increased material usage. Rent expense increased $1.2 million and $1.6
million due to higher levels of equipment rentals. Expenses for contract
labor and consulting fees and right-to-use fees related to switching
equipment and software purchases changed very little during the quarter but
increased $4.1 million and $3.2 million for the nine months, respectively.
Substantially all the remaining increase was at CBLD, CBS and CBD as a result
of higher direct costs caused by higher revenue levels.
In 1997, special items were $4.3 million in expenses for the quarter and a
$14.5 million net credit for the nine months, all at CBT. Regulatory
mandates require CBT to modify its network to accommodate connections with
competing networks and to allow customers to maintain their telephone numbers
when they switch local service providers. Additionally, CBT has begun to
incur programming costs to ready its systems for the Year 2000. Results for
the third quarter 1997 reflect $2.8 million in mandated telecommunications
costs and $1.5 million in Year 2000 programming costs. Results for the nine
months ended September 30, 1997, reflect $5.0 million in mandated
telecommunications costs and $1.5 million in Year 2000 programming costs. In
addition, results for the nine months 1997 include $21.0 million in pension
settlement gains with no impact on the third quarter of 1997. Results for the
three and nine months in 1996 reflect $5.5 million and $16.5 million,
respectively, in pension settlement gains.
<TABLE>
<CAPTION>
INFORMATION SYSTEMS
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
------- ------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $137.2 $125.1 $12.1 10 $401.7 $346.5 $55.2 16
Costs and expenses 106.0 104.9 1.1 1 320.2 290.0 30.2 10
Special items:
Year 2000
programming costs 3.0 - 3.0 5.1 - 5.1
Acquired research and
development costs - 2.1 (2.1) - 2.1 (2.1)
------ ------ ----- ------ ------ -----
Total 109.0 107.0 2.0 2 325.3 292.1 33.2 11
Operating income $ 28.2 $ 18.1 $10.1 56 $ 76.4 $ 54.4 $22.0 40
</TABLE>
The information systems segment provided more than a third of the Company's
revenue growth and a majority of the operating income growth for the quarter and
nine months. The results were achieved while significant spending was incurred
for product development and Year 2000 programming.
Revenues increased $12.1 million during the third quarter and $55.2 million
during the nine months compared to last year. Data processing revenues
increased $16.4 million and $42.5 million primarily from growth in cellular
subscribers . Subscriber levels in the core wireless market increased 29%
for the nine months 1997 compared to the nine months 1996. The increase in
data processing revenues attributable to the growth in core wireless
subscribers was partially offset by a decline in the number of subscribers
for whom CBIS performs wireless long distance billing. The decline resulted
from the Telecommunications Act of 1996 causing a loss in market share to other
long distance carriers. Professional services revenues increased $5.2 million
for the nine months reflecting higher levels of development work for PCS
clients and enhancement requests from existing clients. Professional services
revenues decreased by $3.8 million in the third quarter of 1997 when compared
to the third quarter of 1996 as a result of the high level of development
work that was done for new PCS clients in the last half of 1996 and lower
levels of activity with other customers. International revenues increased
$6.3 million for the nine months as a result of revenues associated with
acquisitions made in the last half of 1996 which were partially offset by
less activity with certain existing customers.
Costs and expenses, excluding special items, increased $1.1 million during the
third quarter and $30.2 million during the nine months compared to last year.
Direct costs of providing services increased $12.4 million for the nine
12
<PAGE>
months from a higher volume of business and additional costs from companies
acquired in the second half of 1996. Research and development costs for the
nine months increased $15.4 million from higher development activity in
support of the Precedent 2000 software platform for PCS subscribers. Special
items in 1997 include costs to reprogram systems and software for the Year
2000 of $3.0 million in the third quarter and $5.1 million for the nine
months. Special items in 1996 include $2.1 million in acquired in-process
research and development costs related to an acquisition. Research and
development and Year 2000 costs in 1997 were 14% of the nine months revenues
in 1997 as compared to 11% in 1996.
<TABLE>
<CAPTION>
TELESERVICES
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
------- ------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $103.0 $95.5 $ 7.5 8 $329.4 $252.9 $76.5 30
Costs and expenses 96.5 83.5 13.0 16 295.7 221.7 74.0 33
Special items:
Year 2000
programming costs .3 - .3 .3 - .3
------ ----- ----- ------ ------ -----
Total 96.8 83.5 13.3 16 296.0 221.7 74.3 34
Operating income $ 6.2 $12.0 $(5.8) (48) $ 33.4 $ 31.2 $ 2.2 7
</TABLE>
The teleservices segment had a challenging quarter. Major items affecting
results were a sharp decline in traditional inbound and outbound services
resulting partially from seasonal effects, industry-wide softness in direct
response marketing and reductions in overall marketing activity by certain
clients. The softness was somewhat offset by revenues from clients for
outsourced dedicated services which grew by more than 30% compared to the third
quarter of 1996.
Revenues increased $7.5 million and $76.5 million during the third quarter and
nine months of 1997 compared to the same periods last year. Excluding the
acquisitions in the second half of 1996, revenues decreased approximately 2% for
the quarter and increased 19% for the nine months ended September 30, 1997.
Dedicated services contributed revenue gains of $22.7 million and $85.5 million
for the third quarter and nine months. Strong sales in the technology and
telecommunications industry produced $13.6 million and $56.4 million of the
dedicated services increase, primarily as a result of increased volumes from
major clients. Traditional inbound/outbound service revenues decreased $15.5
million for the third quarter and $10.6 for the nine months as a result of
softness in the market and a reduction in overall marketing activities by
certain clients.
Costs and expenses increased at a higher rate than revenues largely because
costs could not be reduced as rapidly as volumes declined from second quarter
levels. The costs were reduced later in the quarter as the Company reacted to
the lower than anticipated volume levels. Expenses increased $13.0 million
for the third quarter and $74.0 million for the nine months of 1997 compared
to the same periods last year, due in large part to higher headcount costs,
depreciation associated with new and expanded facilities and businesses
acquired in the last half of 1996. The growth-related costs, combined with
acquisitions and softness in traditional inbound/outbound service revenues
and profits, caused the company's operating margin, excluding special items,
to decline to 6.3% for the quarter and 10.2% for the nine months. Included
in special items for both the third quarter and nine months 1997 are costs
related to Year 2000 programming costs.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
------- ------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
OTHER INCOME
(EXPENSE), NET $ 6.0 $ 4.9 $1.1 23 $14.3 $ 9.4 $ 4.9 53
INTEREST EXPENSE $ 9.1 $ 7.1 $2.0 29 $26.8 $25.1 $ 1.7 7
INCOME TAXES $26.9 $25.8 $1.1 4 $87.2 $72.9 $14.3 20
</TABLE>
13
<PAGE>
The increase in other income (expense), net for the nine months 1997 was
primarily from interest income related to an Internal Revenue Service (IRS)
refund and higher joint venture income. The increase for the nine months was
partially offset by expenses incurred for the second quarter share split.
Excluding a reversal of $2.5 million in interest expense related to
overearnings liabilities in the third quarter 1996, interest expense for the
third quarter and nine months 1997 was comparable to the same periods last
year. The weighted average interest rate for debt was 6.9% at September 30,
1997 compared to 7.0% at September 30, 1996. For the nine months ended
September 30, 1997 and 1996, average debt outstanding was $502 million and
$510 million, respectively.
The effective tax rate for income taxes was 34.8% for nine months ended
September 30, 1997 compared to 35.3% for the nine months ended September 30,
1996. The 1997 rate benefited from the extension of the research and
experimentation tax credit which was contained in the new federal tax law
passed in the quarter.
FINANCIAL CONDITION
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.
Should the Company pursue several potential investments that could require
large amounts of capital, external financing, including equity issuance, may
be necessary.
Cash provided by operating activities, which is the Company's primary source
of liquidity, was $210 million for the first nine months of 1997 compared to
$162 million for the first nine months of 1996. The increase in cash flows
from operations was due in large part to higher net income combined with
higher payables and other liabilities, and the receipt of a large refund from
the IRS related to conclusion of the 1989-1994 federal tax return audits.
The increase was partially offset by the increase in accounts receivable
(which was the result of higher revenues and the timing of cash receipts from
certain significant clients) and over $10 million in contributions to the
Company's qualified pension plans. The contribution to the Company's
qualified pension plans and $21 million in non-cash pension settlement gains
account for the majority of the decrease in other long-term liabilities.
The Company's most significant investing activity for the first nine months
of 1997 continued to be capital expenditures. Capital expenditures were $177
million, up $36 million from the same period last year. At CBT, upgrades to
switching and transmission equipment for high-capacity data lines, internet
access and strong access line gains are driving equipment spending to
increase network capacity. CBT also purchased a PCS license from the Federal
Communications Commission (FCC) for the Cincinnati marketplace. MATRIXX's
capital spending increased for the expansion of facilities and the opening of
three new call centers. The increase in 1997 capital spending by CBT and
MATRIXX was partially offset by the impact of 1996 capital expenditures for
acquisitions by CBIS and MATRIXX which totaled $28 million. The Company
anticipates 1997 capital expenditures to be approximately $230 million
including $140 million at CBT.
ACCOUNTING UNDER SFAS NO. 71
CBT presently gives accounting recognition to the actions of regulators where
appropriate as prescribed by SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation." Under SFAS No. 71, the Company records certain
assets, liabilities, and depreciation expense because of actions of
regulators. This includes the application of estimated useful lives and
depreciation methods that would not apply to unregulated businesses.
Criteria that would give rise to the discontinuance of SFAS No. 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.
At the present time, CBT believes that, based on its current competitive and
regulatory environment, the application of SFAS No. 71 remains appropriate.
While accounting under SFAS No. 71 is currently appropriate, it is
14
<PAGE>
increasingly likely that CBT will conclude that the discontinuation of SFAS
No. 71 is required. This could result from events such as the Public
Utilities Commission of Ohio's (PUCO) approval of a price cap plan for local
service, significant growth in competition or other events affecting future
rates and cost recovery. In the event that CBT determines it no longer meets
the criteria for following SFAS No. 71, the Company could recognize an
extraordinary non-cash pre-tax charge in the a range of up $320 million.
This would include the elimination of the approximately $ 300 million
embedded regulatory asset resulting from the use of regulatory lives for
depreciation of plant assets which are longer than the estimated useful
lives. CBT's discontinuation of SFAS No. 71 could result in lower future
depreciation even though the lives used for future depreciation would be
shorter than those used for regulatory purposes. CBT will continue to
monitor closely whether SFAS No. 71 is applicable and anticipates that an
event could happen in the near future resulting in the discontinuation of
SFAS No. 71.
REGULATORY MATTERS AND COMPETITIVE TRENDS
FEDERAL - On August 8, 1996, the FCC issued its order on interconnection, the
first of three significant rulings that will determine the ground rules for
local exchange competition. CBT and several other local exchange carriers
(LECs) sought review of this order by the United States Court of Appeals on the
grounds that the order is inconsistent with the requirements of the
Telecommunications Act of 1996 (the Act). On July 18, 1997 the Court of Appeals
issued its decision. The court said the FCC rules exceeded the FCC's authority
under the Act in several areas. The court rejected the FCC pricing guidelines
and the "pick and choose" rule which would have allowed new entrants to select
the most favorable provisions of interconnection arrangements. The court also
rejected the FCC's claim to review interconnection arrangements between local
phone companies and competitors, which have been approved by state commissions.
The court affirmed the obligation to let rival companies use the LECs electronic
ordering systems and various elements of their network. CBT continues to review
the court's decision for its effect on CBT, including on-going negotiations with
potential competitors. An appeal of the decision to the United States Supreme
Court is anticipated.
On May 7, 1997, the FCC adopted orders on other substantive issues mandated
by the Act, including universal service, access reform and price cap
productivity factor revisions. The universal service order defines universal
service to include Touch-Tone, 911, and other services with a goal to
maintain affordable rates for all residential customers. Under the order,
non-rural companies like CBT will continue to receive funding from the
current universal service fund until January 1, 1999. At that time, they
will move to a new higher-cost funding mechanism based on the difference of a
revenue benchmark and forward-looking economic cost. The mechanisms for
determining the revenue benchmark and forward-looking costs have not been
determined and will be evaluated more fully by the FCC over the next several
months.
The universal service order also calls for $2.25 billion annually to be
available for discounts to schools and libraries, $400 million for rural health
care providers and approximately $650 million for Lifeline nationally. All
telecommunications carriers, including wireless providers, will contribute to
the schools' and libraries' fund, healthcare fund and Lifeline fund based on
total retail revenue (both interstate and intrastate), while funding for the
high-cost fund for universal service will be based on interstate and
international retail revenue. A number of appeals have already been filed.
In addition, on May 7, 1997, the FCC also adopted rules related to access
charges applicable to the long distance interstate market. The access charge
rules reform the current rate structure applicable to the long distance
market. Under the adopted rules, from 1998 through 2000 access structure
changes will occur. Current minutes of use-based charges which are
recovering non-traffic sensitive costs, will be transitioned to flat rate
charges subject to pre-established caps. The FCC has also adopted a
prescriptive safeguard to bring access rates to competitive levels in the
absence of competition by February 2001. A number of interested parties have
filed appeals of this order. The United States Court of Appeals for the
Eighth Circuit will hear the legal arguments at a date yet to be determined.
In July 1997, CBT's price cap tariff filing was approved by the FCC without
suspension. This means CBT's interstate access and toll prices will be
regulated, rather than its earnings. Prices will be capped or indexed annually
based on the difference of inflation, as measured by the GDP-PI, a 6.5%
productivity offset and exogenous cost
15
<PAGE>
adjustments. The FCC also retained a low-end earnings backstop that allows
carriers earning less than a 10.25% rate of return to adjust their indices to
reflect the 10.25% level. The election of price caps will better enable CBT
to meet the challenges being faced in the new competitive environment. CBT
and Citizens Utilities have filed petitions for reconsiderations with the FCC
to revisit the establishment of the 6.5% productivity offset for elective
carriers. In addition, several appeals have been filed with the U.S. Court
of Appeals regarding the order establishing the 6.5%.
OHIO - The Company believes that CBT will face increased competition under
the PUCO's local service guidelines in the fourth quarter of this year. The
ultimate impact of the increased competition will depend upon court rulings,
and how the PUCO addresses CBT's suspension request and the outcome of the
alternative regulation proceeding. A number of entities have requested
interconnection arrangements with CBT to date. CBT has negotiated
interconnection arrangements with four wireless carriers (Airtouch, Ameritech
Cellular, GTE Wireless and Nextel Wireless) and on August 7, 1997 filed with
the PUCO a two year interconnection agreement with Time Warner
Communications. The agreement sets terms by which Time Warner will connect
to CBT's network, including how calls will be exchanged and how each company
will be compensated. Time Warner will likely be a facilities-based competitor
of CBT.
Also in August 1997, the PUCO issued decisions in arbitration cases involving
CBT and MCI and IntelCom Group (ICG). These rulings set terms, prices and
conditions for connection with CBT's network. Revised interconnection
agreements between CBT and these companies have been filed and, once approved
by the PUCO, both companies can proceed with plans to offer local service in
Ohio before year end. MCI's agreement includes terms for MCI to resell CBT's
communications services, as well as for MCI to be a facilities-based
competitor. ICG is expected to compete as a facilities-based competitor.
On February 5, 1997, CBT filed an application with the PUCO seeking approval
of a new alternative regulation plan called "Commitment 2000" to supersede an
existing plan which has since expired in May 1997. The PUCO issued an order
that all rates, terms and conditions of that existing plan will continue
until a decision is made. The Commitment 2000 plan proposes marketing and
pricing flexibility which will enable CBT to be more responsive in the
quickly changing local competition market. In addition, the plan provides
for a realignment of rates by reducing business rates and increasing
residence rates in a revenue neutral manner.
As part of CBT's "Commitment 2000" filing, CBT requested suspension or
modification of certain interconnection requirements mandated by the Act. On
October 2, 1997, the PUCO responded to this request by providing interim
relief, including relief with respect to the timing of implementation of
certain support systems, pending the final outcome of the PUCO's
consideration of the "Commitment 2000" filing. However, the PUCO denied
CBT's request to delay the implementation of number portability until
industry standards are developed. CBT is required to provide number
portability by May 15, 1998. The primary reason for the PUCO's denial of
CBT's request was the PUCO's opinion that number portability is an important
requirement to allow competition to mature. Federal and state regulators
have not clearly defined how incumbent local exchange carriers, like CBT,
will recover the costs incurred to implement number portability. It appears
that a decision on the cost recovery issues related to number portability
will not be available until early 1998 from either the federal or state
regulatory agencies. The ultimate outcome related to the cost recovery
issues is uncertain.
KENTUCKY - On May 9, 1997, CBT filed a petition with the Public Service
Commission of Kentucky (PSCK) for suspension and modification of certain
requirements of local competition mandated by the FCC. The PSCK opened a
proceeding to address CBT's request and set the matter for hearing in
October. On September 30, 1997, CBT filed to withdraw its petition due to a
delay by the PUCO to a similar request on the CBT's Commitment 2000 Plan.
CBT may refile its request with the PSCK after a decision is rendered in Ohio.
CBT has received a notice from the PSCK that a management audit will be
conducted beginning in the first quarter of 1998. The PSCK is required to
periodically conduct management audits of the largest regulated entities under
its jurisdiction.
16
<PAGE>
BUSINESS OUTLOOK
COMMUNICATIONS SERVICES - Competition in the local exchange business is
increasing, due to legislative and regulatory initiatives, as well as new
technologies. CBT continues to develop new service offerings to offset future
competitive loss and is working to assure implementation of rules that result in
fair competition. Nevertheless, these initiatives and developments could make
it more difficult for CBT to maintain current revenue and profit levels.
CBT is awaiting the outcome of the decision by the PUCO regarding the
Commitment 2000 plan. Approval of the plan will allow CBT to be more
responsive to competition in the local market. CBT will continue to incur
significant expenses for the remainder of 1997 and during 1998 for regulator
mandated interconnection and local number portability costs. In 1998, total
mandated costs could be in a range of $15 to $25 million. Additionally,
CBT's Year 2000 programming costs are expected to be in the range of $10 to
$15 million in 1998 but should be less in 1999.
CBT will continue to develop new products and services in an effort to
broaden the services it can offer to its customers. During the second
quarter, the Company purchased a PCS license from the FCC for the Cincinnati
marketplace. CBT has not yet decided to build-out this license. Further, the
Company is evaluating possible alliances with alternative providers both in
wireless (PCS and cellular) and wireline. These actions, if undertaken,
could cause expenses to increase in advance of corresponding revenues and
could require significant incremental capital expenditures.
CBT's triennial depreciation represcription with regulators from the FCC, the
PUCO and the PSCK was held in May 1997. As a result of the meeting, a
tentative agreement was reached that would likely increase depreciation
expense by somewhat more than $8 million in 1997 and in future years. The
increase will not occur until the final orders are received from the FCC, the
PUCO and the PSCK which is expected to occur in the fourth quarter of 1997.
This increase will have no material impact on the Company's ongoing
depreciation if the Company discontinues SFAS No. 71.
CBT continues to closely monitor the applicability of SFAS No. 71. While
accounting under SFAS No. 71 is currently appropriate, it is increasingly
likely that CBT will determine that it should discontinue the application of
SFAS No. 71 as early as the fourth quarter of 1997.
CBLD, CBD and CBS face stiff competition in their markets especially from
larger companies. In order to assure success, they will continue to offer
and develop superior products, services and value. The focus will be on
niche markets and opportunities. CBD now competes with R.H. Donnelley, CBD's
former sales representative for Yellow Page Services. This new competition
may affect CBD's ability to grow revenues and profits.
INFORMATION SYSTEMS - CBIS provides quality service to its clients because
of its knowledge of the market, technology, resources and client needs. CBIS
continues to rely on significant clients for most of its revenue. CBIS's top
three clients, excluding CBT, accounted for 63% of its revenues in the first
nine months of 1997. CBIS maintains multi-year contracts with its clients,
but some contracts have early termination clauses. The loss of one of the
top three clients could result in a material reduction in revenues and
profits. One client representing approximately 5% of CBIS's 1996 revenues
has committed to renew the relationship through August 2004. The Company
earlier reported that the relationship with this client might be terminated.
CBIS will incur the substantial amount of the Company's Year 2000 programming
costs because it is reliant on information systems software and equipment.
These costs will likely be in the range of $15 to $20 million in 1998, and
are expected to be lower in 1999. CBIS believes that its ability to maintain
a leadership position in the technological development of billing systems
will be critical to its future.
TELESERVICES - MATRIXX's strong market opportunity, service quality,
marketing skills and product offerings should continue to provide for future
growth. The teleservices traditional business has become very competitive
and has experienced softness in the third quarter of 1997 This was in part
the result of changes in the marketing programs of some key large clients and
reduced direct response business. "Outsourced marketing services" where
clients are served by a dedicated MATRIXX service team now represents
approximately two-thirds of MATRIXX's revenues
17
<PAGE>
and should grow faster than traditional direct response business in the long
run. The dedicated services business has strengthened MATRIXX's position in
outsourced marketing services.
MATRIXX plans to take additional steps to enhance services to its clients,
improve productivity and better position itself for further growth. MATRIXX
anticipates a fourth quarter restructuring charge of up to $35 million to
make these changes. If fully implemented, the resulting changes could
contribute $10 million in annualized savings. The outlook for the fourth
quarter is for continued improvement from the third quarter in revenues and
earnings reflecting benefits of seasonality and adjustments to the cost
structure made late in the third quarter.
MATRIXX's top three clients accounted for 39% of its 1997 revenues down from
42% for the same period in 1996. Loss of any significant contracts would
have an adverse effect on its revenues and profits. MATRIXX must continue to
win new contracts and grow its business with existing clients in a
competitive market that has current capacity in its call centers. The level
of intensity and success of MATRIXX's clients in the marketplace are also
important drivers of MATRIXX's growth.
YEAR 2000 PROGRAMMING - The Company will incur up to $40 million in
expenses in 1998 in order to ready its software and systems for the Year
2000. Year 2000 programming costs are expected to be lower in 1999. Some
major CBIS applications are expected to be Year 2000 compliant in 1998. If
the Company were to be unsuccessful in readying its software and systems for
the Year 2000 the effect could be a material adverse impact on the business.
BUSINESS DEVELOPMENT - The Company continues to review opportunities for
acquisitions and divestitures for all its businesses to enhance shareowner
value. In October 1997, MATRIXX agreed to acquire the assets of the Maritz
Inc. teleservices group. Revenues for the acquired group were approximately
$47 million for the most recent twelve month period. The Company expects to
finalize the acquisition later in the fourth quarter. The acquisition should
result in increased 1998 revenues for MATRIXX and is expected to have an
immaterial near term impact on earnings.
18
<PAGE>
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 11, 1997 /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, 1997
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, 1997
CINCINNATI BELL INC.
COMPUTATION OF EARNINGS 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,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding . . . . . . . 135,898 134,715 135,695 134,299
Net effect of stock options, if dilutive, based on
the treasury stock method using the average
market price . . . . . . . . . . . . . . . . . . . . . 1,775 3,246 1,903 2,992
-------- -------- -------- --------
Total shares for computing primary earnings
per share. . . . . . . . . . . . . . . . . . . . . . . 137,673 137,961 137,598 137,291
-------- -------- -------- --------
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 51.8 $ 46.9 $ 163.2 $ 133.4
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share . . . . . . . . . . . . . . . . . . $ .38 $ .34 $ 1.19 $ .97
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED
Weighted average common shares outstanding . . . . . . . 135,898 134,715 135,695 134,299
Net effect of stock options, if dilutive, based on
the treasury stock method using the greater
of average or period - end market price. . . . . . . . 1,775 3,418 1,904 3,418
Total shares for computing fully diluted earnings
per share. . . . . . . . . . . . . . . . . . . . . . . 137,673 138,133 137,599 137,717
-------- -------- -------- --------
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 51.8 $ 46.9 $ 163.2 $ 133.4
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share . . . . . . . . . . . . . . . . . . $ .38 $ .34 $ 1.19 $ .97
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,700
<SECURITIES> 0
<RECEIVABLES> 355,300
<ALLOWANCES> 13,800
<INVENTORY> 15,600
<CURRENT-ASSETS> 425,500
<PP&E> 2,020,700
<DEPRECIATION> 1,000,000
<TOTAL-ASSETS> 1,752,100
<CURRENT-LIABILITIES> 513,000
<BONDS> 269,900
0
0
<COMMON> 135,900
<OTHER-SE> 634,800
<TOTAL-LIABILITY-AND-EQUITY> 1,752,100
<SALES> 0
<TOTAL-REVENUES> 1,295,800
<CGS> 0
<TOTAL-COSTS> 1,032,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,700
<INTEREST-EXPENSE> 26,800
<INCOME-PRETAX> 250,400
<INCOME-TAX> 87,200
<INCOME-CONTINUING> 163,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,200
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
</TABLE>
