<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1997, 135,902,231 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 Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 433.1 $ 376.0 $ 862.6 $ 738.1
-------- -------- -------- --------
Costs and Expenses
Cost of providing services and products sold 240.6 201.8 476.6 389.7
Selling, general and administrative 65.3 62.8 136.1 128.0
Depreciation and amortization 45.6 42.4 89.8 84.3
Special charges (credits) (6.0) (5.5) (21.0) (11.0)
-------- -------- -------- --------
Total Costs and Expenses 345.5 301.5 681.5 591.0
-------- -------- -------- --------
Operating Income 87.6 74.5 181.1 147.1
Other Income (Expense), Net 4.9 3.0 8.3 4.5
Interest Expense 9.1 8.4 17.7 18.0
-------- -------- -------- --------
Income Before Income Taxes 83.4 69.1 171.7 133.6
Income Taxes 29.2 24.3 60.3 47.1
-------- -------- -------- --------
Net Income $ 54.2 $ 44.8 $ 111.4 $ 86.5
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Common Share $ .39 $ .32 $ .81 $ .63
-------- -------- -------- --------
-------- -------- -------- --------
Dividends Declared Per Common Share $ .10 $ .10 $ .20 $ .20
-------- -------- -------- --------
-------- -------- -------- --------
Average Common Shares Outstanding Including
Equivalents (000) 137.6 137.9 137.6 137.0
Retained Earnings
Beginning of Period $ 332.7 $ 185.3 $ 288.5 $ 157.1
Net Income 54.2 44.8 111.4 86.5
Common Dividends Declared (13.6) (13.5) (27.2) (27.0)
Other 0.2 - 0.8 -
-------- -------- -------- --------
End of Period $ 373.5 $ 216.6 $ 373.5 $ 216.6
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 9.2 $ 2.0
Receivables, less allowances of $12.3 and $11.7 333.8 315.0
Material and supplies 16.4 17.3
Deferred income taxes 14.6 15.4
Prepaid expenses and other current assets 46.5 40.9
--------- ---------
Total current assets 420.5 390.6
Property, plant and equipment - net 1,012.8 985.8
Goodwill and other intangibles 207.5 205.1
Investments in unconsolidated entities 67.7 61.3
Deferred charges and other assets 28.1 28.1
--------- ---------
Total Assets $ 1,736.6 $ 1,670.9
--------- ---------
--------- ---------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year $ 233.4 $ 224.2
Accounts payable and accrued liabilities 183.8 176.2
Accrued taxes 36.0 37.9
Advance billing and customers' deposits 36.6 39.8
Other current liabilities 31.9 34.2
--------- ---------
Total current liabilities 521.7 512.3
Long-term debt 274.3 279.5
Deferred income taxes 118.6 119.6
Other long-term liabilities 90.6 125.1
--------- ---------
Total liabilities 1,005.2 1,036.5
--------- ---------
Shareowners' Equity
Common shares-$1 par value; 480,000,000
shares authorized 135.9 135.1
Additional paid-in capital 225.7 213.1
Retained earnings 373.5 288.5
Currency translation adjustments (3.7) (2.3)
--------- ---------
Total shareowners' equity 731.4 634.4
--------- ---------
Total Liabilities and Shareowners' Equity $ 1,736.6 $ 1,670.9
--------- ---------
--------- ---------
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 111.4 $ 86.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 89.8 84.3
Special charges (credits) (21.0) (11.0)
Provision for loss on receivables 6.5 3.3
Other, net (8.5) (2.4)
Changes in assets and liabilities net of effects
from acquisitions and disposals:
Increase in receivables (23.4) (18.8)
Increase in other current assets (4.2) (3.0)
(Decrease) increase in accounts payable and
accrued liabilities 8.0 (18.3)
(Decrease) increase in other current liabilities 4.6 (33.2)
Increase (decrease) in deferred income taxes
and unamortized
investment tax credits (1.0) 5.0
Decrease in other assets and liabilities-net (15.3) (1.2)
--------- --------
Net cash provided by operating activities 146.9 91.2
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant (76.1) (39.8)
Capital expenditures-other (46.1) (23.7)
Acquisitions, net of cash acquired (1.1) (12.6)
Disposition of assets - 12.7
Other, net 1.5 (4.2)
--------- --------
Net cash used in investing activities (121.8) (67.6)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term debt 6.7 1.8
Repayment of long-term debt (4.4) (4.9)
Issuance of common shares 6.9 13.3
Dividends paid (27.1) (26.7)
--------- --------
Net cash provided by (used in) financing
activities (17.9) (16.5)
--------- --------
Net increase in cash and cash equivalents 7.2 7.1
Cash and cash equivalents at beginning of period 2.0 2.9
--------- --------
Cash and cash equivalents at end of period $ 9.2 $ 10.0
--------- --------
--------- --------
Cash paid for:
Interest (net of amount capitalized) $ 17.3 $ 16.5
Income taxes $ 46.4 $ 49.2
</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 will better reflect the
Company's telephony businesses and will have no effect on the financial
results. All prior period amounts have been reclassified to conform with
the new 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 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. 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 Form 10-Q.
(2) STATUS OF 1995 BUSINESS RESTRUCTURING LIABILITY - 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 during 1995, 1996 and the
first quarter 1997. For the three and six months ended June 30, 1997, the
Company recorded $6.0 million and $21.0 million, respectively, of non-cash
settlement gains resulting from lump-sum pension distributions to
employees retiring under the offer. For the three and six months ended
June 30, 1996, the Company recorded $5.5 million and $11.0 million,
respectively, of non-cash settlement gains. Cash expenditures of $.8
million during the quarter reduced the restructuring liability to $5.9
million at June 30, 1997. Management believes that the 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- --------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 165.9 $ 161.9 $ 326.7 $ 320.7
Costs and Expenses 129.6 124.1 246.9 244.5
------- -------- -------- --------
Operating Income $ 36.3 $ 37.8 $ 79.8 $ 76.2
Net Income $ 21.8 $ 22.7 $ 47.0 $ 44.7
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Results for the three and six months of 1997 include $6.0 million and
$21.0 million, respectively, of pension settlement gains which increased
net income by $3.8 million and $13.4 million, respectively. Results for
three and six months 1996 include $5.5 million and $11.0 million,
respectively, of pension settlement gains which increased net income by
$3.5 million and $7.0 million, respectively.
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 six months of 1997, the new contract reduced CBT revenues by
approximately $3.2 million and $6.7 million, respectively, and increased
CBT expenses by $1.1 million and $2.3 million, respectively, over 1996
amounts.
June 30, December 31,
Millions of Dollars 1997 1996
------------------- -------- ------------
Current Assets $ 147.0 $ 135.6
Telephone Plant-Net 870.9 855.2
Other Noncurrent Assets 22.1 14.7
-------- --------
Total Assets $1,040.0 $1,005.5
-------- --------
-------- --------
Current Liabilities $ 209.2 $ 154.3
Noncurrent Liabilities 170.4 179.1
Long-Term Debt 219.0 221.5
Shareowner's Equity 441.4 450.6
-------- --------
Total Liabilities and Shareowner's Equity $1,040.0 $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 24% of the
Company's consolidated revenues for the six months ended June 30, 1997 and
1996.
During the first quarter 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 matter is before the Delaware Chancery Court. The Company's
investment at June 30, 1997 was $59.6 million. The future rights to the
earnings of the partnership and the ability of the Company to realize the
market value of its investment are uncertain.
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
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(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) COMMON SHARE PURCHASE RIGHTS PLAN - In the first quarter 1997, the
Company's Board of Directors adopted a Share Purchase Rights Plan by
granting a dividend of one preferred share purchase right for each
outstanding common share to shareowners of record at the close of business
on May 2, 1997. Under certain conditions, each right entitles the holder
to purchase one-hundredth of a Series A Preferred Share. The rights
cannot be exercised or transferred apart from common shares, unless a
person or group acquires 15% or more of the Company's outstanding common
shares. The rights will expire May 2, 2007, if they have not been
redeemed.
(8) COMMON SHARES - On February 3, 1997, the Company's Board of Directors
approved a two-for-one split of the Company's common shares, payable to
shareowners of record May 2, 1997. On April 28, 1997, the Company's
shareowners approved an amendment to the articles of incorporation to
increase the authorized number of common shares from 240 million to 480
million. These events did not affect the total dollar amount of common
shareowners' equity. All references to the number of common shares, per
share amounts and authorized common shares have been retroactively
restated to give effect to these changes.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(9) 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
Millions of Dollars 1997 1996 1997 1996
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Communications Services $ 207.1 $ 195.0 $ 407.0 $ 384.4
Information Systems 134.0 114.5 264.5 221.4
Teleservices 111.2 80.0 226.4 157.4
Intersegment (19.2) (13.5) (35.3) (25.1)
-------- -------- -------- --------
$ 433.1 $ 376.0 $ 862.6 $ 738.1
-------- -------- -------- --------
-------- -------- -------- --------
INTERSEGMENT REVENUES
Communications Services $ 5.6 $ .7 $ 8.1 $ 1.8
Information Systems 11.8 11.5 24.0 21.3
Teleservices 1.8 1.3 3.2 2.0
-------- -------- -------- --------
$ 19.2 $ 13.5 $ 35.3 $ 25.1
-------- -------- -------- --------
-------- -------- -------- --------
OPERATING INCOME
As Reported
Communications Services $ 49.6 $ 46.7 $ 106.7 $ 92.7
Information Systems 25.5 18.8 48.2 36.3
Teleservices 12.6 9.6 27.2 19.2
Corporate and Eliminations (.1) (.6) (1.0) (1.1)
-------- -------- -------- --------
$ 87.6 $ 74.5 $ 181.1 $ 147.1
-------- -------- -------- --------
-------- -------- -------- --------
OPERATING INCOME
Excluding Special Items
Communications Services $ 43.6 $ 41.2 $ 85.7 $ 81.7
Information Systems 25.5 18.8 48.2 36.3
Teleservices 12.6 9.6 27.2 19.2
Corporate and Eliminations (.1) (.6) (1.0) (1.1)
-------- -------- -------- --------
$ 81.6 $ 69.0 $ 160.1 $ 136.1
-------- -------- -------- --------
-------- -------- -------- --------
ASSETS
Communications Services $1,100.7 $1,030.8
Information Systems 267.8 251.2
Teleservices 268.7 261.1
Corporate and Eliminations 99.4 49.3
--------- --------
$1,736.6 $1,592.4
--------- --------
--------- --------
CAPITAL ADDITIONS (including acquisitions)
Communications Services $ 53.6 $ 26.8 $ 89.2 $ 44.8
Information Systems 6.8 7.2 9.9 14.5
Teleservices 11.6 8.6 17.0 12.0
Corporate 5.1 .2 5.1 .2
-------- -------- -------- --------
$ 77.1 $ 42.8 $ 121.2 $ 71.5
-------- -------- -------- --------
-------- -------- -------- --------
DEPRECIATION AND AMORTIZATION
Communications Services $ 30.9 $ 29.9 $ 61.2 $ 59.4
Information Systems 8.0 7.9 15.7 15.9
Teleservices 6.6 4.6 12.7 8.8
Corporate .1 - .2 .2
-------- -------- -------- --------
$ 45.6 $ 42.4 $ 89.8 $ 84.3
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
8
<PAGE>
MANAGEMENT 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. 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 first quarter Form 10-Q 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 $433.1 million and $862.6 million for the second quarter and the
first six months in 1997, up 15% and 17% respectively, from $376.0 million and
$738.1 million for the same periods in 1996. The customer-care businesses CBIS
and MATRIXX produced over 80% of the three month and six month revenue
increase.
Costs and expenses were $345.5 million and $681.5 million for the second
quarter and first six months in 1997, up 15% for both periods, from $301.5
million and $591.0 million for the same periods in 1996. Included in the costs
and expenses for both years were special items for settlement gains from lump
sum pension distributions paid to employees retiring under the early retirement
offer. The settlement gain reduced costs and expenses $6.0 million and $21.0
million for the three and six months in 1997 and $5.5 million and $11.0 million
for the three and six months in 1996.
Operating income was $87.6 million and $181.1 million for the second quarter
and first six months in 1997, up 18% and 23%, respectively, from $74.5 million
and $147.1 million for the same periods in 1996. Excluding the special items,
operating income was $81.6 million and $160.1 million, up 18% for both periods.
Each of the Company's three segments improved its operating income in the three
and six month periods.
Net Income in 1997 was $54.2 million or $.39 per common share for the second
quarter and $111.4 million or $.81 per common share for the first six months.
Excluding special items, net income was $50.3 million or $.37 per common
share and $98.0 million or $ .71 per common share for the second quarter and
six months.
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNICATIONS SERVICES
The Company enhanced the presentation of its financial results by replacing the
Telephone Operations segment with the Communications Services segment in 1997.
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 June 30, Six Months Ended June 30,
----------------------------------------- --------------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
------ ------ ------ -- -------- -------- ------ --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Local service $ 95.8 $ 92.3 $ 3.5 4 $ 190.7 $ 182.8 $ 7.9 4
Network access 43.2 40.1 3.1 8 83.7 78.9 4.8 6
Other services 68.1 62.6 5.5 9 132.6 122.7 9.9 8
------- ------ ------ ------ ------ -----
Total 207.1 195.0 12.1 6 407.0 384.4 22.6 6
Costs and expenses 163.5 153.8 9.7 6 321.3 302.7 18.6 6
Special items (6.0) (5.5) (.5) (9) (21.0) (11.0) (10.0) (91)
------- ------ ------ ------ ------ -----
Total 157.5 148.3 9.2 6 300.3 291.7 8.6 3
Operating income $ 49.6 $ 46.7 $ 2.9 6 $ 106.7 $ 92.7 $ 14.0 15
Excluding special items:
Operating income $ 43.6 $ 41.2 $ 2.4 6 $ 85.7 $ 81.7 $ 4.0 5
Operating margin 21.1% 21.1% 21.1% 21.3%
Access lines (In thousands) 984 939 45 5
Minutes of Use (In millions) 989 925 64 7 1,985 1,841 144 8
</TABLE>
Local service revenues increased $3.5 million and $7.9 million for the three
and six months 1997, respectively, compared to the same periods a year ago.
The increase is primarily from continuing growth in access lines. In the
second quarter 1997, CBT modified its definition of access lines to include
lines used for certain high-speed switched services. For comparative purposes,
access lines were restated for prior periods. The strong business economy,
higher installations of second lines and access to on-line computer services
increased access lines 5% at the end of June 1997 versus a year ago. Access
lines accounted for $3.9 million and $7.8 million of the increase for the three
and six month periods. Most of the remaining increase in local service
revenues was from increased penetration of enhanced custom calling services.
Partially offsetting the increases were decreases in private line and public
telephone revenues from reclassifications to other services categories.
Network access revenues increased $3.1 million and $4.8 million, respectively,
for the three and six month comparable periods to last year. The increase was
principally from the increase in access lines, growth in access minutes of use
of 8%, and special access and state access revenues, net of changes in
overearnings accruals.
Other services increased $5.5 million for the three months and $9.9 million for
the six months because of higher sales at CBLD and CBD.
Costs and expenses increased $9.7 million for the second quarter and $18.6
million for the six months 1997. Expenses for contract labor and consulting
fees increased $1.0 million and $4.4 million and other increases for
depreciation, right-to-use fees for switching and software purchases,
insurance, materials and other costs increased $6.3 million and $11.0 million.
These expenses were offset by lower benefit costs, gross receipts taxes and
property taxes at CBT. Substantially all the remaining increases were due to
direct costs from higher sales at CBLD and CBD.
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The special items for the three and six month periods in both years were for
pension settlement gains recorded as lump-sum pension distributions paid to
employees retiring under the early retirement offer.
INFORMATION SYSTEMS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ------------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
-------- ------ -------- ---- ------- ------ ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 134.0 $114.5 $ 19.5 17 $ 264.5 $ 221.4 $ 43.1 19
Costs and expenses 108.5 95.7 12.8 13 216.3 185.1 31.2 17
-------- ------ -------- ---- ------- ------- -------
Operating income $ 25.5 $ 18.8 $ 6.7 36 $ 48.2 $ 36.3 $ 11.9 33
Operating margin 19.0% 16.4% 18.2% 16.4%
</TABLE>
Revenues increased $19.5 million during the second quarter and $43.1 million
during the six months compared to last year. Data processing revenues
increased $13.3 million and $26.0 million from growth in cellular subscribers.
Subscriber growth increased 18% for the six months 1997 compared to the six
months 1996. Professional services revenues increased $2.2 million and $9.0
million from development work for PCS clients and enhancement requests from
existing clients. International revenues increased $4.6 million and $6.8
million as a result of businesses acquired in the last half of 1996.
Costs and expenses increased $12.8 million during the second quarter and $31.2
million during the six months compared to last year. Direct costs of providing
services increased $3.3 million and $11.8 million from a higher volume of
business and additional costs of companies acquired. Research and development
costs increased $8.4 million and $18.9 million from higher development activity
in support of the software platform, Precedent 2000, for PCS subscribers.
Research and development costs were 15% and 14% of the second quarter and six
months revenues in 1997, respectively.
TELESERVICES
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ------------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
-------- ------ -------- ---- ------- ------ ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 111.2 $ 80.0 $ 31.2 39 $226.4 $ 157.4 $ 69.0 44
Costs and expenses 98.6 70.4 28.2 40 199.2 138.2 61.0 44
-------- ------- ------- ---- ------- ------- ------ --
Operating income $ 12.6 $ 9.6 $ 3.0 31 $ 27.2 $ 19.2 $ 8.0 42
Operating margin 11.3% 12.0% 12.0% 12.2%
</TABLE>
Revenues increased $31.2 million and $69.0 million during the second quarter
and six months 1997 compared to the same periods last year. Excluding the
acquisition of Software Support, Inc. and Scherers Communications, Inc. in the
second half of 1996, revenues grew 26% and 31% for the three months and six
months ended June 30, 1997. Dedicated services contributed most of the revenue
gain, increasing $30.1 million and $62.9 million for the second quarter and six
months. Strong sales in the technology and telecommunications industry
produced $19.1 million and $42.9 million of the increase with increased
business from major clients. Traditional inbound/outbound service revenues
were unchanged in the second quarter and were up $4.7 million year-to-date
versus a year ago. Some softness in the market and pricing pressure with
clients, including AT&T, were contributors to a slight decrease in
11
<PAGE>
revenues for inbound services. International revenues increased $1.0 million
in the quarter and are up $1.4 million for the six months.
Costs and expenses increased at a slightly higher rate than revenues. Expenses
increased $28.2 million for the second quarter and $61.0 million for the six
months 1997 compared to the same periods last year, due in large part to higher
headcount costs, depreciation associated with new and expanded facilities in
Houston, Texas and Salt Lake City, Utah. These growth-related costs, combined
with acquisitions and softness in Inbound services revenues and profits, caused
the company's operating margin to decline to 11.3% for the quarter and 12.0%
for the first half. Operating income increased $3.0 million and $8.0 million
for the quarter and year-to-date.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- --------------------------------------
($ Millions) 1997 1996 Change % 1997 1996 Change %
------ ------ ------ -- ------- ------ ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER INCOME
(EXPENSE), NET $ 4.9 $ 3.0 $ 1.9 63 $ 8.3 $ 4.5 $ 3.8 84
INTEREST EXPENSE $ 9.1 $ 8.4 $ .7 8 $ 17.7 $ 18.0 $ (.3) (2)
INCOME TAXES $ 29.2 $ 24.3 $ 4.9 20 $ 60.3 $ 47.1 $ 13.2 28
</TABLE>
The increase in other income (expense), net for the second quarter and six
months 1997 was primarily from interest income from an Internal Revenue Service
(IRS) refund and joint venture income, partially offset by expenses associated
with the share split.
Interest expense for the second quarter and six months 1997 was comparable to
the same periods last year. The weighted average interest rate for debt was
6.9% at June 30, 1997 compared to 7.0% at June 30, 1996. At June 30, 1997 and
1996, average debt outstanding was $502 million and $510 million, respectively.
The effective tax rate for income taxes was 35.1% for both the second quarter
and six months 1997 compared to 35.2% for the second quarter and 35.3% for the
six months 1996.
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.
Cash provided by operating activities, which is the Company's primary source
of liquidity, was $147 million for the first six months of 1997 compared to
$91 million for the first six months of 1996. The increase was due in large
part to higher net income combined with higher payables and other
liabilities, and the receipt of a $23 million IRS refund for the 1989-1991
audit.
The Company's most significant investing activity for the first six months of
1997 continued to be capital expenditures. Capital expenditures were $123
million, up $60 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 in Houston and Salt
Lake City and the opening of two new call centers in Logan, Utah and Oklahoma
City, Oklahoma. Additionally, a payment was made for a corporate airplane that
will be used for business purposes. The increases were partially offset by an
acquisition that was recorded in 1996 by CBIS. The Company anticipates 1997
capital expenditures to be approximately $230 million including $140 million
for the needs of CBT.
12
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the second quarter 1997, Moody's Investor Service (Moody's) raised its
rating on the Company's senior unsecured debt to A2 from A3 and its rating for
commercial paper to P-1 from P-2. According to Moody's, the ratings upgrade
reflects their expectation that cashflow from the Company's non-regulated
operations, CBIS and MATRIXX should continue to generate more predictable and
steadily improving cashflow. They also stated that CBT should maintain its
solid performance in face of evolving competition; CBIS should achieve a more
diversified revenue stream from PCS providers and anticipated growth in
cellular subscribers; and MATRIXX should benefit from the continued trend
toward the outsourcing of corporate inbound/outbound calling.
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 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.
During June, 1997, CBT filed with the FCC to begin price-based regulation,
rather than cost-based regulation, for interstate operations effective July 1,
1997. 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 increasingly
likely that CBT will be required to discontinue the application of SFAS No. 71.
This could result from events such as the Public Utilities Commission of Ohio's
(PUCO) intention to approve a price cap plan for local service, significant
growth in competition, unfavorable receipt of pending arbitration decisions, 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 charge in the range of
$300 million. This would include the elimination of the embedded regulatory
assets resulting from the under-depreciation of plant assets of approximately
$200 million. CBT will continue to monitor closely whether SFAS No. 71 is
applicable.
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 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 high-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 cost have not been determined and will be evaluated more fully
by the FCC over the next several months.
13
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The universal service order also calls for $2.25 billion annually to be
available for discounts to schools and libraries and an additional fund of $400
million for health care providers. All telecommunications carriers, including
wireless providers, will contribute to the schools' and libraries' 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. While all interested parties may file a legal
challenge of the order by August 18, 1997, 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
and remove implicit rate subsidies by establishing a process whereby cost-based
rates are achieved. From 1998 through 2000, current access charge rate levels,
containing implicit subsidies, are gradually reduced to cost-based levels.
Part of the lost revenues currently derived from access charges will be
recovered through increases to non-primary access lines of residence customers
and multiline business customers up to a pre-established rate cap amount. In
addition, portions of the current minutes-of-use rates will be transitioned to
a flat-rate charge billed to the long-distance carrier. While interested
parties have until August 1997 to pursue a legal challenge of the order, a
number of parties have already filed appeals. The United States Court of
Appeals for the Eighth Circuit will hear the legal arguments at a date yet to
be determined.
On June 16, 1997, CBT filed with the FCC a request to have interstate access
charges determined under a price cap methodology effective July 1, 1997. This
means CBT's 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 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.
OHIO - The Company believes that CBT will face increased competition under the
PUCO's local service guidelines beginning 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. Interconnection agreements with
two wireless carriers have been submitted to the PUCO for approval, and two
other agreements are pending arbitration decisions since all terms could not be
resolved through negotiations. Arbitration issues include discount rates for
the resale of service. The PUCO is expected to render its arbitration decision
in the near term.
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. The PUCO's statutory obligation is to render a decision
regarding Commitment 2000 no later than November 1997.
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. In addition, CBT
indicated in its petition that it intends to file with the PSCK, no later than
during the fourth quarter, an application for alternative regulation treatment
similar to the request pending before the PUCO. The PSCK has indicated that it
intends to address the May 9 suspension request in a separate docket.
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.
14
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OUTLOOK
COMMUNICATIONS SERVICES - 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 pursuing co-branding and alliances with other
providers where appropriate. These actions, if undertaken, could cause
expenses to increase in advance of corresponding revenues.
Competition in the local exchange business is increasing, due to legislative
and regulatory initiatives, and new technologies. CBT continues to develop new
service offerings to offset future competitive loss, and is working to assure
implementation of rules to assure fair competition. Nevertheless, these
initiatives and developments could make it more difficult for CBT to maintain
current revenue and profit levels. Further, CBT is also awaiting the outcome
of a PUCO decision for CBT's Commitment 2000 plan proposal. Approval of the
plan will allow CBT to be more responsive to competition in the local market.
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 will likely increase depreciation expense
by more than $8 million in 1997. The increase will not occur until the final
orders are received from the FCC, the PUCO and the PSCK in the last half of
1997. This increase will have no material impact on the Company's depreciation
for the current period 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 be required to discontinue the application of SFAS No. 71.
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.
INFORMATION SYSTEMS - CBIS provides quality service because of its knowledge
of the market, technology, resources and attention to 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
six months of 1997. CBIS maintains multi-year contracts with its clients but
several contracts allow clients to terminate at any time. The loss of one of
the top three clients could result in a material reduction in revenues and
profits. One client that represents approximately 5% of CBIS's revenues has a
contract that expired in May 1997. CBIS and the client have continued the
relationship based on a memorandum of understanding while discussions continue
toward a formal contract extension. 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 believes that its service quality, marketing skills,
expansion of product offerings and facilities, and strategic acquisitions, will
continue to provide strong growth. However, the marketplace is becoming very
competitive. Comparisons with the first quarter 1997 reflect some softness in
the marketing programs of some large clients, including AT&T. The outlook for
the second half of 1997 is for continued revenues and earnings growth but
somewhat less than in the first half of the year. MATRIXX's top three clients
accounted for 39% of its first half revenues. Loss of any significant
contracts would have an adverse effect on its revenues and profits. MATRIXX
must continue to win new contracts and retain business with existing clients to
maintain its success.
OTHER - 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 ensure that the Company's systems continue to meet its internal needs
and those of its customers. The Company has begun to incur expenses for this
change. These expenses may be significant and may continue into the year 1999.
The Company continues to review opportunities for acquisitions and divestitures
for all its businesses to enhance shareowner value.
15
<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.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cincinnati Bell Inc.
Date: AUGUST 8, 1997 /s/ BRIAN C. HENRY
-----------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
17
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 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 June 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 Six Months
Ended June 30, Ended June 30,
-------------- -----------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common shares outstanding 135,737 134,439 135,594 134,091
Net effect of stock options, if dilutive, based on
the treasury stock method using the average
market price 1,867 3,453 1,972 2,953
------- ------- ------- -------
Total shares for computing primary earnings
per share 137,604 137,892 137,566 137,044
------- ------- ------- -------
------- ------- ------- -------
Net income $ 54.2 $ 44.8 $ 111.4 $ 86.5
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ .39 $ .32 $ .81 $ .63
------- ------- ------- -------
------- ------- ------- -------
FULLY DILUTED
Weighted average common shares outstanding 135,737 134,439 135,594 134,091
Net effect of stock options, if dilutive, based on
the treasury stock method using the greater
of average or period - end market price 2,043 3,477 2,099 3,477
------- ------- ------- -------
Total shares for computing fully diluted earnings
per share 137,780 137,916 137,693 137,568
------- ------- ------- -------
------- ------- ------- -------
Net income $ 54.2 $ 44.8 $ 111.4 $ 86.5
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ .39 $ .32 $ .81 $ .63
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,200
<SECURITIES> 0
<RECEIVABLES> 346,100
<ALLOWANCES> 12,300
<INVENTORY> 16,400
<CURRENT-ASSETS> 420,500
<PP&E> 1,985,100
<DEPRECIATION> 972,300
<TOTAL-ASSETS> 1,736,600
<CURRENT-LIABILITIES> 521,700
<BONDS> 274,300
0
0
<COMMON> 135,900
<OTHER-SE> 595,500
<TOTAL-LIABILITY-AND-EQUITY> 1,736,600
<SALES> 0
<TOTAL-REVENUES> 862,600
<CGS> 0
<TOTAL-COSTS> 681,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,500
<INTEREST-EXPENSE> 17,700
<INCOME-PRETAX> 171,700
<INCOME-TAX> 60,300
<INCOME-CONTINUING> 111,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,400
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
