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, 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 October 31, 1994, 65,850,088 Common Shares were outstanding
Form 10-Q Part I Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
Revenues
Telephone operations
Local service. . . . . . . . . . . . . . . $ 83,610 $ 75,886 $241,955 $224,902
Network access . . . . . . . . . . . . . . 33,574 33,440 103,913 101,477
Long distance. . . . . . . . . . . . . . . 9,265 10,930 28,052 31,826
Other. . . . . . . . . . . . . . . . . . . 18,657 19,093 53,467 59,033
-------- -------- -------- --------
145,106 139,349 427,387 417,238
Information systems. . . . . . . . . . . . . 79,644 84,094 223,448 224,409
Marketing services . . . . . . . . . . . . . 55,896 23,176 160,503 71,069
Other telecommunications . . . . . . . . . . 32,265 30,738 93,486 89,710
-------- -------- -------- --------
Total Revenues . . . . . . . . . . . . . . 312,911 277,357 904,824 802,426
-------- -------- -------- --------
Costs and Expenses
Operating expenses . . . . . . . . . . . . . 158,120 145,552 466,291 419,681
Plant and building services. . . . . . . . . 49,806 36,837 132,425 112,591
Depreciation and amortization. . . . . . . . 40,343 39,876 114,387 109,224
Taxes other than income taxes. . . . . . . . 21,346 22,907 69,232 69,308
-------- -------- -------- --------
Total Costs and Expenses . . . . . . . . . 269,615 245,172 782,335 710,804
-------- -------- -------- --------
Operating Income . . . . . . . . . . . . . 43,296 32,185 122,489 91,622
Other Income (Expense) - Net . . . . . . . . . 479 1,436 889 13,284
Interest Expense . . . . . . . . . . . . . . . 12,437 10,279 37,329 30,508
-------- -------- -------- --------
Income Before Income Taxes and Cumulative
Effect of Accounting Change. . . . . . . . . 31,338 23,342 86,049 74,398
Income Taxes . . . . . . . . . . . . . . . . . 11,231 7,697 31,576 24,426
-------- -------- -------- --------
Income Before Cumulative Effect of
Accounting Change. . . . . . . . . . . . . . 20,107 15,645 54,473 49,972
Cumulative Effect of Accounting Change . . . . - - (2,925) -
-------- -------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . 20,107 15,645 51,548 49,972
Preferred Dividend Requirements. . . . . . . . - 73 - 2,248
-------- -------- -------- --------
Income Applicable to Common Shares . . . . . . $ 20,107 $ 15,572 $ 51,548 $ 47,724
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Common Share
Income Before Cumulative Effect of
Accounting Change. . . . . . . . . . . . . $ .31 $ .24 $ .83 $ .76
Cumulative Effect of Accounting Change . . . - - (.04) -
-------- -------- -------- --------
Net Income . . . . . . . . . . . . . . . . . .31 .24 .79 .76
-------- -------- -------- --------
-------- -------- -------- --------
Dividends Declared per Common Share. . . . . . $ .20 $ .20 $ .60 $ .60
-------- -------- -------- --------
-------- -------- -------- --------
Weighted Average Number of Common Shares
Outstanding (000). . . . . . . . . . . . . . 65,532 64,689 65,309 62,747
2
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (Cont'd)
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
Retained Earnings at Beginning of Period . . . $231,696 $345,157 $227,392 $342,483
Add: Net Income . . . . . . . . . . . . . . 20,107 15,645 51,548 49,972
Deduct: Common Dividends. . . . . . . . . . 13,129 13,043 39,245 37,832
Pension Liability Adjustment. . . . - - 1,021 -
Preferred Dividends . . . . . . . . - 73 - 2,248
Acquisition of Common Shares. . . . - - - 4,453
Issuance of Common Shares Under
Employee Plans. . . . . . . . . . - 17 - 253
-------- -------- -------- --------
Retained Earnings at End of Period . . . . . . $238,674 $347,669 $238,674 $347,669
-------- -------- -------- --------
-------- -------- -------- --------
See Notes to Financial Statements.
3
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
September 30, December 31,
1994 1993
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 14,522 $ 8,668
Receivables less allowances of $11,023 and $14,031 . . . . . . 260,833 241,669
Material and supplies. . . . . . . . . . . . . . . . . . . . . 16,689 21,627
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 30,858 30,391
Other current assets . . . . . . . . . . . . . . . . . . . . . 19,007 22,471
---------- ----------
341,909 324,826
---------- ----------
Property, Plant and Equipment
Telephone plant. . . . . . . . . . . . . . . . . . . . . . . . 1,481,532 1,430,822
Less accumulated depreciation. . . . . . . . . . . . . . . . (583,920) (541,690)
---------- ----------
897,612 889,132
---------- ----------
Other property . . . . . . . . . . . . . . . . . . . . . . . . 316,116 303,917
Less accumulated depreciation. . . . . . . . . . . . . . . . (165,149) (145,480)
---------- ----------
150,967 158,437
---------- ----------
1,048,579 1,047,569
---------- ----------
Other Assets
Intangibles, primarily goodwill - net. . . . . . . . . . . . . 192,246 192,341
Deferred and other assets. . . . . . . . . . . . . . . . . . . 41,511 56,324
Other investments. . . . . . . . . . . . . . . . . . . . . . . 48,661 43,030
---------- ----------
282,418 291,695
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $1,672,906 $1,664,090
---------- ----------
---------- ----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 151,936 $ 132,648
Debt maturing in one year. . . . . . . . . . . . . . . . . . . 64,045 112,029
Accrued disposal and restructuring costs . . . . . . . . . . . 15,101 35,385
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . . 42,101 38,135
Advanced billing and customers' deposits . . . . . . . . . . . 36,454 31,553
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,320 24,587
---------- ----------
341,957 374,337
---------- ----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 528,190 522,888
---------- ----------
Deferred Credits and Other Long-Term Liabilities
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 158,736 158,438
Unamortized investment tax credits . . . . . . . . . . . . . . 17,701 19,371
Other long-term liabilities. . . . . . . . . . . . . . . . . . 87,275 73,441
---------- ----------
263,712 251,250
---------- ----------
Shareowners' Equity
Common shares - $1.00 par value. . . . . . . . . . . . . . . . 65,650 64,982
Authorized shares: 240,000,000
Outstanding shares: at September 30, 1994, 65,650,342;
at December 31, 1993, 64,982,178
Additional paid-in capital . . . . . . . . . . . . . . . . . . 234,358 223,257
Reinvested earnings. . . . . . . . . . . . . . . . . . . . . . 238,674 227,392
Foreign currency translation adjustment. . . . . . . . . . . . 365 (16)
---------- ----------
539,047 515,615
---------- ----------
Total Liabilities and Shareowners' Equity. . . . . . . . . . . . $1,672,906 $1,664,090
---------- ----------
---------- ----------
See Notes to Financial Statements.
4
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
For the Nine Months
Ended September 30,
-------------------
1994 1993
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 51,548 $ 49,972
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization. . . . . . . . . . . . . . . 114,387 109,224
Cumulative effect of accounting change . . . . . . . . . . 2,925 -
Provision for loss on receivables. . . . . . . . . . . . . 5,236 5,224
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . 7,418 (8,293)
Changes in assets and liabilities
Decrease (increase) in receivables . . . . . . . . . . . . (26,600) 682
Decrease in other current assets . . . . . . . . . . . . . 4,436 7,324
Increase (decrease) in accounts payable. . . . . . . . . . 15,556 (27,768)
Decrease in accrued disposal and restructuring costs . . . (20,284) -
Increase (decrease) in other current liabilities . . . . . 16,154 (182)
Increase in deferred income taxes and unamortized
investment tax credits. . . . . . . . . . . . . . . . . . 4,029 16,665
Decrease (increase) in other assets and liabilities. . . . 17,577 (10,985)
-------- -------
Net cash provided by operating activities. . . . . . . . 192,382 141,863
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant . . . . . . . . . . . (88,802) (73,265)
Capital expenditures-other . . . . . . . . . . . . . . . . (27,968) (38,904)
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . 10,755 10,072
-------- -------
Net cash used in investing activities. . . . . . . . . . (106,015) (102,097)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings. . . . . . . . . . . . (48,643) (36,567)
Proceeds from issuance of long-term debt . . . . . . . . . - 49,615
Principal payments on long-term debt . . . . . . . . . . . (3,151) (2,134)
Proceeds from issuance of common shares. . . . . . . . . . 9,816 644
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (39,125) (40,315)
Payments made to acquire common shares . . . . . . . . . . - (5,481)
-------- -------
Net cash used in financing activities. . . . . . . . . . (81,103) (34,238)
-------- -------
Effect of exchange rate changes on cash and cash equivalents 590 (76)
-------- -------
Net increase in cash and cash equivalents. . . . . . . . . . 5,854 5,452
Cash and cash equivalents at beginning of period . . . . . . 8,668 5,304
-------- -------
Cash and cash equivalents at end of period . . . . . . . . . $ 14,522 $ 10,756
-------- -------
-------- -------
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . $ 25,534 $ 23,135
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 21,794 $ 15,861
See Notes to Financial Statements.
5
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements of Cincinnati
Bell Inc. have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
Management, include all adjustments necessary for a fair presentation of
the results of operations, financial position and cash flows for each
period shown. All adjustments are of a normal and recurring nature except
for those outlined in Notes (2), (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 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 and the current year's
previously issued Forms 10-Q.
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 $11.8 million and
$30.7 million for the quarter and nine months ended September 30, 1993,
respectively. In addition to the Information Systems revenue, certain
prior year amounts have been reclassified to be consistent with the 1994
presentation. These reclassifications had no effect on operating income or
net income for all periods presented.
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").
(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 and
related activities (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. The Company expects that the
disposal and restructuring actions will be substantially complete in 1994.
A total of $20.3 million was charged to the disposal and restructuring
reserve for the nine months ended September 30, 1994 including the
operating results of the businesses to be sold or disposed. These
businesses had revenues of $46.6 million and operating expenses of $60.3
million for the nine months ended September 30, 1994 which were charged to
the reserve. In addition, $3.5 million of employee severance costs, $2.2
million for the write-off of fixed assets, and $.9 million of other costs
were charged to the reserve during the first nine months of 1994. The
Company believes that the reserve of $15.1 million at September 30, 1994 is
adequate to cover the estimated future costs of disposing and closing of
businesses associated with the restructuring actions.
6
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
The assets of the operations to be sold or disposed consist of net current
assets of $5.7 million and net noncurrent assets of $4.0 million at
September 30, 1994. These amounts consist of accounts receivable,
property, plant and equipment and related liabilities.
The Company announced on November 3, 1994 the sale of CBIS Federal which
includes substantially all of the above mentioned assets. The results of
the sale and the operating losses of CBIS Federal through the date of sale
is expected to approximate the amounts used to accrue the disposal loss in
1993.
(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 For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
Revenues and Sales. . . . . . . . . . .$150,990 $145,154 $444,874 $434,487
Costs and Expenses. . . . . . . . . . .$127,256 $118,202 $371,597 $359,181
Income Before Cumulative Effect
of Accounting Change. . . . . . . . .$ 13,642 $ 15,998 $ 41,944 $ 51,785
Cumulative Effect of Accounting
Change. . . . . . . . . . . . . . . . - - $( 2,405) -
Net Income. . . . . . . . . . . . . . .$ 13,642 $ 15,998 $ 39,539 $ 51,785
Results for the nine months ended September 30, 1994, include two
significant nonrecurring charges that were recorded in the first quarter of
1994. As more fully described in Note (4) to the financial statements, the
Company, including CBT, adopted SFAS 112, thereby reducing CBT's net income
by $2.4 million, net of a deferred tax benefit. In addition, CBT recognized
$2.5 million in incremental postretirement expenses resulting from
adjusting deferred amounts to a level that is expected to be recovered in
regulated rates. This adjustment reduced net income by $1.6 million. CBT
had received approval from the Public Utilities Commission of Ohio ("PUCO")
in 1993 to defer these incremental postretirement expenses while they were
being addressed in CBT's request for alternate regulation. CBT is no
longer deferring these costs in 1994.
Results for the nine months ended September 30, 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. The gain is included in Other Income (Expense)
- net.
7
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, December 31,
1994 1993
------------- -----------
Current Assets. . . . . . . . . . . . . . . . . $ 163,534 $ 159,641
Telephone Plant-Net . . . . . . . . . . . . . . 908,017 900,141
Other Noncurrent Assets . . . . . . . . . . . . 20,976 32,161
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . $1,092,527 $1,091,943
---------- ----------
---------- ----------
Current Liabilities . . . . . . . . . . . . . . $ 122,185 $ 139,438
Noncurrent Liabilities. . . . . . . . . . . . . 205,910 196,389
Long-Term Debt. . . . . . . . . . . . . . . . . 312,132 310,500
Common Shareowner's Equity. . . . . . . . . . . 452,300 445,616
---------- ----------
Total Liabilities and Invested Capital. . . . . $1,092,527 $1,091,943
---------- ----------
---------- ----------
(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 $2.9
million ($.04 per common share), 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.
(5) CONTINGENCIES - The Company, which has a 49% interest in a cellular
partnership, is seeking to dissolve the partnership because of poor
performance. The Company has pursued this litigation to maximize the value
of this asset for the benefit of the shareholders. There are many possible
outcomes of this litigation. The potential impact of a settlement from the
lawsuit is an extremely broad range depending upon the form of distribution
and the amount of damages awarded. At this time, the Company is unable to
narrow the range described above but the Company believes it will recover
its $44 million investment in the partnership.
(6) CONCENTRATION OF RISK - The Company derives significant revenues from AT&T
and its affiliates by providing network services, information management
systems, and marketing services. With the completion of the merger of AT&T
and McCaw Cellular Communications Inc. in the third quarter of 1994, the
Company's revenues from AT&T as combined with McCaw have increased when
compared to prior periods. Revenues from AT&T accounted for 17% of the
Company's consolidated revenues and 44% of CBIS's revenues for the nine
months ended September 30, 1994.
8
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(7) INTEREST RATE AND CURRENCY EXCHANGE SWAP - In 1990, the Company entered
into an interest rate and foreign currency swap agreement to reduce the
impact of changes in interest rates and foreign currency exchange rates.
Under the swap agreement, the Company received 225 million French francs in
return for $41.7 million. The swap agreement has the effect of converting
a portion of the Company's short-term variable interest rate borrowings to
long-term at French franc fixed interest rate. At the end of the agreement
in the year 2000, the original amounts will be exchanged. This transaction
was designated as a hedge of the Company's net investment in its French
subsidiary of MATRIXX Marketing and accordingly, the currency translation
associated with this transaction is reflected in the currency translation
adjustment in shareowners' equity. The Company does not engage in foreign
currency speculation.
The Company receives quarterly interest payments calculated using market
rates on a notional amount of $41.7 million. The Company accrues interest
on a notional amount of 225 million French francs. The approximate
effective rate is such that net interest expense is based on the interest
cost implicit in the contract measured in French francs (approximately
11%). Net amounts due to or from the counterparty are reflected in
interest expense in the periods in which they accrue. The net effect of
the swap for the first nine months of 1994 was to increase expense by $3.3
million and to increase the Company's average interest rate from 7.32% to
8.03%.
Interest due under the contract is payable in five equal annual
installments of 66.4 million French francs each beginning in August 1996.
Since these payments are to be made in French francs, the Company is
subject to the risk of currency ratio fluctations, and accrues the effect
of such fluctuations as part of interest expense.
The Company would not be currently subject to a loss if the counterparty
should fail because of the current position of the swap.
9
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's net income for the quarter ended September 30, 1994 was $20.1
million, an increase of $4.5 million or 29% compared to the same quarter in
1993. Earnings per common share for the quarter ended September 30, 1994 were
$.31, an increase of $.07 or 29% over the same period in 1993.
The Company's net income for the first nine months of 1994 was $51.5 million, an
increase of $1.5 million or 3% compared to the same period in 1993. For the
nine months ended September 30, 1994, earnings per common share were $.79, an
increase of $.03 or 4% when compared to the same period in 1993.
Results in the first quarter of 1994 included an after-tax charge of $2.9
million or $.04 per common share for a required change in accounting for
postemployment benefits (SFAS 112). Results in the first quarter of 1993
included an after-tax gain of $6.5 million or $.10 per common share from the
sale of CBT's residential equipment leasing and PhoneCenter Store businesses.
Excluding the above noted significant items in both years, net income for the
nine month periods ended September 30, 1994 and 1993 would have been $54.5
million and $43.5 million, respectively, an increase of 25%, and earnings per
common share would have been $.83 and $.69 per common share respectively, an
increase of 20%.
Results for interim periods may not be indicative of the results for the full
year.
DISPOSAL AND RESTRUCTURING OF CBIS OPERATIONS
The operating results of the businesses to be sold or closed are being charged
to the disposal and restructuring reserve in 1994, therefore, the revenues and
expenses of these businesses are excluded in the reported amounts for 1994.
The Company announced on November 3, 1994 that DynCorp of Reston, Virginia has
purchased CBIS Federal. In connection with the restructuring of its operations,
CBIS reduced its workforce by 377 employees through September 30, 1994 since
December 31, 1993.
REVENUES
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $312.9 $277.3 $ 35.6 13 %
Nine months ended $904.8 $802.4 $102.4 13 %
Several factors affected the revenues for the three and nine months ended
September 30, 1994. Marketing Services increased significantly because of the
acquisition of WATS Marketing in November 1993. Information Systems revenues in
1994 increased because of the significant growth in cellular subscribers
resulting in higher data processing and professional and consulting revenues.
The increase was offset by the exclusion of revenues from non-strategic business
of CBIS which are being sold or closed and charged to the disposal and
restructuring reserve. Telephone Operations revenues increased primarily as the
result of access line growth reaching record levels and the new Ohio rate plan.
10
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
TELEPHONE OPERATIONS
Local Service
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 83.6 $ 75.9 $ 7.7 10 %
Nine months ended $242.0 $224.9 $ 17.1 8 %
Growth in access lines and a new Ohio rate plan effective May 6, 1994 accounted
for $4.7 million and $9.7 million of the increase in local service revenues for
the three and nine months, respectively. Access lines have increased about 4%
from 841,000 at September 30, 1993 to 871,000 at September 30, 1994. Revenues
also were higher by $2.2 million and $6.0 million for the three and nine months,
respectively, as the result of increased customer use of enhanced central office
features such as custom calling services and use of directory assistance
services.
Network Access
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 33.6 $ 33.5 $ .1 - %
Nine months ended $103.9 $101.5 $ 2.4 2 %
Interstate access revenues increased $1.6 million and $4.1 million for the three
and nine months, respectively, from access line growth, higher minutes of use
and lower National Exchange Carrier Association settlement payments. Partially
offsetting the increases was a decrease in intrastate access revenues of $1.5
million and $1.7 million, respectively, from lower independent company
settlements and a reduction in the Ohio carrier common line rate.
Long Distance
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 9.2 $ 10.9 $ (1.7) (16)%
Nine months ended $ 28.0 $ 31.8 $ (3.8) (12)%
Long distance revenues decreased for the quarter and nine months, $2.0 million
and $3.8 million, respectively, because of lower settlement revenues from
independent companies, the effect of a favorable retroactive interexchange
carrier adjustment in February 1993 and a January 1994 rate reduction in
interstate message tolls.
11
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
Other
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 18.7 $ 19.0 $ ( .3) (2)%
Nine months ended $ 53.5 $ 59.0 $ (5.5) (9)%
Revenues are lower in 1994 primarily because CBT discontinued its business
telecommunications equipment leasing business in late 1993 and sold its
residential equipment leasing and PhoneCenter Store businesses in the first
quarter 1993. These actions resulted in decreases in lease revenues of $1.3
million and $5.9 million for the three and nine periods, respectively. In
addition, billing and collection revenues decreased $1.6 million for the nine
months as the result of a lower volume of business. The decreases for the nine
month period were partially offset by higher sales and marketing commissions of
$2.0 million and a lower provision for uncollectible accounts of $1.2 million as
a result of businesses being discontinued or sold in 1993.
INFORMATION SYSTEMS
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 79.6 $ 84.1 $ (4.5) (5)%
Nine months ended $223.4 $224.4 $ (1.0) - %
Information Systems revenues in 1994 reflect a significant increase over 1993
after excluding 1993 amounts related to operations to be sold or closed.
Revenues of these operations amounted to $18.3 million and $58.2 million for the
three and nine months ended September 30, 1993, respectively. Increases for the
three and nine months were primarily the result of higher data processing and
professional and consulting services provided to cellular industry and wireline
clients. There were also increases in professional and consulting fees
primarily from international clients for the development of telecommunications
solutions.
In August 1994, CBIS announced a major contract renewal through 1999 with McCaw
Cellular Communications Inc., the largest cellular service provider in the
United States. CBIS currently provides billing for McCaw's cellular properties.
Given the continuing growth of the cellular market, the contract is expected to
generate revenues for CBIS in excess of $600 million. There were no other
significant contracts received, renewed or terminated in the first nine months
of 1994.
MARKETING SERVICES
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 55.9 $ 23.2 $ 32.7 141 %
Nine months ended $160.5 $ 71.1 $ 89.4 126 %
The acquisition of WATS Marketing accounted for the majority of the increase in
revenues contributing $26.5 million and $74.5 million for the three and nine
month periods. In addition, the Outbound, Inbound, Business and Custom Services
divisions all experienced growth in revenues as the result of an increased
volume of business.
12
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
OTHER TELECOMMUNICATIONS
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 32.3 $ 30.7 $ 1.6 5 %
Nine months ended $ 93.5 $ 89.7 $ 3.8 4 %
Revenues of the Company's long distance re-selling business increased $1.1
million and $4.3 million for the three and nine months, respectively, primarily
because of a higher number of customers and from its 800-service because of a
higher customer base and increased usage levels. Revenues of the directory and
supply businesses were comparable with 1993 amounts.
COSTS AND EXPENSES
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $269.6 $245.2 $ 24.4 10 %
Nine months ended $782.3 $710.8 $ 71.5 10 %
The primary factors affecting costs and expenses for the above periods are as
follows. Marketing Services expenses increased because of the expenses of WATS
Marketing which was purchased in November 1993. Information Services costs and
expenses increased corresponding with the growth in cellular subscribers of its
data processing clients. Telephone Operations costs and expenses increased
because of increased depreciation expense resulting from changes in regulatory
prescribed rates and higher right-to-use fees for network software upgrades.
Decreases in costs and expenses were reflected in both the Information Services
and Telephone Operations segments as the result of operations that were or in
the process of being sold or closed in 1993 and 1994.
Telephone Operations costs and expenses increased $5.6 million and $6.0 million
for the three and nine months as a result of right-to-use fees for network
software upgrades for advanced customer calling features. Postretirement costs
were $.9 million and $4.5 million higher in 1994 than in 1993 because of CBT's
deferral of approximately $1 million of costs per quarter in 1993 (see Note 3 to
the financial statements). The deferral was discontinued in the first quarter
of 1994 and $2.5 million of previously deferred costs were expensed. In January
1993, CBT revised its vacation policy for the period in which employees earned
vacation in order to be on an equivalent basis with the Company's other
subsidiaries. The change in vacation policy caused an increase in expenses of
$.9 million and $4.9 million for the three and nine months in 1994 compared to
1993.
Depreciation and amortization expense of Telephone Operations increased $3.8
million and $7.8 million for the three and nine month periods in 1994 primarily
because of recently approved depreciation rate represcriptions by the Federal
and Kentucky authorities (effective January 1, 1994) and the PUCO (effective
July 1, 1994.) It is estimated that CBT's 1994 depreciation expense will be
approximately $10 million higher than in 1993 primarily because of the changes
in the prescribed rates. The increases resulting from the rate represcriptions
were $3.1 million and $6.7 million for the three and nine month periods in 1994,
respectively.
13
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
Partially offsetting the nine months increases in Telephone Operations costs and
expenses were decreases of $1 million resulting from inventory control and cost
containment efforts and $2.6 million from the effect of CBT's sale of its
residential equipment leasing and PhoneCenter Store businesses in the first
quarter 1993.
On November 2, 1994, CBT presented a separation offer to 18 of its senior
management. The deadline for acceptance is December 30, 1994. It is
anticipated that a number of these senior managers will accept this offer but it
is too early to estimate the final number. Costs related to this offer will be
accrued in the fourth quarter 1994 but should be less than $3 million.
Information Systems costs and expenses increased in 1994 when compared to 1993
after adjusting 1993 amounts for the operations to be sold or closed. Costs and
expenses for these operations were $22.1 million and $67.3 million for the three
and nine months ended September 30, 1993. In 1994, direct costs related to data
processing and professional and consulting services for cellular industry and
wireline clients and professional and consulting services for international
clients were the primary reasons for the increase. Partially offsetting the
increases was the decrease related to the recording in 1993 of the write-down of
capitalized software costs to net realizable value. Included in the above 1993
costs and expenses for the operations to be sold or closed is $.7 million and
$2.1 million for the three and nine months, respectively, for amortization of
goodwill associated with the Company's investment in the CBIS Federal operations
which was included in special charges at the end of 1993.
Marketing Services costs and expenses increased $22.4 million and $66.4 million,
respectively, for the three and nine months from the addition of WATS Marketing
and $4.5 million and $9.0 million for the same comparable periods respectively,
from higher direct costs associated with increased revenues. Included in the
WATS Marketing costs for the three and nine months was $.6 million and $1.8
million, respectively, for amortization of goodwill related to the acquisition.
The increase in costs of providing services was from the Outbound, Inbound,
Business and Customer Services divisions.
Other Telecommunications costs and expenses had minor increases for both the
three and nine months comparisons. Costs of providing services increased for
both periods primarily because of revenue growth in the long distance business.
Expenses in 1993 included a second quarter $3.0 million provision for inventory
loss on used telecommunications and computer equipment at Cincinnati Bell
Supply. The provision was the result of management's evaluation of the
marketability of the inventories in light of market conditions and management
plans at the time.
OTHER INCOME (EXPENSE) - NET
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ .5 $ 1.5 $ (1.0) (67)%
Nine months ended $ .9 $ 13.3 $(12.4) (93)%
Year-to-date results for 1993 include the $9.8 million gain from the sale of
CBT's residential equipment leasing and PhoneCenter stores in the first quarter
of 1993. The sale was the result of CBT's decision that opportunities to
achieve a higher rate of return for its available resources existed in fields
other than the leasing and retail of residential equipment.
14
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
INTEREST EXPENSE
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 12.5 $ 10.3 $ 2.2 21 %
Nine months ended $ 37.4 $ 30.5 $ 6.9 22 %
The increase in interest expense in 1994 is the result of refinancing short-term
debt in late 1993 with long-term debt at higher interest rates and an increase
in average total debt. The weighted average interest rate on total debt
outstanding was 8.0% in 1994 compared to 7.8% in 1993. The average total debt
outstanding for the nine month period increased approximately $94 million from
$520 million in 1993 to $614 million in 1994 principally from the WATS Marketing
acquisition.
INCOME TAXES
September 30 Increase
(In millions) 1994 1993 (Decrease) Change
----------------------------------------
Three months ended $ 11.2 $ 7.7 $ 3.5 45 %
Nine months ended $ 31.5 $ 24.4 $ 7.1 29 %
Higher income before taxes was the principal reason for the increase in income
taxes. The Company's effective tax rate for the three and nine months ended
September 30, 1994 was 35.8% and 36.7%, compared to 33.1% and 32.8% for the same
periods last year, respectively. The 1993 effective tax rates were reduced
principally as a result of recording additional research and experimentation tax
credits in the third quarter 1993. The tax credit had been reinstated
retroactively because of the Omnibus Budget Reconciliation Act enacted in August
1993.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to finance its ongoing operating requirements, including
network expansion and modernization, business development and dividend programs.
The Company maintains adequate lines of credit with several institutions to
provide support for borrowings and general corporate purposes.
Cash provided by operating activities for the nine months ended September 30,
1994 was $192.4 million, an increase of $50.5 million over the same period in
1993. This cash from operations, together with the cash from issuance of shares
to the Company's dividend reinvestment and benefit plans, provided the funds for
capital expenditures, dividend payments and a $49 million reduction in short-
term borrowings.
15
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
The primary use of resources continued to be capital expenditures which were
$116.8 million for the first nine months in 1994 compared to $112.2 million for
the same period in 1993. Capital expenditures for telephone plant were higher
resulting from an increase in access lines and modernization of equipment.
Capital expenditures for 1994 are expected to be approximately $160 million of
which approximately $113 million is for the telephone operations of CBT. CBT's
investment in digital and fiber optic transmission is projected to be $66
million, including $19 million to update switches to accommodate changes in the
North American Numbering Plan (a one-time event in 1994), and $47 million for
other demands. Included in capital expenditures were capitalized software
development costs of $5.5 million and $19.9 million for nine month periods of
1994 and 1993, respectively. The decrease in capitalized costs was the result
of a decrease in gross software development expenditures as CBIS continues to
focus on its core businesses and the result of less costs eligible for
capitalization.
CBT could decide that in order to remain competitive in the future, it must
aggressively pursue a strategy of expanding its offerings beyond its traditional
business. For example, CBT may adopt a strategy of running fiber optic wiring
to a majority of residential customers in order to offer a full line of
services. This decision would result in a need for capital but the amount is
not determinable at this time because of unknown factors as customer acceptance,
period of implementation, and area of coverage. Any capital spending increases
would not be entirely incremental or additive as reductions would be achieved in
other areas. CBT may wish to enter other businesses through acquisitions,
investments and strategic alliances with established companies in such
businesses and through the development of such capabilities internally. Such
transactions could require substantial capital which could be generated
internally and from external sources.
Receivables increased from December 31, 1993 levels primarily as a result of
increased revenues and the timing of billings related to terms of international
contracts. The increase in accounts payable balances was primary the result of
payments for costs of revenue and increased accruals for employee compensation.
Other non-current liabilities increased primarily from accrued postretirement
costs. The adoption of SFAS 112 in 1994 for postemployment costs and an
increase in the accrued interest associated with the Company's interest rate and
currency swap also contributed to the increase.
CAPITALIZATION
The Company's debt to capitalization ratio at September 30, 1994 was 52.4%
compared to 47% at September 30, 1993. The increase was due to a decrease in
shareholders' equity, attributable to the special charges recorded in the
fourth quarter of 1993, and an increase in debt from to the acquisition of WATS
Marketing in November 1993.
In September 1994, Standard & Poor's lowered its ratings on Cincinnati Bell
Inc.'s senior unsecured debt from A to A- and commercial paper from A-1 to A-2.
Standard & Poor's reasons for the change were increased debt for the acquisition
of WATS Marketing, a riskier business profile as the Company relies on a greater
portion of revenues from its diversified activities, and the performance of CBIS
over the last three years.
16
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
REGULATORY MATTERS
ALTERNATIVE REGULATION
Pursuant to procedures established by the PUCO, local exchange companies are
permitted to file plans proposing alternate forms of regulation for competitive
services and basic service rates. CBT filed for a threshold increase in rates
with an alternative regulation proposal in 1993. Thereafter, CBT and the
intervenors signed a settlement agreement which was approved by the PUCO on May
5, 1994 increasing revenues by $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% will trigger a revenue retargeting formula. This
formula will allow for certain rates to be retargeted in the following
monitoring period. This alternative regulation plan provides increased pricing
flexibility in some areas, which allows CBT to be more responsive to customers
and more competitive.
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
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 RATE CHANGES
The Federal Communications Commission (FCC) is required by the Communication Act
of 1934 to prescribe the depreciation rates that are used to compute
depreciation expense for communications common carriers. It is their practice
to review and revise CBT's depreciation rates and amortizations once every three
years, in conjunction with the PUCO and the Public Service Commission of
Kentucky (PSCK). CBT, the FCC and the state commissions discuss data relative
to CBT's plant, plans and asset life expectations, along with the depreciation
rate and amortization proposals. At the conclusion of these meetings the FCC
Common Carrier Bureau and state commissions make their recommendations. CBT
then formally files for revised depreciation rates and amortizations that agree
with the FCC, PUCO and PSCK recommendations to reach a settlement. This
eventually culminates with a depreciation rate order issued by each jurisdiction
which adopts new depreciation rates, amortizations and effective dates.
17
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
In January 1994, CBT completed a successful triennial depreciation
represcription with regulators from the FCC, the PUCO and the PSCK. The new
depreciation rates were effective January 1, 1994 in the interstate and Kentucky
jurisdictions, and effective July 1, 1994 in the Ohio jurisdiction.
KENTUCKY FILING
During October 1994, CBT filed a proposal with the PSCK for new regulated rates
for telephone services provided to its Kentucky customers. This proposal, if
approved in its entirety, would result in uniform rates for basic service in
CBT's Kentucky and Ohio metropolitan service areas and increase revenues by $3.4
million annually.
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. Typically, regulatory recovery periods are longer than the useful
lives that otherwise might be used. 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. 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.
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.
Customer demands, technology, the preferences of policy makers and the
convergence of other industries with the telecommunications industry are causes
for increasing competition in the telecommunications industry for CBT. 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 and CBT is evaluating these regulatory changes.
These impacts are expected to make it very challenging to maintain and grow
revenues. CBT is evaluating the way it conducts business in order to further
improve customer responsiveness and quality. CBT is working on plans that, if
approved by CBI management and the Board of Directors, would result in a
significant redesign of the Company including a possible reduction in workforce.
CBT expects to substantially complete the plan in the first part of 1995. If
such a plan is adopted, the charges to earnings would be material.
18
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
CBIS primarily conducts its business under long-term contracts covering two
markets. The first is the international market and the average contract length
is two to five years. The contracts are for specific client telecommunication
projects and after completion of the initial contract, CBIS generates
maintenance revenues related to the project. During a contract period, CBIS has
the opportunity to bid on additional business with its client. Due to the
nature of the projects, CBIS is always in a competitive situation with respect
to new bids.
The second is the market for data processing and support services for clients in
the telecommunications industry. Contracts range in length from three to ten
years and constitute the majority of CBIS's revenues. CBIS had eight contracts
come up for renewal in 1993 and was successful in obtaining renewals for six
contracts with an average life of four years. Although CBIS has achieved
success in retaining these clients, the telecommunications industry is becoming
highly competitive and CBIS will have to continue to provide high quality cost-
competitive pricing in the future to retain these clients. CBIS has received
indications from a current cellular billing client that they may not renew its
contract when it ends in 1996. The revenues from this contract amounted to
approximately five percent of CBIS's revenues through September 30, 1994. CBIS
must continue to retain current data processing customers because a contract
non-renewal from a significant customer could have a material impact on the
future earnings of CBIS.
MATRIXX has taken aggressive steps to capture efficiencies by integrating 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.
19
Form 10-Q Part II Cincinnati Bell Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
Exhibit
Number
------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
20
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 November 14, 1994 /s/ Brian C. Henry
--------------------- ------------------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
21