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 March 31, 1994
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 April 29, 1994, 65,259,047 Common Shares were outstanding
Form 10-Q Part 1 Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
For the Three Months
Ended March 31,
----------------------
1994 1993
-------- --------
Revenues
Telephone operations
Local service. . . . . . . . . . . . . . . . . . . . . . . $ 77,211 $ 74,005
Network access . . . . . . . . . . . . . . . . . . . . . . 36,353 33,189
Long distance. . . . . . . . . . . . . . . . . . . . . . . 9,672 11,559
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,195 21,089
-------- --------
140,431 139,842
Information systems. . . . . . . . . . . . . . . . . . . . . 70,678 68,365
Marketing services . . . . . . . . . . . . . . . . . . . . . 50,605 24,754
Other telecommunications . . . . . . . . . . . . . . . . . . 30,355 29,506
-------- --------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . 292,069 262,467
-------- --------
Costs and Expenses
Operating expenses . . . . . . . . . . . . . . . . . . . . . 153,426 134,039
Plant and building services. . . . . . . . . . . . . . . . . 40,081 38,951
Depreciation and amortization. . . . . . . . . . . . . . . . 37,165 34,708
Taxes other than income taxes. . . . . . . . . . . . . . . . 24,684 23,572
-------- --------
Total Costs and Expenses . . . . . . . . . . . . . . . . . 255,356 231,270
-------- --------
Operating Income . . . . . . . . . . . . . . . . . . . . . 36,713 31,197
Other Income (Expense) - Net . . . . . . . . . . . . . . . . . 602 10,658
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . 12,394 10,375
-------- --------
Income Before Income Taxes and Cumulative
Effect of Accounting Change. . . . . . . . . . . . . . . . . 24,921 31,480
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 9,275 10,653
-------- --------
Income Before Cumulative Effect of Accounting Change . . . . . 15,646 20,827
Cumulative Effect of Accounting Change . . . . . . . . . . . . (2,925) --
-------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 12,721 20,827
Preferred Dividend Requirements. . . . . . . . . . . . . . . . -- 1,087
-------- --------
Income Applicable to Common Shares . . . . . . . . . . . . . . $ 12,721 $ 19,740
-------- --------
-------- --------
Earnings Per Common Share
Income Before Cumulative Effect of Accounting Change . . . . $ .24 $ .32
Cumulative Effect of Accounting Change . . . . . . . . . . . (.04) --
-------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ .20 $ .32
-------- --------
-------- --------
Dividends Declared per Common Share. . . . . . . . . . . . . . $ .20 $ .20
-------- --------
-------- --------
Weighted Average Number of Common Shares
Outstanding (000). . . . . . . . . . . . . . . . . . . . . . 65,083 61,842
2
Form 10-Q Part 1 Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Cont'd)
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
For the Three Months
Ended March 31,
----------------------
1994 1993
-------- --------
Retained Earnings at Beginning of Period . . . . . . . . . . . . $227,392 $342,483
Add: Net Income. . . . . . . . . . . . . . . . . . . . . . . 12,721 20,827
Deduct: Common Dividends . . . . . . . . . . . . . . . . . . 13,042 12,442
Pension Liability Adjustment . . . . . . . . . . . . 1,021 --
Preferred Dividends. . . . . . . . . . . . . . . . . -- 1,087
Acquisition of Common Shares . . . . . . . . . . . . -- 4,027
Issuance of Common Shares Under Employee Plans . . . -- 236
-------- --------
Retained Earnings at End of Period . . . . . . . . . . . . . . . $226,050 $345,518
-------- --------
-------- --------
See Notes to Financial Statements.
3
Form 10-Q Part 1 Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
1994 1993
---------- ----------
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 8,618 $ 8,668
Receivables less allowances of $14,550 and $14,031 . . . . . 239,979 241,669
Material and supplies. . . . . . . . . . . . . . . . . . . . 20,981 21,627
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 30,058 30,391
Other current assets . . . . . . . . . . . . . . . . . . . . 18,484 22,471
---------- ----------
318,120 324,826
---------- ----------
Property, Plant and Equipment
Telephone plant. . . . . . . . . . . . . . . . . . . . . . . 1,458,891 1,430,822
Less accumulated depreciation. . . . . . . . . . . . . . . (562,538) (541,690)
---------- ----------
896,353 889,132
---------- ----------
Other property . . . . . . . . . . . . . . . . . . . . . . . 313,787 303,917
Less accumulated depreciation. . . . . . . . . . . . . . . (152,024) (145,480)
---------- ----------
161,763 158,437
---------- ----------
1,058,116 1,047,569
---------- ----------
Other Assets
Intangibles, primarily goodwill - net. . . . . . . . . . . . 190,000 192,341
Deferred and other assets. . . . . . . . . . . . . . . . . . 46,486 56,324
Other investments. . . . . . . . . . . . . . . . . . . . . . 42,465 43,030
---------- ----------
278,951 291,695
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . $1,655,187 $1,664,090
---------- ----------
---------- ----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year. . . . . . . . . . . . . . . . . . $ 99,373 $ 112,029
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 120,555 132,648
Accrued disposal and restructuring costs . . . . . . . . . . 30,832 35,385
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . 31,890 38,135
Advanced billing and customers' deposits . . . . . . . . . . 32,593 31,553
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,883 24,587
---------- ----------
347,126 374,337
---------- ----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . 529,429 522,888
---------- ----------
Deferred Credits and Other Long-Term Liabilities:
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 166,644 158,438
Unamortized investment tax credits . . . . . . . . . . . . . 18,746 19,371
Other long-term liabilities. . . . . . . . . . . . . . . . . 75,359 73,441
---------- ----------
260,749 251,250
---------- ----------
Shareowners' Equity
Common shares - $1.00 par value. . . . . . . . . . . . . . . 65,186 64,982
Authorized shares: 240,000,000
Outstanding shares: at March 31, 1994, 65,185,901;
at December 31, 1993, 64,982,178
Additional paid-in capital . . . . . . . . . . . . . . . . . 226,550 223,257
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 226,050 227,392
Foreign currency translation adjustment. . . . . . . . . . . 97 (16)
---------- ----------
517,883 515,615
---------- ----------
Total Liabilities and Shareowners' Equity. . . . . . . . . . . $1,655,187 $1,664,090
---------- ----------
---------- ----------
See Notes to Financial Statements.
4
Form 10-Q Part 1 Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
For the Three Months
Ended March 31,
----------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,721 $ 20,827
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . 37,165 34,708
Cumulative effect of accounting change . . . . . . . . . . . 2,925 --
Provision for loss on receivables. . . . . . . . . . . . . . 1,649 1,685
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . 3,366 (7,557)
Changes in assets and liabilities
Decrease in receivables. . . . . . . . . . . . . . . . . . . 2,434 9,208
Decrease in other current assets . . . . . . . . . . . . . . 980 1,427
Decrease in accounts payable . . . . . . . . . . . . . . . . (16,594) (25,353)
Decrease in accrued disposal and restructuring . . . . . . . (4,553) --
Increase in other current liabilities. . . . . . . . . . . . 3,544 3,074
Increase in deferred income taxes and unamortized
investment tax credits. . . . . . . . . . . . . . . . . . . 11,648 1,772
Decrease in other assets and liabilities . . . . . . . . . . 384 266
-------- --------
Net cash provided by operating activities. . . . . . . . . 55,669 40,057
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant . . . . . . . . . . . . (32,107) (30,953)
Capital expenditures-other . . . . . . . . . . . . . . . . . (8,058) (13,375)
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . 10,994 7,087
-------- --------
Net cash used in investing activities. . . . . . . . . . . (29,171) (37,241)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (payments of) notes payable. . . . . . . (14,272) 16,135
Principal payments on long-term debt . . . . . . . . . . . . (2,908) (810)
Proceeds from issuance of common shares. . . . . . . . . . . 3,497 141
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (12,999) (13,470)
Payments made to acquire common shares . . . . . . . . . . . -- (5,572)
-------- --------
Net cash used in financing activities. . . . . . . . . . . (26,682) (3,576)
-------- --------
Effect of exchange rate changes on cash and cash equivalents . 134 69
-------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . . (50) (691)
Cash and cash equivalents at beginning of period . . . . . . . 8,668 5,304
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . $ 8,618 $ 4,613
-------- --------
-------- --------
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . . $ 4,005 $ 6,676
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 1,079 $ 959
See Notes to Financial Statements.
5
Form 10-Q Part 1 Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements of Cincinnati
Bell Inc. have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
Management, include all adjustments necessary for a fair presentation of
the results of operations, financial position and cash flows for each
period shown. All adjustments are of a normal and recurring nature except
for those outlined in Notes (2), (3) and (4). 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 such SEC rules and regulations.
Management believes that the disclosures made are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with financial statements and notes
thereto included in the Company's 1993 Annual Report on Form 10-K.
Certain reimbursable costs previously recorded as information systems
revenues in the 1993 Forms 10-Q have been reclassified as a reduction of
operating expenses. This reclassification amounted to $8.7 million for the
first quarter of 1993. The reclassification had no effect on operating
income or net income for all periods presented. In addition to the
information systems revenue, certain prior year amounts have been
reclassified to be consistent with the 1994 presentation.
The consolidated financial statements include the accounts of Cincinnati
Bell Inc. and its wholly owned subsidiaries (the "Company"). The
significant subsidiaries include: Cincinnati Bell Telephone Company
("CBT"), Cincinnati Bell Information Systems Inc. ("CBIS") and MATRIXX
Marketing Inc. ("MATRIXX"). Investments in certain partnerships and joint
ventures are accounted for using the equity method. All significant
intercompany transactions and balances have been eliminated in
consolidation.
(2) DISPOSAL AND RESTRUCTURING OF CBIS OPERATIONS - In late 1993, the Company
determined the need to reorganize CBIS, its information systems subsidiary.
This reorganization focused on two phases. The first phase was the
elimination of non-strategic and underperforming operations. This resulted
in CBIS taking action to divest its holdings in its federal operation (CBIS
Federal), consolidating its foreign data center operations, and eliminating
unprofitable domestic and international activities. The second phase of
the plan was to reorganize the remaining operations into strategic business
units. These actions are expected to be completed in 1994.
For the first quarter 1994, revenues of $13.4 million and operating
expenses of $19.3 million related to the discontinued operations were
charged against the accrual for disposal and restructuring costs. These
results were not materially different from estimates used to record the
1993 restructuring charges. The Company believes that the accrual for the
disposal and restructuring at March 31, 1994 is adequate to provide for the
estimated loss on the sale of CBIS Federal and its operating losses through
the date of sale. The accrual also includes estimated operating losses and
other costs related to restructuring of CBIS operations other than CBIS
Federal.
The assets of the discontinued operations consist of net current assets of
$14.9 million and net noncurrent assets of $7.4 million. These amounts
consist primarily of accounts receivable, property, plant and equipment and
related liabilities.
6
Form 10-Q Part 1 Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(3) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information, in thousands of dollars, is for the Company's consolidated
wholly owned subsidiary, Cincinnati Bell Telephone Company:
For the Three Months
Ended March 31,
1994 1993
-------- --------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . $146,268 $145,622
Costs and Expenses. . . . . . . . . . . . . . . . . . . . $122,698 $123,417
Income Before Cumulative Effect of Accounting Change. . . $ 13,634 $ 19,842
Cumulative Effect of Accounting Change. . . . . . . . . . $ (2,405) $ --
Net Income. . . . . . . . . . . . . . . . . . . . . . . . $ 11,229 $ 19,842
Results for the quarter ended March 31, 1994, include two significant
nonrecurring charges. As more fully described in Note (4) to the financial
statements, effective January 1, 1994, the Company, including CBT, adopted
SFAS 112, "Employers Accounting for Postemployment Benefits". The
cumulative effect of this accounting change was recognized in the first
quarter 1994 as a change in accounting principle, thereby reducing CBT's
net income by $2.4 million ($.04 per share), net of a deferred tax benefit.
Also in 1994, CBT has discontinued deferring incremental postretirement
benefit costs and adjusted the amount of previously deferred costs to a
level that is expected to be recovered in regulated rates. The amount of
the adjustment, which increased postretirement benefit costs, was $2.5
million and reduced net income by $1.6 million ($.03 per share).
Results for the quarter ended March 31, 1993, include a gain from the sale
of the residential equipment leasing and PhoneCenter Store businesses to
AT&T Consumer Products. The sale increased net income by approximately
$6.5 million ($.10 per common share). The gain is included in Other Income
(Expense) - net.
March 31, December 31,
1994 1993
---------- ----------
Current Assets. . . . . . . . . . . . . . . . . . . . . . $ 163,043 $ 159,641
Telephone Plant-Net . . . . . . . . . . . . . . . . . . . 907,161 900,141
Other Noncurrent Assets . . . . . . . . . . . . . . . . . 20,800 32,161
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . $1,091,004 $1,091,943
Current Liabilities . . . . . . . . . . . . . . . . . . . $ 132,512 $ 139,438
Noncurrent Liabilities. . . . . . . . . . . . . . . . . . 201,907 196,389
Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . 312,277 310,500
Common Shareowner's Equity. . . . . . . . . . . . . . . . 444,308 445,616
---------- ----------
Total Liabilities and Shareowner's Equity . . . . . . . . $1,091,004 $1,091,943
---------- ----------
---------- ----------
7
Form 10-Q Part 1 Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
(Unaudited)
(4) CHANGE IN ACCOUNTING PRINCIPLE - Effective January 1, 1994, the Company
adopted SFAS 112, "Employers' Accounting for Postemployment Benefits".
SFAS 112 requires the accrual of the obligation for benefits provided to
former or inactive employees, their beneficiaries and covered dependents
after employment but before retirement. These benefits include workers'
compensation, disability benefits and health care coverage for a limited
time. SFAS 112 changed the Company's method of accounting for
postemployment benefits from recognizing costs as benefits are paid, to
accruing the expected costs of providing these benefits. The cumulative
effect of this accounting change was recognized in the first quarter 1994
as a change in accounting principle, thereby reducing net income by $2.9
million, which is net of a deferred tax benefit of $1.6 million. The on-
going expense recognized under SFAS 112 is not significantly different from
that recorded under prior methods.
8
Form 10-Q Part 1 Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Cash provided from operating activities for the first quarter of 1994 was $55.7
million, an increase of $15.6 million. The excess of cash from operations over
the amounts of cash flows invested and dividend payments was used to reduce
short-term borrowings.
The primary use of capital resources continued to be capital expenditures.
Capital expenditures were $40.2 million and $44.3 million for the first quarter
1994 and 1993, respectively. Included in the capital expenditures were
capitalized software costs of $2.4 million and $6.5 million, respectively.
Capital expenditures for 1994 are expected to be approximately $160 million of
which $95 million is for additions to property, plant and equipment of CBT.
The Company's debt to capitalization ratio at March 31, 1994 was 54.8% compared
to 47.0% at March 31, 1993. The increase is due primarily to the impact of the
special charges in late 1993 and the acquisition of WATS Marketing in November,
1993.
In March 1994, Duff & Phelps Credit Rating Co. ("Duff & Phelps") lowered the
ratings of the notes of the Company from "A" to "A-". The reasons given for the
change were the increase in debt and exposure to financial risk in the
competitive telemarketing business as the result of the acquisition of WATS
Marketing in late 1993. Also noted as a reason for the change was the lack of
consistent profitability in the Information Systems business. Separately, Duff
& Phelps established an initial rating of "Duff 1-" for the Company's commercial
paper. In addition, the Company's "A" rating on senior unsecured debt and "A-1"
rating on commercial paper with Standard & Poor's is being reviewed following
the acquisition of WATS Marketing.
Management believes that the Company has adequate internal and external
resources available to finance its business development, construction and
dividend programs. The Company maintains adequate lines of credit with several
institutions to provide support for borrowings and general corporate purposes.
RESULTS OF OPERATIONS
The Company's consolidated net income for the first quarter ended March 31, 1994
decreased $8.1 million or 39% when compared to the same period in 1993.
Earnings per common share for the first quarter 1994 decreased $.12 or 38%
compared to 1993. The 1994 results include an adjustment in postretirement
benefit costs (see Note (3) to financial statements) and charges associated with
a change in accounting principle (see Note (4) to financial statements). These
two items reduced net income by $.07 per common share. The 1993 results include
a gain from the sale of CBT's residential equipment leasing and PhoneCenter
Store businesses which increased net income by $.10 per common share. Revenues
increased $29.6 million or 11% and costs and expenses increased $24.1 million or
10%. Revenues and costs and expenses were higher in 1994 as a result of the
acquisition of WATS Marketing in late 1993.
9
Form 10-Q Part 1 Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
In 1993, CBIS adopted a plan to dispose of CBIS Federal and restructure other
operations within CBIS. For the first quarter 1994, revenues of $13.4 million
and operating expenses of $19.3 million related to the discontinued operations
were charged against the accrual for disposal and restructuring costs. These
results were not materially different from estimates used to record the 1993
restructuring charges. The Company believes that the accrual for the disposal
and restructuring at March 31, 1994 is adequate to provide for the estimated
loss on the sale of CBIS Federal and its operating losses through the date of
sale. The accrual also includes estimated operating losses and other costs
related to restructuring of CBIS operations other than CBIS Federal.
Efforts to sell CBIS Federal continue and it is expected that the sale will be
completed by the end of the year. In connection with the restructuring of the
remaining CBIS operations, CBIS announced on April 11, 1994 a reduction of 220
employees or 9% of the CBIS non-federal workforce. The severance costs for
these employees were included in the special charges in 1993.
Results for interim periods may not be indicative of the results for the full
year.
Revenues
For the Three Months Ended
March 31,
-------------------------- Increase
1994 1993 (Decrease) Change
-------- -------- ---------- ------
Telephone operations
Local service $ 77.2 $ 74.0 $ 3.2 4 %
Network access 36.3 33.2 3.1 9 %
Long distance 9.7 11.5 (1.8) (16)%
Other 17.2 21.1 (3.9) (18)%
-------- -------- -------
140.4 139.8 .6 --
Information systems 70.7 68.4 2.3 3 %
Marketing services 50.6 24.8 25.8 104 %
Other telecommunications 30.4 29.5 .9 3 %
-------- -------- -------
Total Revenues $292.1 $262.5 $29.6 11 %
Local service revenues increased from a 3% growth in access lines and higher
revenues from central office features including greater sales of advanced
calling features. Access lines were 856,000 at the end of the first quarter
1994 compared to 833,000 at the end of the first quarter 1993.
Network access revenues increased as a result of a 10% increase in minutes of
use, lower settlement payments and greater end user charges.
Long distance revenues decreased from the effect of higher settlements recorded
in the first quarter 1993 and also from a rate decrease in January 1994 for
interstate intraLATA message tolls.
Other revenues decreased for several reasons. Billing and collection revenues
decreased from lower volume of business. Equipment leasing revenues decreased
as CBT discontinued the leasing of business equipment late in 1993. The effect
of the sale of the residential equipment leasing and PhoneCenter Store
businesses during the first quarter 1993 also contributed to the decrease.
These declines were partially offset by higher revenues for inside wiring
services, and higher commissions from product sales.
10
Form 10-Q Part 1 Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT'D)
CBT received approval on its alternative regulation plan from the Public
Utilities Commission of Ohio ("PUCO") on May 5, 1994. The new rates and
alternative regulation commitments went into effect on May 6, 1994 and will
increase revenues by $11.9 million annually or 3.75% on Ohio regulated services.
Information systems revenues increased for the first quarter of 1994 compared
to 1993. The development of telecommunications solutions for international
customers and an increase in data processing services provided to wireless and
wireline subscribers were the primary reasons for the increase in revenues.
Offsetting most of the increase was the effect of $21.6 million in revenues
from operations to be sold or discontinued that are included in 1993 revenues
while the 1994 amounts are charged against the accrual for disposal and
restructuring as described above.
The increase in marketing services revenues were primarily the result of the
WATS Marketing acquisition in 1993. In addition, revenues were higher in 1994
because of increased business in the outbound call processing operations.
Other telecommunications revenues increased in the long distance business from
the introduction of new products, particularly 800-service and calling cards,
and the minimization of customer attrition.
For the Three Months Ended
March 31,
-------------------------- Increase
1994 1993 (Decrease) Change
-------- -------- ---------- ------
Costs and Expenses $255.4 $231.3 $24.1 10 %
There were several reasons for the increase in costs and expenses. Most of the
increase was the result of the WATS Marketing acquisition in 1993.
Telephone operations expenses increased primarily because of higher depreciation
and amortization expense and postretirement benefit costs. Depreciation and
amortization expense was higher in 1994 because of depreciation rate
represcriptions by federal and state regulatory authorities which became
effective January 1, 1994. Postretirement benefit costs were higher because of
the inclusion of a $2.5 million adjustment of postretirement benefit costs which
were deferred in 1993. CBT's sale of its residential equipment leasing and
PhoneCenter Store businesses in the first quarter 1993 and a lower number of CBT
employees in 1994 than 1993 resulted in lower expenses in 1994 than 1993.
Excluding 1993 expenses of $23.6 million related to the operations being sold
or discontinued, first quarter 1994 expenses of the Information Systems
segment increased when compared to 1993. Data center expenses increased
because of a higher volume of data services revenues and higher costs for
providing customer bills. In addition, the costs of increased data center
capacity and expenses related to upgrading computer workstations increased
operating expenses for the quarter.
Marketing services expenses increased primarily from higher direct labor costs
as a result of increased revenues in the outbound call processing operations and
the WATS acquisition mentioned previously. Partially offsetting this increase
was a decrease in long distance telephone costs as the result of favorable
tariffs negotiated with the long distance carriers.
11
Form 10-Q Part 1 Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
For the Three Months Ended
March 31,
-------------------------- Increase
1994 1993 (Decrease) Change
-------- -------- ---------- ------
Other Income (Expense) - Net $ .6 $ 10.7 $(10.1) (94)%
Results for 1993 include a gain of $9.8 million from the sale of CBT's
residential equipment leasing and PhoneCenter Store businesses and income from
the Anixter - Cincinnati joint venture which terminated at the end of 1993.
For the Three Months Ended
March 31,
-------------------------- Increase
1994 1993 (Decrease) Change
-------- -------- ---------- ------
Interest Expense $ 12.4 $ 10.4 $ 2.0 19 %
A higher average interest rate on total debt outstanding caused the increase in
interest expense. This was the result of refinancing short-term debt with long-
term debt with higher interest rates during the last six months of 1993.
For the Three Months Ended
March 31,
-------------------------- Increase
1994 1993 (Decrease) Change
-------- -------- ---------- ------
Income Taxes $ 9.3 $ 10.7 $ (1.4) (13)%
Lower income before taxes was the principal reason for the decrease in income
taxes. The Company's effective tax rate was 37.2% for the three months ended
March 31, 1994 and 33.8% for the same period in 1993. The reasons for the
higher annual effective tax rate were principally due to the new tax law which
increased rates and non-deductible expenses.
CHANGE IN ACCOUNTING PRINCIPLE
As more fully described in Note (4) to the financial statements, effective
January 1, 1994, the Company adopted Statement of Financial Accounting Standards
("SFAS") 112, "Employers' Accounting for Postemployment Benefits". The
cumulative effect of this accounting change was recognized as a change in
accounting principle, thereby reducing net income by $2.9 million, which is net
of a deferred tax benefit of $1.6 million.
REGULATORY MATTERS
ALTERNATIVE REGULATION
Pursuant to procedures established by the PUCO, local exchange companies are
permitted to file plans proposing alternative forms of regulation for
competitive services and basic service rates. On January 31, 1994, the PUCO
staff issued its evaluation of CBT's filing. Thereafter, CBT and the
intervenors signed a settlement agreement which was filed with the PUCO on April
11, 1994. The agreement, which was approved by the PUCO on May 5, 1994, will
increase revenues by
12
Form 10-Q Part 1 Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
$11.9 million annually or 3.75% on Ohio regulated services. The alternative
regulation commitments and new rates became effective May 6, 1994. CBT's
authorized rate of return on capital will be 11.18%, but CBT can earn up to
11.93% in a monitoring period without any retargeting of rates. Earnings higher
than 11.93% result in retargeting of rates in the next monitoring period.
OPTIONAL INCENTIVE REGULATION
For interstate services, CBT began to operate under an Optional Incentive
Regulation (OIR) plan in January 1994. This is an alternative form of
regulation for small and midsized companies with more emphasis on price
regulation similar to price caps. The plan involves the following:
- - OIR does not impose a productivity offset.
- - CBT can retain higher levels of profit if it improves its
productivity/efficiency up to a maximum of 12.75% under OIR versus 11.50%
under rate of return regulation.
- - Ratepayers benefit from efficiency gains because the gains are flowed through
in the form of lower rates in the next tariff period when rates are retargeted
to the authorized rate of return.
- - CBT need not be permanently committed to OIR in contrast with price cap
regulation.
In addition, CBT has more pricing flexibility. Rate changes and new services
can be made on a 14 day notice without cost support if CBT sets rates no higher
than a geographically adjacent price cap local exchange carrier. This allows
CBT to be more responsive to customers and more competitive. Historical revenue
requirements and demand are used instead of forecasts.
DEPRECIATION REPRESCRIPTION
In January 1994, CBT completed a successful triennial depreciation
represcription with regulators from the Federal Communications Commission, the
PUCO and the Public Service Commission of Kentucky. The new rates were recorded
retroactive to January 1, 1994 in the interstate and Kentucky jurisdictions.
CBT has asked permission to use new rates in Ohio effective July 1, 1994.
EFFECTS OF REGULATORY ACCOUNTING
CBT presently gives accounting recognition to the actions of regulators where
appropriate, as prescribed by SFAS 71, "Accounting for the Effects of Certain
Types of Regulation". Under SFAS 71, CBT records certain assets and liabilities
because of the actions of regulators. Amounts charged to operations for
depreciation expense reflect estimated useful lives and methods prescribed by
regulators rather than those that might otherwise apply to unregulated
enterprises. In the event CBT determines that it no longer meets the criteria
for following SFAS 71, the accounting impact to CBT would be an extraordinary
non-cash charge to operations of an amount which would be material. Criteria
that give rise to the discontinuance of SFAS 71 include increasing competition,
which restricts CBT's ability to establish prices to recover specific costs and
a significant change in the manner in which rates are set by regulators from
cost-based regulation to another form of regulation. CBT periodically reviews
these criteria to ensure that continuing application of SFAS 71 is appropriate.
BUSINESS OUTLOOK
Cincinnati Bell operates businesses in several different markets. Each of the
businesses has fluctuations in revenues and operating earnings as the result of
the overall level, timing and terms of many contracts. These circumstances may
increase the variability of financial results on a quarter-to-quarter basis.
13
Form 10-Q Part 1 Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
Customer demands, technology, the preferences of policy makers and the
convergence of other industries with the telecommunications industry are causes
of increasing competition in the telecommunications industry. The range of
communications services, the equipment available to provide and access such
services and the number of competitors offering such services continue to
increase. Federal and state regulators are encouraging changes that promote
competition in the industry. These impacts are expected to make it very
challenging to maintain and grow telephone revenues. CBT will need to respond
with active programs to market products and reduce costs.
CBT continues to monitor the technological changes and competitive and
regulatory environment of the telecommunications business and to develop
strategies to address these changes. CBT is evaluating the way it conducts
business in order to further improve customer responsiveness and quality. Also,
CBT is evaluating productivity improvement programs that could involve
retraining of employees, re-engineering of systems, restructure of its
organization, resource levels and other operating costs.
CBIS must improve operational processes and generate sufficient revenues to
recover its software costs. In its effort to reorganize, CBIS will continue to
evaluate overall results by addressing potential non-strategic and non-
profitable activities. CBIS is also focusing on strengthening its core
business. Important to its growth is the success of products using CBIS's
"Edge" system, an object-oriented, open-architecture, distributed processing
platform. Precedent 2000, an important product using the CBIS Edge platform is
expected to begin delivery to certain customers later in the year. It is too
early to predict the success of this system.
MATRIXX needs to continue to successfully integrate the WATS acquisition. The
continued trend in the outsourcing of telemarketing is important for MATRIXX's
continued growth.
The success of the other businesses will be determined by how well they meet the
changing needs of their customers.
14
Form 10-Q Part 11 Cincinnati Bell Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
Exhibit
Number
------
11 Computation of Earnings per Common Share
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
15
SIGNATURES
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 May 13, 1994 /S/ Brian C. Henry
--------------- ----------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
16
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 1994
_______________________________
CINCINNATI BELL INC.
(Exact Name of Registrant as specified in its charter)
_______________________________
EXHIBITS
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 *